Cameron gets it right, US hedge fund managers still way off on the eurozone crisis
Posted on 13 December 2011 with 6 comments from readers
British Prime Minister David Cameron abandoned the European Union to its fate in the eurozone crisis last week, protecting the British national interest from the inevitable failure of the eurozone as far as he could.
But Wall Street titans like Barton Biggs still do not get it, although he seemed equivocal in his latest Bloomberg interview. The US Government does. Secretary of State Hilary Clinton yesterday said their concern was not over Britain’s veto but whether the proposals on the table would actually work.
British veto
Mr Cameron is from the same school of pragmatism. What was the point of supporting something that is not going to work? How would that help the situation, particularly in his own country for which he is responsible? So he made his excuses at the last minute and left the EU to its fate.
Markets yesterday took the same line as the British and voted against what the eurozone leaders concocted in Brussels last week. They failed to come up with a credible solution to push the markets in the other direction and so they fell sharply.
Now comes the inevitable downward spiral until the EU puts a credible solution on the table. The danger is that such opportunities pass and in the meantime there will be significant further damage to the global economy.
Only when it is too late and the damage is enormous will the EU leadership produce something that might have worked last week. Will it then work? We think it will not and so the eventual cost of saving the eurozone will be far too high for it to be achieved.
In Germany finance directors are planning for a ‘northern euro’ and ’southern euro’ though what this means in practice it hard to tell. The Bundesbank has still not denied the story that it is printing Deutsche Marks just in case they are needed (click here), and if this was nonsense they would surely have done so.
Certainly the finance managers of major companies in the eurozone are preparing for the unthinkable but perhaps now inevitable, the break-up of the euro.
Going broke
The half-measures of the summit last week just make this more likely and not less, and perhaps at the margin support from the UK would have helped though it would most likely not be decisive in turning the crisis around.
For the UK the distance from Europe means that its own highly-indebted position (click here) may be overlooked for sometime giving the economy some breathing space. But the impact of the eurozone break-up will still be felt strongly.
Standby for more major turbulence in global financial markets as this failure of the euro is not being planned for except in large German companies.
Bond yields will continue to go up in the southern eurozone and down in the northern eurozone, ratings agencies will respond and eventually the markets will crack the eurozone in two. This will bankrupt the eurozone banks and the contagion through credit default swaps will pull down US banks too.
It is one almighty mess and could make the post-Lehman crisis look a walk in the park.
6 Comments posted by readers:
European banks are carrying vast quantities of bad debt on their balance sheets from government debt and gigantic real estate losses that are still being carried at full value. They also may have written a lot of debt insurance (remember AIG?). The European central bank will need to print a lot of euros to keep them from collapsing next year. They make the American banks look great in comparison, because they dwarf the European economies in size.
Bloomberg TV interviewed a very successful hedge fund manager (referred to as ‘The Wizard’ on Bloomberg TV) who said he fears Germany is making a power play to eventually control Europe through finance. He expects that the Germans and French will retaliate against the UK by freezing their banks out of deals and by taking other actions. Of course, the UK has a big friend with the world reserve currency and 312,000,000 people. (Although you never know whose side this current President might take. He might throw our traditional UK allies to the wolves.) What would that friend do if forced to choose between the UK and Germany? This crisis could be a good chance for the US to rid the globe of the only immediate challenger to the dollar, if some folks in Europe want to play nasty. The China money won’t be ready to take over for a while, especially if their economy is wrecked by a total European meltdown, if we can destroy the little euro.
As you can see, I would make a dangerous President, who would have already set up a team to kill the euro, as soon as the crisis started. (And just think, I was raised a good Catholic. Now you know why we need confession.) Just in case such a plan actually exists, you want to be in dollars during the coming currency war. Anything else, except oil, could be toast. I’m not saying it will happen, but 2 very successful investors said today that it is now a toss-up. Neel Kashkari of PIMCO ran TARP for the US government. They pick pretty bright folks to do stuff like that. He said on CNBC Monday morning that the recent euro fix would probably fail.
How about Canada exiting the Kyoto climate thing. I love Canadian oil sands. Those Canadians are such smart people.
An excellent summary of the most likely outcome.
UK needs to use every defence at its disposal to shoot down any vindictive Euro regulation/legislation heading its way
Shoot-down – may summon up pictures of 1941 in the East End of London – all ver again. Now there’s a picture.
The only advantage Britain has is that it is less chained to the anchor. With its longer maturity of debt it is in the position to be the last man which might be more what it takes to be considered a “winner”. It’ll still be a shredded rag.
Using lines like “the unthinkable but perhaps now inevitable” puts this publication in the tabloid zone.
Small correction… I meant to type “last man standing” instead of “last man” – apologies for the sloppy typing.
There are always limits. You can ignore and reject the limits, but you can’t ignore the consequences of ignoring the limits! European debt has reached it’s limit….now for the fun part….the consequences!
Welcome back Paul King. Your contrarian views are welcomed as a defence against ‘confirmation bias’. It is perhaps inevitable that like-minded souls congregate together so conflicting views are rare and extremely necessary.
I also express contrary views but unlike you the Editor exercises his prerogative of censorship. Perhaps my views are more dangerous! Read this comment quickly before it is deleted!