1. These countries have an aging population that is spending less and less.
2. The governments are spending less and less.
Both the above factors mean that the real GDPs of these countries will keep shrinking in the long-term.
3. These countries are perpetually stuck with a currency which isn't going down in spite of deteriorating economic conditions. A strong currency makes these countries uncompetitive in the global markets.
4. Moreover, the interest rates that these governments have to pay are going up.
A ECB intervention can cure point 4, but 1,2,3 have no real solutions.
I see a 90% probability that the Eurozone will break down sooner or later.
Printing money or forming a political (or fiscal) union are possible options, but these options are extremely difficult to implement.
I would assign of probability of 10% of a solution being found by either of these two ways.
Given one of the above is certainty, shouldn't one act before the fact than to repent for slower response?
If you expect serious inflation, you should convert all your cash to real assets.
If you expect serious deflation, you should convert all your real assets to cash.
It isn't possible to protect oneself from both inflation and deflation at the same time.
My problem is not that I don't know what will happen to Eurozone. I am pretty sure it is going to break up (90% sure as stated in earlier post).
My problem is that I don't know when Eurozone will break up.
If it is going to take many years and the European leaders are going to try all sorts of things to save the Eurozone till then, we can have a very strong bull market in that period.
On the other hand, it is going to happen in next few months, we have a case for a brutal bear market that can take us much lower.
I don't think it is prudent to take a call now on where the Eurozone will be in next few weeks. It is just best to wait and keep accumulating cash till we get a clear signal from the Eurozone.
The Indian benchmark indices fell by close to two per cent in Thursday's trading session. They were flat for the better half of the day, but with the opening of the European markets they lost steam and took a steep dive.
I can't understand the reason behind this because European market has never affected Indian market so much.
I can't understand the reason behind this because European market has never affected Indian market so much.
Please give some light on this.
It is not European Stock Markets which are affecting our markets. It is the sentiments in the market. Weak and pessimistic sentiments cause the markets to move down. Escalation in Eurozone crisis is going to have lot of weak sentiments not only in Europe but across the World because of exposure of various businesses and banks to Europe.
When a Bank/Investor does not know who is solvent and who has the capacity to pay back, it creates uncertainty. In the business world, no one likes uncertainty and then they do not lend to anyone. Problems in Europe force banks/investors across the world to stop lending/investing because they are not sure of their losses in Europe (and of course they are over leveraged on their portfolios) and they want to hold on to whatever Cash they have. The whole money business halts which is the lifeline of World economy. This in turn makes the things worse, money supply dries, new investments don't happen and recovery is delayed. It is a deadly cycle and things get much worse before they start to improve.
Hence any bad news and losses in Europe tends to create ripples across both sides of Europe.
Eurozone finance ministers have demanded written commitments from Athens on austerity measures and structural reforms before releasing an installment of eight billion euros ($11 billion) from a May 2010 bailout deal. The funds are all that stands between Greece and bankruptcy next month.
The whole money business halts which is the lifeline of World economy. This in turn makes the things worse, money supply dries, new investments don't happen and recovery is delayed. It is a deadly cycle and things get much worse before they start to improve.
Private investors have been dumping Eurozone sovereign bonds for a some time. The outflow is accelerating now.
Moreover, European banks are increasingly finding it difficult to raise money.
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Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.
Markets take a fresh hit over Spain's economic problems and warnings over growth from Asia, while the US fails to agree how to cut its deficit. The whole world market is so unstable because of some unwise political decisions.
Dr. KENNETH ROGOFF, after being extremely hopeless about any nearterm solution to EUROPE in an interview on cnbctv18, diluted his stance after a power full rally drove S&P 500 to 1265-1280, if ROGOFF cant be sure, we would be discussing something which is beyound our comprehension.
Could someone post links to yields of benchmark bonds of key nations? Alchemist posted links to Italian and India bonds earlier in the thread.
Want to check how Germany is doing. If German bond yields start rising then it means "Game Over" for Europe.
German bond yields are unlikely to rise significantly - no matter what happens to the Eurozone.
