Posted on 27 November 2011 with 4 comments from readers
Germany has its printing presses working overtime but they are not printing euros but Deutsche Mark notes in case the eurozone sovereign debt crisis ends in a return to national currencies.
At the same time the British Foreign Office has issued warnings to embassies in the eurozone to prepare to handle the problems of its expatriates who may be unable to access local bank accounts and face rioting mobs.
Perhaps this is only an example of highly developed countries planning for all eventualities but disaster planning always adds to fear as it shows that the previously unthinkable is now being contemplated: a break-up of the eurozone single currency.
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But there is no mechanism in place to achieve this in an orderly fashion. The planning has not been that good. The euro’s founding fathers thought that allowing for failure might encourage it to happen. No matter we have gotten there anyhow.
It is only a matter of time before the long-awaited Greek debt default brings the house of cards down. Greece has to repay its next debt instalment on December 17th so a pre-Christmas financial market crash is very likely now.
Credit markets are tightening across the eurozone with German bond rates higher than those of the debt-ridden UK, Italian rates well in the danger zone of no-return and Belgium losing triple-A status at the end of last week.
Wilder economic projections in a eurozone break-up have GDP plunging by 50 per cent and unemployment soaring. It is essentially the realization of the armageddon scenario that the world thought it managed to avoid in early 2009.
What really happened then was that the can got kicked down the proverbial road. The huge bailouts and balooning of global debt levels then just postponed the inevitable day of reckoning for a massively over-indebted world. That is after all where the totally unsustainable eurozone sovereign debts originated.
US bond yields
The US is already feeling the heat from Europe in its own financial markets. Stock prices are low because the contagion from Europe will hit US banks and multinationals. But US bond prices are high and yields low because capital has fled the sinking eurozone.
Going forward that gives the US and currencies with dollar-pegs a short-term advantage in terms of cheap capital. However, the enemy is then at the gate because the US bond market will become an unsustainable bubble itself and when it breaks that will be devastating for the highly leveraged US economy.
That said the immediate worries are confined to the eurozone. But the outlook elsewhere is hardly encouraging.