One of the key themes of our rather cheery Four Horsemen of
the Apocalypse global outlook right now is that all Four Horsemen - EUR, USD,
JPY & GBP - are in terminal trouble. All will suffer some sort of chronic
failure. The failure of any one will trigger the ultimate collapse of the others
(although Euro, Yen or Sterling going first will likely send the Dollar
sky-rocketing - albeit not for long).
In the report, we repeatedly say that any of the four could
go at any stage and trying to guess which could be the first to go is folly -
but that does not stop us and when the report was written we had a slight
hankering for it being the Euro. Recent events have, of course, now changed all
that. We are certain it will be the Euro. The ECB (and by implication Austria,
Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain) is
living on borrowed time. The French smoke and mirrors re-fi plan (AKA when is a
default not a default? When you can kick the can down the road!) contains more
holes than a large wedge of French Gruyere - cf
www.guardian.co.uk/world/2010/aug/16/swiss-win-the-gruyere-cheese-war.
These were so obvious that it made us realize that even EU
finance ministers could not insult our intelligence so brazenly.
Do not be surprised if the EU decides that the GIPSIs must
leave the single currency and re-introduce Drachma, Punts, Escudos, Pesetas and
Lire - but with a difference. These meaningless second tier currencies could
well be artificially pegged to the single currency meaning that the GIPSI
banking system would be cut adrift and their new currencies would be traded more
on street corner black markets than Manhattan’s money markets.
Having previously focused on the problems facing debt-ravaged
Japan, which by simple metrics is the most indebted of the Four Horsemen of the
Economic Apocalypse, it is time to look at how the wedding between the Euro
family and the GIPSI nations (Greece, Ireland, Portugal, Spain and Italy) is
bringing about increased economic chaos in, arguably, what is the most complex
of our horsemen, the Euro zone.
The Euro zone’s fundamental flaw was the co-mingling of debt
of lower risk nations such as Germany and France in the same credit risk pool as
the GIPSIs. This disaster in the making is now entering the final sequence.
How were nations with such disparate risk profiles able to
obtain similar credit ratings and interest costs on debt?
The answer lies in the determination of the European Central
Bank, on behalf of the EU, to manipulate criteria that even the weaker economies
could eventually achieve. However, it still required creative accounting,
unfathomable derivative contracts and the financial engineering capabilities of
Wall Street’s sharpest minds before 17 members managed to gain entry into the
monetary union club, thereby enjoying years of collective cheap funding. The
periphery nations boomed as their lower cost bases and higher growth rates were
combined with access to previously unimagined amounts of cheap credit.
In the cold light of day it does seem inconceivable that
Greece, having spent around half of the last 200 years in default, was granted a
credit rating comparable to Germany. However, once the credit ratings agencies
swallowed the deception that the Euro zone was broadly homogenous, investors,
including banks, followed. The GIPSIs are Europe’s version of sub-prime,
overwhelmed with debt they are unlikely to ever be able to repay. Greek
borrowing costs, which had been running at well over 25 percent per year,
virtually converged with German debt costs at well below 5 percent. Membership
of the Euro for countries that had previously had difficulties raising capital
and whose price of capital had reflected this was like giving membership of a
candy shop to children with a sweet tooth.
The whole plan of the Euro was another example of the effects
of the tidal wave of global liquidity that flooded markets in the 1980s and
1990s, flowing into the most immediately rewarding (and generally riskiest)
asset classes. Asset bubbles grew and grew until 2008… when they started to
burst.
To be continued…
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on
[email protected]
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