Germany is considered to be the strongest among all major economies in the world. Even if the Eurozone breaks down, Germany won't have any problems in meeting its debt obligations.
German sovereign yields have been steadily falling since May and are currently below 2%.
It would be France and not Germany that would be the last economy to get into trouble before the Eurozone implodes.
German bond yields are unlikely to rise significantly - no matter what happens to the Eurozone.
Disclaimer: I am not always right. .
The latest German bond auction has ended in a "disaster".
Yields have increased byover 8% today. In other words, bond prices have fallen over 8%.
Yields are still very low compared to other sovereign bonds around the world.
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In one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the low returns offered -- just 2 percent annually over 10 years -- deterred investors made uneasy by the escalating cost of the crisis to Germany.
That meant the central bank had to pick up 39 percent of the 6 billion euros ($8 billion) of debt Germany had hoped to sell after commercial banks bought just 3.644 billion euros of the issue.
Yes, definitely a good read, especially as the author's views are similar to mine. .
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The EFSF facility they created is woefully underfunded. It can barely deal with financing the third Greek bailout.
Agreed and I have pointed that out earlier too.
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Banks around the world are dumping their holdings of Italian public debt but there is no buyer other than the ECB because of the risk.
Agreed and I have pointed that out earlier too.
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There is of course a solution at hand; and the only one that will work because all the other options seem to have been exhausted.
That option requires Germany to reconsider its refusal to bear its large share of the fiscal burden that will come with Eurozone fiscal union.
It requires all unwanted national sovereign bonds of Eurozone members to be replaced by a single Eurobond that is jointly and severally guaranteed and underpinned by the weight and ability of the ECB behind it to print money if necessary to ensure that such bonds are honoured.
This solution would resolve both the over-indebtness problem of the Eurozone and the problem of banking system collapse at a single stroke.
I agree partially.
I think it's a theoretically-possible solution, but not practically-possible. German public is unlikely to agree to any such solution.
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Should the unthinkable (but increasingly likely) disorderly break-up happen, the public debt problem will be accompanied by an unresolved private debt problem throughout the Eurozone of equally monumental proportions! That really will break the system and the banks!
Agreed and I have pointed that out earlier too.
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Such a recession would last for a minimum of 2-3 years and would probably be quickly followed by a similar debt crisis in the US.
That is one point that I don't agree with.
Firstly, I don't expect a similar crisis in US immediately following the Eurozone break-up. US's ability to borrow cheaply depends on how "safe" its debt is considered compared to debt of other countries. With the demise of the Eurozone, there would be no other large and stable economic entity left in the world except the US. US economy is doing much better than economies in the Eurozone. Collapse of the Eurozone would allow US to borrow cheaply for many years to come.
Even if US debt crisis does worsen, I expect the US government to react to it by inflating the economy (increasing the money supply).
That would lead to high inflation and not deflation.
Defaults in the Eurozone would lead to a sharp decrease in money supply and hence deflation. Some countries may face high inflation because of collapsing currencies.
We have all heard about Eurozone crisis, but in all this discussion where is Britain?
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Originally Posted by Prudent_Investor
The Euro was Germany's idea to compete against USA as they realized their own economy and currency will not be strong enough to pose a serious competitive challenge to US and US Dollar. This was the driving political force for Euro creation apart from the trade benefits otherwise advertised. US - Germany hostility is a long term known issue.
England never joined Euro as they didn't wanted to lose US support and getting closer to Germany by submission to the Euro would have meant just that.
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Originally Posted by Alchemist
Britain is in a much better position compared to the Eurozone as it has its own currency (GBP)
In short, Britain's strong alignment towards the US have saved them from the mess. They are not doing great, but way better than other Eurozone countries.
...
However, I don't think Indian IT workforce is easy to replace.
Salaries and costs in US are still around 3 times that in India.
Costs in Philippines and Vietnam are still 25%-30% more than India and it will take 3-5 years of high inflation, before costs in India become same as those in Philippines or Vietnam.
