Sovereign debt bubble thread

[MadImmortalMan]

That and the inflation large-scale government spending would entail can save me personally.

But what else could help the U.S.?  Besides a monarchy, Neil.

Hard to say.  A profound cultural shift would be required.

In pretty much the entire free world. Not likely, IMO.

[Zanza]

Another interpretation is that it was the maximum it could agree on without being ripped apart by internal political divisions.

I would note that her ability to go a bit further always seems a bit greater immediately after regional elections.

Yes, but that's not really contradictionary, is it? Of course a politician has more leeway after than before an election.

As it stands I think if Europe fails it will be, above all, Merkel's fault which would be a damning failure for a successor (in office and party) of Adenauer.

The perception in Germany is different, so the party of Adenauer won't fault her.

Incidentally on past Chancellors I've been wondering how Schroeder's perceived?  Given how much people are linking Germany's recent economic success with the Hartz agenda is his time in office being re-evaluated, or not so much?

Not sure. My impression is that his esteem is rising among many.

I don't just mean the press though.  Though you're right there's a consensus from the Guardian to the Economist on that.  Even the Telegraph spends half its time relishing the end of the EU and the other, saner half, fretting about whether it'll be safe in the end.  But it's more than the press I mean people like Stephen King, who's head economist of HSBC, economists and asset managers who are commenting.

It's not just the press here either, but various economists etc. too.

[Iormlund]

It's interesting to see how in both Spanish and now also main OT fora at Paradox there is growing interest on how to take savings out of our government's reach. That's not a good sign.

[The Larch]

It's interesting to see how in both Spanish and now also main OT fora at Paradox there is growing interest on how to take savings out of our government's reach. That's not a good sign.

Because plenty of people are a bunch of histerics.

[Iormlund]

Maybe. But quite frankly, I'd say breakup of the EZ is now the most likely scenario. I can't see enough political will to keep it together.

[DGuller]

How much of a clusterfuck would that be?  And would it be for the better in the long term?

[The Larch]

How much of a clusterfuck would that be?  And would it be for the better in the long term?

A humongous one, which I don't think that people advocating for an euro split are completely aware of.

[Iormlund]

There is a UBS study about a single country exiting the EZ voluntarily I read sometime ago, but I have no idea how good its conclusions are.

IIRC it predicted a loss of something like 20 to 30% GDP in the first year and single digits afterwards for Germany, up to 50% GDP collapse during the first year and a third of that from then on for a weak member.

[DGuller]

There is a UBS study about a single country exiting the EZ voluntarily I read sometime ago, but I have no idea how good its conclusions are.

IIRC it predicted a loss of something like 20 to 30% GDP in the first year and single digits afterwards for Germany, up to 50% GDP collapse during the first year and a third of that from then on for a weak member.

Heil Merkel?

[MadImmortalMan]

If Germany left, I assume. Portugal certainly wouldn't cause all that.

[Iormlund]

That's the effect on each economy if that particular country left the Euro. Then there would also be effects on other countries.

[Sheilbh]

If Germany left, I assume. Portugal certainly wouldn't cause all that.

The report's here:
http://www.scribd.com/doc/64020390/xrm45126
One of their interesting points is that generally curency breakups also involve authoritarian regimes or civil wars.

But if you think about it the consequences would be catastrophic. 

Many countries would default on domestic debt, or see that debt effectively devalued due to conversion.  That would almost certainly cause a collapse of the banking system in Europe - probably in the UK and possibly in the US too (and you've banned bailouts).  The conversion and exchange rate fluctuations would be totally unexpected and difficult to predict - no institution's really prepared for them.

In addition there's all the legal questions of how to redenominate every single contract of the last 10 years - Nomura's produced a paper on this.  (Edit:  I think Nomura's also produced a paper advising investors how to try and do well out of a Eurocollapse - which surely is a bad sign.)

