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Two pieces of news rocked the euro on
Friday. With Greece on the brink of default, a "Grand Finale" draws
near.
Friday was a momentous day for the
grand currency experiment known as the euro.
Two explosive pieces of news, both
relating to Germany, hit the forex markets hard
(and sent the euro tumbling lower).
Equities were slammed again too -- on
Friday afternoon, the Dow is down 300 points as I write. Europe's problems
are the world's problems now.
The first shock development, broken by
Reuters, was a high-level resignation at the European Central Bank (ECB).
Juergen Stark, the
"top German official" at the ECB, confirmed he would leave his post
before the end of the year. Stark's departure would come almost three years
before his official term expires (May 2014).
And his reason for leaving? A
disagreement over "euro bonds" -- the printing press
crisis solution in which Europe binds itself together financially, by way of
the German checkbook. The new uncertainty sent the
euro plummeting.
We have written at length about euro
bonds in these pages, and the need for a drastic solution to the sovereign
debt crisis.
In declaring "Europe must become like the U.S.,"
we were ahead of the curve, with numerous highly placed officials, including
former German Chancellor Gerhard Schroeder, talking about a "United
States of Europe" not long afterward.
That piece stirred up some anger, however, leading to "Germany's
Terrible Choice" -- a clarification of the fact that
Germany must either "embrace the euro fully and pay its neighbors' bills, or break up the currency to
catastrophic near-term result."
In other words: Federalization and
monetization (via euro bonds) is not the only way to go. Adopting a more
unified monetary regime does not have to be Europe's destiny. But it is the
only way to avoid mayhem in the here and now.
UBS, a large investment bank, has even
warned of trade collapse, domestic banking collapse, and the threat of civil
war as a possible cost of break-up.
The second piece of news to hit
Friday, fueling a record rise in
credit-default-swap values, was Chancellor Angela Merkel's plan to
"shore up German banks" in the event that Greece defaults. Via
Bloomberg:
The emergency plan involves measures
to help [German] banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of
Greece's bailout is withheld, said the people, who spoke on condition of
anonymity because the deliberations are being held in private.
"The euro cannot be allowed to
fail, it won't fail," says Chancellor Merkel. Yet behind closed doors,
that possibility is being considered.
There is no telling where a Greek default might lead -- and confirmation of such could be
possible by the time you read this.
Macro Trader subscribers
were given the green light to short the euro early last week (before the
major meltdown happened).
The euro has been stuck in a congested
range against the $USD since May 2011," we
wrote. "We have been standing aside waiting for that range to end,
and now there are signs of resolution."
So what happens next? The smart money
is still on some form of printing press outcome, in which the European
Central Bank gives up its "hard money" ways and takes a page from
the Federal Reserve.
The Swiss tried to shoulder the pain
of a too-strong currency, but eventually threw in the towel.
The European Central Bank likewise
hates inflation, but they may hate the prospect of a 1931 Credit-Anstalt-style financial collapse even more. A banking
meltdown and the threat of eurozone depression
cannot be written off.
All of this
suggests the "core" countries will be dragged, kicking and
screaming, to the forced embrace of a printing press solution... to the
long-run result of a much lower euro.
Justice
Litle
Taipan
Publishing Group
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