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Eurozone May Soon Collapse

Discussion in 'World Economy' started by satz, Sep 16, 2011.

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  1. satz

    satz Captain SENIOR MEMBER

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    Eurozone may soon collapse


    i suspect the eurozone will soon collapse and trigger global financial contagion. This will be not remotely as bad as 2008, but painful nevertheless. A double-dip recession is not certain, but looks likely.

    I have been obliged to abandon my earlier optimism that eurozone politicians would find ways of postponing Greek default, and the global economy would grow slowly but avoid recession. European politicians have poured much political capital into creating the eurozone, and will go to extraordinary lengths to prevent a rupture.

    A month ago, there was support for Eurobonds - guaranteed by all member-states - that would enable weaker countries to access credit at low interest rates. But the ruling of a German constitutional court last week has cast doubt on the legality of Eurobonds. Hence attempts to save Greece and other weak states have been swamped by scepticism in financial markets.

    On Monday, the credit-default swap rate in Europe indicated a 98 % chance of Greek default. The yield on some Greek bonds skyrocketed to 60%, a clear indication that bondholders expect to get back only a fraction of their principal. The European Financial Stability Facility can prop up Greek, Portuguese and Irish bonds for some time, but it lacks the firepower to prop up Spanish and Italian bonds, which are coming under pressure. Italy has asked China to buy its bonds, but that looks a very long shot.

    That leaves the European Central Bank (ECB) as the last line of defence. The ECB could print euros to finance unlimited purchases of dodgy gilts. But it was created as an independent institution to fight inflation, so will oppose monetising unlimited tainted gilts, despite high political pressure to do so. After a point, it will surely refuse further gilts purchases.

    The Eurobond option looked promising earlier, but is in trouble. Eurobonds would in effect provide guarantees from solvent northern Europeans to loans of improvident southern Europeans. Some analysts thought such financial engineering might avoid raising the hackles of northern voters angry about handouts to irresponsible southerners. The big blow, however, came from the German Constitutional Court.

    While upholding the constitutionality of the EFSF, it placed stringent curbs on rescues that entailed permanent transfers to others, caused large losses to German taxpayers, or offered guarantees that could be triggered by other European governments. Financial engineers will seek ways round this ruling, but will probably fail.

    Alternatively, all eurozone countries could engineer a speedy fiscal union, in which a eurozone finance minister will be empowered to impose taxes and spending guidelines on errant governments. However, Greece and other weak countries will resist surrendering their sovereignty over taxes and spending. Besides, a fiscal union will require referendums in European countries, whose voters have grown increasingly sceptical about the eurozone.

    If Greece defaults, it can stay in the EU but will have to leave the eurozone. On joining the eurozone, Greek gave up its currency (the drachma) and adopted the euro, issued by an independent ECB. The ECB provided euros to Greek banks against gilts as collateral: that is how Greece got its money supply. But if it defaults, surely the ECB will reject its gilts as collateral and stop supplying it with euros. Absent euro supplies, Greece will have to exit the eurozone and create drachmas again.

    Ref:-Eurozone may soon collapse; trigger financial contagion: Swaminathan S Anklesaria Aiyar - The Economic Times
     
  2. Ahmad

    Ahmad 2nd Lieutant FULL MEMBER

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    too bad if it happens.
     
  3. Sanjeeb Bose

    Sanjeeb Bose Lieutenant SENIOR MEMBER

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    Much depends upon Germany & France & others, how they pitch in to pull it through this mess. Until then very bad scenarios ahead. Bad for whole world.
     
  4. Picdelamirand-oil

    Picdelamirand-oil Lt. Colonel MILITARY STRATEGIST

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    I'm still waiting for collapse
     
  5. Manmohan Yadav

    Manmohan Yadav Brigadier STAR MEMBER

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    I have been Hearing this since 2008
     
  6. satz

    satz Captain SENIOR MEMBER

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    I think France and Germany will go all the way to save Eurozone.

    Germany is already doing it by spending there tax payers money, oh i guess France and Germany are the only two countries getting benefited.
     
  7. Picdelamirand-oil

    Picdelamirand-oil Lt. Colonel MILITARY STRATEGIST

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    I think there is a war, using media, to amplify the crise in Eurozone. It's a problem of confidence and you can attack the confidence by the media.

    When people loss confidence in your economy interest rate and CDS and so on increase degrading the situation. So bad news are self-fulfilling. Wall street and the city were the attackers. This was to hide their own problems and to be able to say that if they have problem now it's due to Eurozone.

    The media war against the Euro was useful in as much as it forced the Eurozone to implement the reforms necessary to overcome the crisis. There was, of course, no revolution here, playing as we are by the “rules of the game”, that is to say without scaring the markets. No thundering statements, but compromises and solid actions made after lengthy discussions. And gradually the structures have come into place that strengthen the Eurozone. The contrast with US and UK inaction is striking.

    Everything is relative, of course, but global violence in 2013 figures to make Euroland one of the few havens of peace, stability, and comfort… and for investors it will be one of the few regions offering some visibility for the future. This will create a powerful engine for exiting the European crisis in 2013.

    The improvement of relations of Euroland with BRICS, would weigh in favor of the necessary reforms in global governance.

    Euroland, born in the crisis and strengthening with each wave like a tidal power plant, Asia, and South America are better equipped to become the big winners in the “reshuffled” world, while the old powers, like the United States, the United Kingdom, Israel, Japan, etc., are failing to adapt to the multi-polar, post-crisis world and find themselves utterly destitute.

    Let there be no mistake: 2013 will be difficult for a Europe in recession. But whether it is through the banking union which will begin functioning in early 2014, through increased political integration or through the European Stability Mechanism, the independence of Euroland states is affirmed. One sees it in disagreements with the IMF on Greece: by 2015, the European Stability Mechanism will have sufficient credibility and skills to let the IMF deal with developing countries (or save the US or UK) and concentrate only on European problems. This decoupling from the institutions of the “world before” and from the United States allows Euroland to engage in the constructive dynamic of adaptation to the “world after”, through custom-made tools.

    GEAB N°70 is available! 2013, the first steps in a chaotic
     
  8. Jungibaaz

    Jungibaaz Lt. Colonel ELITE MEMBER

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    Eurozone wont collapse.
    Only I think there is a danger some may drop out.

    Thank God, Gordon Brown didn't let us join the EU.
    Else, we'd have Brussels dictate our policies here in the UK.

    edit: Thanks to the austerity approach and entire reliance on quantitative easing and monetary measures, we probably wont see recovery for some EU states till after 2016-2018. As for Spain and Greece, it's way worse.
     
    Last edited: Jan 11, 2013
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  9. Picard

    Picard Lt. Colonel RESEARCHER

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    Germany is dependant on EU for buying their products, in fact. That's main reason they want Eurozone.
     
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  10. Jungibaaz

    Jungibaaz Lt. Colonel ELITE MEMBER

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    EU is meant to be some sort of win-win situation for everyone and no need for a trade-off between mutual beneficial and self interests. But as with Greece and Spain, Miss Merkel's actions/words are plagued with self interest. It defeats the vision of the EU.
     
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  11. Picdelamirand-oil

    Picdelamirand-oil Lt. Colonel MILITARY STRATEGIST

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    I'm not sure UK won't collapse as USA will
     
  12. vstol jockey

    vstol jockey Colonel MILITARY STRATEGIST

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    Whether EU collapses or not but UK is sure to collapse once the referendum is completed in Scotland.
     
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