An old Wall Street expression,
"IBG-YBG," explains why the euro currency is still strong. But
Germany and France could be the ones to pull the plug.
As you may have noticed, the crisis
situation in Europe is getting worse.
One side says: "Greece must
default -- the sooner the better."
The other side says: "Greece
cannot default -- to even think of it would be disaster."
Meanwhile, the euro currency trades
higher on every whisper of bailout, every thin reed of impossible settlement
Why is the euro trading so strongly,
even as fiscal disaster looms? In part because the euro is the main
counterweight to the dollar -- call it the "anti-dollar" -- and a
weak USD is good for risk assets.
All the long side players want to keep
the party going in commodities and emerging market equities. And so they want
the USD weak... which means they want the euro currency strong, or at least
So the euro gets bid up at every
chance, even as a slow-motion train wreck unfolds.
It is widely understood that crisis is
coming. There is not a hope in Hades of resolving the eurozone's problems without major pain -- quite
possibly made worse by all this delay. But that doesn't matter for the time
being -- as far as trading in the euro goes -- because of an expression known
IBG-YBG stands for "I'll be gone,
you'll be gone."
It is what investment bankers say to
each other when they put together a terrible deal, knowing the eventual
fallout will not hit them. It is what i-bank traders say when they lever up
on a highly risky position, knowing it will end in tears at some point, but
not today (and not before bonus time).
The IBG-YBG mentality leads to all
kinds of gross distortions, in markets and politics alike. It encourages
short-term decisions for the sake of immediate profit, at terrible long-term
cost to someone else. And we are seeing this play out in the eurozone now.
Europe's politicians have a natural
feel for IBG-YBG. They can live in a fantasyland now because they will not be
around later. For example, here is Angela Merkel of Germany:
The euro is our currency. And it is
much more than just a currency. It is the embodiment of Europe today. Should
the euro fail, Europe will fail. We are going to defend the euro...
That statement does not make a lot of
sense. Why does the euro currency have to be the "embodiment of
Europe?" And why would Europe "fail" just because a currency
experiment got scrapped?
Right now there is failure taking
place in plain sight. What is failing is the ridiculous notion that a
high-tech export powerhouse, like Germany, can share the same monetary policy
with low-tech, debt-addled periphery countries like Greece and Portugal.
The politicians spout nonsense because
they can't be honest about what is going on. Behind the scenes, it is all
about the banks. A Greek default, via domino effect, would lead to potential
huge losses for the banks, German banks most of all.
Europe's politicians want to save the
banks at all costs, though they can't say this out loud. This is even more true because of who gets sacrificed. Saving the banks
means brutal austerity for current and future generations. The citizens of
Ireland, Portugal and Greece -- and possibly soon Spain -- are on the hook to
become debt slaves, in order to pay for mistakes made by others.
It's not going to hold together
though. The exercise of "kicking the can down the road" can only go
on for so long. The failed experiment will blow up, and Europe's current crop
of leaders will be gone.
At some point the bank connection will
come to light. All the back and forth over "will they or won't
they," in respect to Greek default, will then switch to
"who is going to write the check." Not another temporary loan check
to Greece, mind you, but a clean-up check, to pay for the magnificent losses
of the banks as their sovereign debt holdings go bad.
In an endgame like the above, it may
be a case of every country for itself. Germany would write the biggest check,
but that is because German banks have the biggest exposure. France would
write another big check to bail out French banks. Greek banks, which are also
loaded up on Greek debt, would be left to fend for themselves.
But another painful truth would come
to light in the event that this happens. A monetary hook-up between Germany,
Portugal, Greece et al. is never going to work.
The euro currency was a political pipe
dream in the first place... a design fueled by
political ideals. The main thought was avoiding further episodes of war and
strife by bringing the countries of Europe together. A noble idea. But not
necessarily a concept that would fly.
And so, if German and French
politicians are finally forced to do the ugly thing -- write big checks to
their own banks, at the cost of huge unpopularity at the polls -- they may at
least want to say: "Why not rectify this situation. We've covered our own
costs, but we don't want to write any more checks to Greece, Portugal or the
like, now or in future."
The result could be a nasty divorce in
which the liabilities are split up. Germany and France (and possibly one or
two other "core" countries) go one way, while the periphery
countries go another. The euro currency gets split into two pieces.
An advantage of this split would be a
grouping of rich, strong exporting countries (Germany, France etc.) and a
grouping of weak periphery countries. The "core" euro currency
would then grow very strong, while the peripheral euro currency (representing
Greece and the rest) could be allowed to drop sharply in value.
This would relieve the migraine
headache pressures of monetary policy -- the impossible joke of trying to
treat Germany and Greece the same -- and also allow bank bailouts to take
place on local terms. Germans would thus grumble about bailing out stupid
German banks, but at least the costs would be kept internal.
clear exactly how a euro breakup will happen, or when. But the strange
calculus of the situation is making it more likely that Germany (with France
in tow) could pull the trigger. The current crop of leaders will be
"gone" one way or another -- IBG-YBG -- as the looming eurozone crisis swallows them, and breakup action could
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