Argentina and Indonesia are even more expensive.
Besides that, India's English-speaking population is much greater than the English-speaking population in those countries.
5 years ago no one would have believed that Phillipines will overtake India in the BPO business.
The same holds true for IT. It is only a matter of time (4.5 years in my opinion) when India becomes an "also ran" in this sector. I remain steadfast in my opinion that our IT prowress is an illusion.
Last edited by sudhashbahu : 28th November 2011 at 09:41 AM.
Reason: Changed link to ET instead of TOI
The economic turmoil that began in Greece and has engulfed Ireland, Portugal, Italy and Spain is now closing in on Germany, which failed to get bids for 35% of the ten-year bonds offered for sale. It gives a clear signal that investors are shuddering away from the region where borrowing costs will touch newer peaks and the euro lower depths. It is surely a matter of concern that when the strongest European economy faces difficulty in raising capital, things are worse for the other European nations.
Germany may have faced some difficulty selling 10 year Bonds but that hardly means that the German Economy is facing troubles. Germany is the second largest exporter in the World and imagine the benefits it is having due to a weaker Euro.
In fact, Germany's economy grew fastest in second quarter in whole of last two decades.
I like Germany's approach. Rather than pinching from hard working members to keep afloat the excess spender, they would stand by till the excess spender learns working hard to earn lively hood.That of course would blow away a lot of bloated ego / opulence / luxuries which were assumed to be necessities.
Back to bicycles & bullock carts (renewable energy based transport) may seem bizarre, but eventually would be the savior of the planet.
European and US markets rallied yesterday as 6 major central banks declared their intention to reduce cost of borrowing (dollars) for banks and to provide liquidity in non-domestic currencies.
Nifty is expected to open around 5000 today. I am not sure how long the rally will last.
This move does nothing to solve the core problems that Europe is facing.
On one hand European economies are shrinking and their revenues going down. On the other hand, their overall debt and borrowing costs are going up.
These countries have a solvency problem and no amount of liquidity can cure that.
There are two things that happen when debt in an economy (government or private) becomes too large to service.
Either the government/company defaults or money is printed to repay the debt.
Defaults are fair as they punish those who are holding the riskiest assets (lowest quality bonds and shares).
Printing money is not fair.
By printing money, a government rewards those who hold the riskiest assets and punishes those who hold the safest asset (cash).
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I don't think defaults/bankruptcies are an easy solution for the current crisis.
According to the author:
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Yes, the losses are so huge that we will likely require a lender-of-last-resort to recapitalize bankrupt financial institutions after the "bankruptcy" and keep them operating (because, given the interconnectedness of the global financial system, it really would be a mess if the entire thing suddenly entered bankruptcy court at the same time)
It is not just likely, it is obvious.
If it were a case of insolvency of a large corporation or a single country, a default would have been an easy solution.
When Satyam ran into a liquidity crises, it was supported by the Indian government who asked PSU banks to lend to Saytam.
When Pakistan ran out of dollars, IMF came to its rescue.
During the 2008 crises, private banks in the west were openly supported by their respective governments.
In all cases where external financial support was provided to country/corporation, the support always came from a lender who financial strength was much greater than the country/corporation being supported.
That can't be the case if Eurozone governments are allowed to default.
If all PIIGS are allowed to default, the defaults will spread across the entire world. First to fall will be non-PIIGS European countries with high debt like Hungary. Next will be countries like France who hold large chunks of PIIGS debt. Next will be UK and US because of the financial and trade connections with Eurozone. Next will be China and all other emerging markets and everyone else who is connected to European and American economies.
In short it will start a domino effect and one by one all economies will collapse.
Forget about US and rest of the world, there is no political or financial entity, which is big enough to be a "lender of last resort" for the Eurozone countries if they officially go bankrupt.
ECB can be a "lender of last resort" only if it is allowed to print money. Otherwise, it can't even support Italy or Spain from its own funds.
Either the government/company defaults or money is printed to repay the debt.
In case of corporations, money is not always printed immediately.