This is the OECD on a potential exit from the Euro following sovereign default: "[T]he political fall-out would be dramatic and pressures for euro area exit could be intense ... Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and co-operation would most likely result in a deep depression in both the exiting and remaining euro area countries as well as in the world economy." 

The OECD doesn't normally use that sort of language.  There's war-gaming of Eurocollapse in Whitehall but we just had the independent economic forecasts or the year last year.  The Office behind it effectively said that they couldn't guess at what the consequences of a Euro break down would be, it's just a significant down side risk.

As I've said, in my view, the collapse of the Euro would almost certainly lead to the collapse of the EU (that's why the Polish Foreign Minister made an extraordinary plea in Berlin yesterday).

All of this is assuming a disorderly exit though.  That seems the most likely kind of Eurocollapse we'll see but I think some managed exits may not be nearly as bad, but who can say.

Because plenty of people are a bunch of histerics.

Possibly.  Both BNP Paribas and Citi have observed in recent days a shift in corporates withdrawing money from Italy, Spain, France and Belgium and moving it to the core or outside the Eurozone - Scandinavia's popular.  It's not significant or a run at this point but it's a worrying trend given the stress banks are already under and if it grows it could be very significant.

Edit:
This is also relevant:
http://www.bloomberg.com/news/2011-11-28/mounting-euro-breakup-risk-seen-by-banks-as-debt-crisis-festers.html
Not to mention the head of Fitch's sovereign rating department saying investors are questioning the validity of the entire Eurosystem and the Eurobanks are getting antsy:

Update 08:57: There was a big jump in what eurozone banks deposited at the European Central Bank last night to just under 300bn euros - which shows that they're even more fearful than they were of lending to each other.

The increase over the past fortnight in what they are placing at the ECB is more than 100bn euros.

Eurozone banks are opting for the security of lending to the central bank at a paltry interest rate over earning a proper return by putting their money to work. It shows how anxious they are.

And it also shows that parts of the eurozone are close to a credit crunch, if not already in one.

Again I think a lot of the problems here are ones of confidence and liquidity.  No-one's going to buy any sovereign debt in this market.

[Ideologue]

There is a UBS study about a single country exiting the EZ voluntarily I read sometime ago, but I have no idea how good its conclusions are.

IIRC it predicted a loss of something like 20 to 30% GDP in the first year and single digits afterwards for Germany, up to 50% GDP collapse during the first year and a third of that from then on for a weak member.

Good God.  Jews should probably start making their arrangements.

[Iormlund]

All of this is assuming a disorderly exit though.  That seems the most likely kind of Eurocollapse we'll see but I think some managed exits may not be nearly as bad, but who can say.

I can't see how an orderly exit is even remotely realistic. As soon as rumors of negotiations were heard massive bank runs would take place.

[Sheilbh]

This was unexpected:

Breaking news -- six of the world's central banks have just announced a co-ordinated move to boost liquidity in the world's financial system -- an attempt to avoid a new credit crunch.

Just hitting the wires now. The emergency measure involves the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss Central Bank. They are all cutting the interest rates on 'dollar swaps', which will effectively make it cheaper for commercial banks to get access to dollars.

The six central banks also said they could expand the move to other currencies if needed.

The move has sent stock markets surging, with the FTSE 100 now up 146 points.

More very soon.

Follow-up:

The unexpected co-ordination announced by the world's major central banks has been prompted by the crisis in Europe. Analysts have warned in recent weeks that some of Europe's banks were struggling to access funding, on fears of a disorderly default within the eurozone.

In practice, the Federal Reserve sends dollars over to the European Central Bank, in return for euros. By cutting the cost of that transaction (the 'dollar swap rate'), the move should make it much cheaper for European banks to access dollars.

America isn't actually paying the bill to fix Europe's banks, of course -- the Federal Reserve is swapping greenbacks for euros. But, as Bloomberg put it, "the US is helping to fix the crisis in Europe."

But there'll be more coming.  This is only the last hour or so.