Tuesday, 19 July 2011

08:28 – Spain auctioned a couple billion worth of short-term bonds today. They kept the face value low and the maturities short, hoping to cherry-pick low interest rates and thereby demonstrate that the market still has confidence in Spanish debt, which it doesn’t. Even with the low face value and short maturities, they ended up paying nearly a full percentage point more than they did on their last auction of similar bonds a month or so ago. That bodes very ill for future bond auctions for Spain, and particularly for Italy, which has a huge amount of debt that needs to be refinanced in the coming months. The next Spanish bond auction is set for Thursday, the same day the EU holds its crisis meeting. That auction is for long-term bonds, which are likely to sell at disastrously high interest rates, if at all.


Lab day today.


12:12 – Merkel says that nothing that happens at the summit meeting Thursday will solve the Greece crisis, and she’s right. But I think what she’s really doing is signaling that, as far as Germany is concerned, enough is enough. All of the “solutions” proposed thus far involve Germany paying the lion’s share of the costs, and Germans are tired of being sucked dry to prop up a poor southern fringe EU country that’s going to fail no matter what happens. Germans rightly consider any additional funding provided to Greece to be good money after bad.

At this point, I really don’t see any alternative to the Eurozone collapsing into fragments. Even if the Greece problem were solvable, which it isn’t, Greece is the least of the Eurozone’s problems. The gorilla in the room is Spanish and particularly Italian debt, hundreds of billions of which will need to be refinanced in the coming year. There is simply no way that Germany can fund that effort, and any money it throws down the Greek rat hole now is simply damaging its future prospects. The real question is whether Germany will opt in the relatively near future to abandon the Euro and return to the Deutschmark, or whether Germany will join with France, the Netherlands, and other relatively stronger northern economies in a new Eurozone. My guess is the former. Germany was never really happy about having a common currency, and events have proved them right.

12 thoughts on “Tuesday, 19 July 2011”

  1. Hmm. That contradicts my experience while there–and I arrived just a month before the Euro was implemented. All the Germans I knew were ecstatic about the elimination of a plethora of currencies. Germans love their vacations and spare no expense for them. To be able to travel most everywhere without ever changing currencies or paying exorbitantly for the privilege of doing so, is something I do not think they will be happy to lose. And it was clear to everyone in business that foreigners spent more money after the Euro came about, than before.

    As far as resurrecting the Deutschmark, the probability of that happening is–on a scale of 1 to 10–about a minus 15, IMO. If there is a change in currencies, it will be to a new one, not a return to the old. And make no mistake, the debtor nations do NOT want to return to their currencies, as it would mean financial suicide. They cannot be kicked out, so why in the world would they leave a gravy train for sudden death?

    The only people I knew who wanted the Deutschmark back, were over 80 years old–it is a sentimental thing.

    My guess at what will happen, is that the objective will be to spread the pain around. Banks who made loans will be forced to eat a good part of the loss, as will every one of the stronger countries. There IS enough there to float a bailout.

  2. That’s not what I’m hearing from German friends, who are very tired of paying the bills for Greece, let alone the rest of southern Europe.

    And note that it’s not just sovereign debt that’s a problem. Germany would have to bail out a bunch of non-German European banks, whose collective exposure is huge, probably as much as the sovereign debt.

    But again, we’ll see who’s right. Barring the US via the IMF bailing out the Eurozone, which would be incredibly foolish and irresponsible on our part, the Eurozone simply can’t survive. It was a bad idea in the first place, as most independent economists said at the time and are saying now. The Eurozone is in a train wreck now, and it’s going to end as train wrecks do. The Eurozone authorities can’t even agree what to talk about, let alone what to do.

  3. To be able to travel most everywhere without ever changing currencies or paying exorbitantly for the privilege of doing so, is something I do not think they will be happy to lose.

    That was my impression from the German families that I know. When I first visited in 2001 they have individual wallets with currency for each country they visited. It was difficult to keep track of everything. They loved having a common currency for every country.

    I can also tell you from my travels in the area having a single currency was great. I could get money from the ATM in Germany and spend the money in Spain with ease. Not having to do multiple exchanges was a bonus. It made traveling easier for me and I suspect so for most of the Germans that traveled.

    Germany will never go back to their old currency. It is either the Euro or perhaps some other currency. If Germany were to convert to a different currency the chances would be higher of converting to the dollar than back to the deutchmark in my opinion.

  4. Well, back in the 1980’s gold climbed to never-before reached heights that were multiples of previous highs. The world did not end. It won’t now.

    Afraid I have to agree with the first 2 commenters after the post. I started working in TV news just in time to watch it transform from real news presented by solid newspaper-trained journalists to Hollywood airhead movie-star wanna-be’s stressing gloom and doom every time it rained. Then, strangely, newspapers folded in the truth and accuracy department and followed television’s suit. Until now, when they finally cry wolf so many times that you cannot believe a one of them anymore.

  5. “My guess is the former. Germany was never really happy about having a common currency, and events have proved them right.”

    I thought Germany (and France) were the original Euro evangelists…

  6. I’ve never understood the rationale behind the Euro. Sure, it’s convenient not having to change currencies but how can sovereign countries share a currency? I know some countries peg to or use the USD (and a small number of specks in the Pacific use ours) but how can large countries have a common currency without having a common government?

    I’m surprised the Euro has lasted as long as it has. Can it last much longer without political union of the countries involved? I don’t see how.

  7. “My guess at what will happen, is that the objective will be to spread the pain around. Banks who made loans will be forced to eat a good part of the loss, as will every one of the stronger countries. There IS enough there to float a bailout.”

    I don’t see why it’s in Germany’s interests to float a bailout. That would be like Ray voluntarily bailing out the parasitic woman he’s mentioned on a number of occasions. Why would he want to? Why would any sane person want to? Let her eat at a soup kitchen.

    If Germany bails out the basket cases they’ll just have to do it again and again and again.

  8. “I can also tell you from my travels in the area having a single currency was great. I could get money from the ATM in Germany and spend the money in Spain with ease.”

    When I first visited Europe in 1990 I went to the UK, France and the four Scandinavian countries. I got completely sick of changing currencies and the resultant commissions, so in Finland I didn’t get any of the local currency. I just ate the included meals and one or two optional ones organised by the tour country. It was only for four days but my belt tightened one notch while I was in Finland.

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