A government may use its own cash balance to buy debt/equity of an insolvent company.
Most of the governments around the world have negative operating cash flows (they spend more than they earn). Negative cash flows can't be maintained forever.
Such governments will eventually default or print money.
World markets have rallied today after Merkel said that the Eurozone is working towards fiscal integration.
Merkel's "fiscal integration" means little. It's nothing more than a stringent austerity plan.
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Outlining a long-term approach to tighter fiscal integration in the single currency area, with tougher budget discipline, she dismissed quick fixes such as massive Fed-style money printing by the European Central Bank or issuing joint euro zone bonds.
Austerity doesn't just mean spending cuts. It also means shrinking economies and tax revenues.
Currently PIIGS are paying abnormally high interest on long-term debt, which is not sustainable.
Unless PIIGS' bonds are backed by the Eurozone or ECB agrees to keep purchasing these bonds (by printing money if needed), cost of debt for the PIIGS is unlikely to come down.
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However, sources close to Merkel said she was willing to see the ECB step up its buying of troubled euro zone countries' bonds as a bridging measure until budget controls took hold, but did not see it as a durable solution.
Unless ECB is allowed to print money, it just doesn't have the financial strength to buy debt in a big way.
e.g. Italy alone has to rollover $538 billion of debt in 2012.
Eurozone has planned to leverage EFSF and borrow $1 trillion for it.
The question is where is that $1 trillion going to come from?
Most of the governments around the world have negative operating cash flows (they spend more than they earn). Negative cash flows can't be maintained forever.
Such governments will eventually default or print money.
Not all govts can print money to get out of debt!
It depends on what currency the debt is in. Most of US's debt is in Dollars. So they can get away with printing dollars - that's why US is far safer than other countries. But let's say a good portion of a country's debt is not in it's own currency - i.e. it's sovereign debt, then printing money will get you nowhere. For eg's India's debt in foreign currency is more than 50% of GDP, I think.
The bank in question is the ECB (European Central Bank) which is the central bank for European Monetary Union (EMU) comprising of 17 European Nations.
All the sovereign debt of EMU nations are in the same currency Euro. Since ECB is the only authorized bank to print Euro, it can print Euro and buy out troubled debt of PIIGS nations.
Printing money will lead to higher inflation in EMU and later in other parts of the world but Germany and other nations are not ready to allow higher inflation which is currently held stable at 3%.
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Originally Posted by vinvest
For eg's India's debt in foreign currency is more than 50% of GDP, I think.
India's total external debt was $305.9 billion at the end of March 2010-11.
India's current forex reserves stand at $312 billion.
So India still has foreign currency debt < forex reserve which is a safer situation.
India's debt to GDP is at 70%. Based on a GDP of 1.8 trillion US$ that works out to be 1,260 billion US$. But apart from the $300 billion odd, the rest of close to $1 trillion or INR 50 Lakh Crore is rupee denominated.
So in the worst possible situation the Govt. of India can print money and pay off this debt.
The bank in question is the ECB (European Central Bank) which is the central bank for European Monetary Union (EMU) comprising of 17 European Nations.
I have quoted the part of alchemist's post which I was replying to. It isn't about the ECB.
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Originally Posted by Prudent_Investor
India's total external debt was $305.9 billion at the end of March 2010-11.
India's current forex reserves stand at $312 billion.
So India still has foreign currency debt < forex reserve which is a safer situation.
India's debt to GDP is at 70%. Based on a GDP of 1.8 trillion US$ that works out to be 1,260 billion US$. But apart from the $300 billion odd, the rest of close to $1 trillion or INR 50 Lakh Crore is rupee denominated.
So in the worst possible situation the Govt. of India can print money and pay off this debt.
India was example as compared to the US to show the difference between sovereign and non-sovereign debt. I wasn't making any commentary on India's debt per se other than the fact that sovereign debt is more risky than debt in your own currency.
Rupee falling by 3-4% against the dollar will turn your figures into debt > forex reserves.
Inflation / Deflation
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