Its tough, you boil down to 3 scenarios:
1) Fiscal Union - you're talking about uncapped and openended cross-border fiscal transfers. Transfering all fiscal authority to a central authority - in this case, Germany. Effectively, you might as well say all Europeans are going to become Germans...
2) Disintegration, and; - A.K.A let's kick out the weakest link and let it be a game of "Survival of the Fittest"
3) Coordinated action - not entirely fiscal union. This would mean an orchestrated and coordinated effort to fix the crisis. A costly solution to both creditors and debtors. this will include pooling funds to provide liquidity to nations and private banks, restructuring plans (as discussed) and measures to prevent private sector banking failures (much like TARP and American Banks but with limits on the bailouts).
Per my opinion, the third scenario is most likely to happen. The first scenario presents too many political hurdles and unrest amongst the people. The second scenario would risk collapsing the credit market in Europe. The third is what I would call the lesser of all evils. However, execution is key in this respect (theoretically sound, but executionally mission impossible), and based on the talent we've seen to date (not that I could do a better job), I will try to remain optimistic.
1) Gutenmorgen, erobere ich Sie (I used babelfish to translate "Good morning, I will conquer you." I agree, doubtful that this will happen, well especially cut and dry like this. Even co-ordinated action among the Eurozone will likely be German led, with everyone saying that's what they want too (well, they want that more than being shamed out of the Eurozone).
ReplyDelete2) Co-ordinated action is something they should've thought of (and what apparently only David Cameron saw as a huge mistake) when the Eurozone was formed. The Eurozone seemed like a good idea at the time - reap all the benefits, while giving up no control. Umm.. doesn't always work like that guys! Now it's become such a disaster that co-ordination is not only limited to the Eurozone, but the whole of Europe, and now North America and China are being pulled into it.
I think that the step towards better treaties (a point of debate going into the summit tomorrow) is a good start. We can't have regional politics such as the gongshow in Slovakia hold up cleaning up a situation that has the whole world hanging on the edge of their seats. Down to veto power - give all the power to the Germans! Wait a minute, the lines between options 1 and 3 are starting to blur!
Yeah, the choices are pretty clear...its a matter of which one is most probable. Germany won't destroy the Eurozone by advocating a break-up of the Euro, nor will the prosperous northern countries band together in a mass exodus. The closest/nearest/quickest solution is to throw Greece out. Of course if this happens, the Greek financial system will collapse care of an Argentian-style run on the banks before Euro-denominated deposits get converted to Drachmas...Not to mention the crushing weight of foreign currency-denominated liabilities balooning as the Drachma sinks...BUT proponents of this theory will say -look how Argentinia faired, after a couple of years of near-collapse, they experienced near-double-digit GDP group for several years...The difference, of course, is that Argentinia has natural resources and was saved by the commodities boom whereas Greece only has Parthanon's to sell -and just the one too. Still, I wouldn't preclude it from happening...if it doesn't, this will be a 5-year crisis. If there is no bazooka solution, we'll still be talking about this 18 mths from now, I guarantee it.
ReplyDeleteEven if you throw Greece out, there's still elephants in the room (Italy, Ireland, Spain), not to mention other countries starting to pop up on the radar, such as Poland etc.
ReplyDeleteIn Argentina, didn't the IMF/other organizations talk 75% of the bondholders to take a 65% haircut (the other 25% didn't settle until 2010)? Five year notes were selling at 8.36% This sounds wild.
Recently out of some meeting, leaders stated that the Greek deal for voluntary haircuts should not be looked at as something they will do going forward. But what's the other choice - the CDS markets immediately started becoming more active.
So what's your take, anonymous? What is the way forward, and your investment strategy (are you in/out of the markets, long or short?)
I'm better-bid (long) USD & Treasuries -there is too much volatility and USD has the most liquidity. I'm selectively long on equities -blue-chip, bellweather names...the past few months have presented some awesome buying opportunities though you need nerves of steel and it may take years to be 'proven right' on some of them. I'm underweight commodities (excl. gold & potash) as global growth is slowing & underweight financials (for obvious reasons -Cdn bank valuations are high, rest of the world remains at risk)...Not to start a rumour but lets just say the CFO of a large, multi-national blue chip remarked (off the record) that all of his time is being spent stress-testing his balance sheet in the event that the euro collapses.
ReplyDeleteInteresting. Yes, I agree that long on select equities make sense if your horizon is long enough (like 5 years), and if you have a good stomach. A lot of fundamentals are being overshadowed by the macro picture - out of curiosity, what's your stance on corporate bonds?
ReplyDeleteSo although valuations are high for the Cdn banks, the yields are actually pretty decent, especially if you catch them on an August/September/October morning where the market goes into panic.
The commodity situation has been intriguing me lately, as yes we need global growth (i.e. China) for the demand in commodities to rise. But what about the global growth in population? What about the rise of the middle class in developing countries? There has to be some kind of offset that isn't totally wiped out by the euro slowdown. What happens when Iran keeps threatening (options for next year delivery for oil of $150 are now the biggest bet)? This will surely increase commodities for use in biofuels... I'm trying to flesh out the net impact that I think it will have, but sometimes I'm slow on the gun haha...
With respect to treasuries, I definitely think they are part of a conservative portfolio now, even though yields are in the ridiculous territory. If the euro crisis deepens, then we can definitely see more flight to quality. However, as a young investor (which ultimately means I can have a higher risk tolerance - if I lose everything, I can just start from scratch again), I just can't justify buying these things at such a low yield. Instead, I'll stick to diversifying in different industries and different countries, and try not to check on the portfolio everyday, unless well, I want to go into constant cardiac arrest.