The Euro: which way will it go?

Is the Euro doomed?

The BBC broadcast a documentary today about the euro crisis. Their conclusion? The powers that be will prop up the euro at any cost because the alternative is financial Armageddon.

Contrast that with this article in the UK's Telegraph newspaper which tells us Lloyd's of London is preparing for a Euro collapse.

The chief executive of the multi-billion pound Lloyd's of London has publicly admitted that the world's leading insurance market is prepared for a collapse in the single currency and has reduced its exposure "as much as possible" to the crisis-ridden continent.

Richard Ward said the London market had put in place a contingency plan to switch euro underwriting to multi-currency settlement if Greece abandoned the euro.

In an interview with The Sunday Telegraph he also revealed that Lloyd's could have to take writedowns on its £58.9bn investment portfolio if the eurozone collapses.

Europe accounts for 18% of Lloyd's £23.5bn of gross written premiums, mostly in France, Germany, Spain and Italy. The market also has a fledgling operation in Poland.

The contingency planning comes as German politicians piled the pressure on Greece ahead of elections on June 17.

A conservative member of German chancellor Angela Merkel's cabinet said today Germany would not "pour money into a bottomless pit".

On Sunday, Swiss central bank chief Thomas Jordan admitted his country is drawing up an action plan in the event of the euro's collapse.

Meanwhile Jim Sinclair offered the following viewpoint on his blog today:

The critical decision at the G-8 meeting and several of the bilateral meetings that took place on the sidelines of the Camp David gathering centered on the decision to plunge ahead with the bailout of the European banks in an effort to save the Euro system, with Greece still inside. President Obama is terrified that a financial meltdown of the Euro system will spill over into Wall Street and result in his losing the November elections. Behind the scenes around Camp David, Christine Legarde put the IMF squarely behind a bailout of the European banks, with the full backing of the Federal Reserve and Treasury in the United States to boost the leveraged lending of the European Central Bank (ECB) to prop up the European banks. ECB will take junk bonds and other vastly over-priced assets as collateral for loans to the Spanish, Greek and other European banks. This will offset an additional estimated $500 billion in new write-offs by bondholders of Greek debt.

The bottom line is that if Greece leaves the Euro, the contagion will spread overnight to Spain, Portugal, Ireland, and, perhaps, even Italy. So, the IMF, the Obama Administration and the ECB are all on board to further delay the reality of the financial and banking crisis through hyperinflationary measures. The idea is that the situation will take many months to fully play out, and Obama and his re-election team hope that the system will hold together past the November elections.

Which way will the Euro go? And how will it impact Canada?

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Wed Post #1: Print, Print, Print.

Two days ago it was Alessio "BBC Trader" Rastani's gloom and doom musings on Europe that garnered all the attention.

Today it is Attila Szalay-Berzeviczy, head of UniCredit global securities (Italy’s biggest lender) and former Chairman of the Hungarian stock exchange (pictured above).

Bloomberg is reporting that Szalay-Berzeviczy has written an OpEd piece in which he claims that the euro is “practically dead” and Europe faces a financial earthquake from a Greek default.

Sounds familiar, doesn't it?

• “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece's spirits. A Greek default will trigger an immediate magnitude 10 earthquake across Europe. Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty within minutes. The impact of a Greek default will rapidly spread across the continent, possibly prompting a run on the weaker banks of weaker countries. The panic escalating this way may sweep across Europe in a self-fulfilling fashion, leading to the breakup of the euro area.”

Of course this is just "one scenario among many". Szalay-Berzeviczy offers this ray of hope:

• “It’s one scenario among many, one which may lead to the breakup of the euro area via a banking crisis. This can still be averted. It primarily depends on the Germans, and secondly on European citizens, especially on how much the Greek population can tolerate.”

All Europe has to do is print, print, print.

Pity they can't print more Gold and Silver too.

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Sun Post #2: The Great Greek Domino (updated)

Over the counter (OTC) derivatives and credit default swaps (CDS) are mysterious terms that have been brought to the forefront since the 2008 Financial Crisis.

But it's important you understand what they are and what their implications are for the economy, monetary policy and their impact on Silver and Gold.

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.

Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange.

Facilitating liquidity and mitigating credit risk is what derivatives are all about.

Products traded on the exchange must be well standardised to transparent trading.

But there are non-standard products ttraded in the so-called over-the-counter (OTC) derivatives markets.

OTC derivatives have less standard structure and are traded bilaterally (between two parties). OTC derivatives are significant in the asset classes such as interest rate, foreign exchange, equities and commodities.

They have become a crucial part of the world of global finance. The OTC derivatives markets have grown exponentially over the last two decades and have been driven by interest rate products, foreign exchange instruments and credit default swaps.

The notional outstanding of OTC derivatives markets has risen to the point where they totaled approximately US$601 trillion at December 31, 2010.

If something were to occur where payouts had to be made on only a small portion of this US$601 trillion total, the outcome could be catastrophic.

Many believe OTC derivatives and credit default swaps are financial instruments which are out of control.  Warren Buffet once called them "financial weapons of mass destruction. Time bombs that could harm the whole economic system".

Are those 'time bombs' about the detonate?

Enter the rapidly evolving sovereign debt situation in Europe.  Suddenly Buffet's famous derivatives statement is brought into sharp focus.

Europe is preparing for a domino to collapse that could set these "financial weapons of mass destruction" into motion.

Today the German newspaper der Spiegel announced that the German Finance Minister is preparing for a Greek bankruptcy.

• "German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone."

The key concern of a Greek bankruptcy is that it could trigger a massive credit crunch larger than the one triggered by the collapse of Lehman Bros in 2008.

Credit lines provided to countries like Spain or Italy could evaporate if investors stop lending them money after a Greek bankruptcy.

Then there is the question of what happens to all the trillions in other interconnected debt.

Tonight every one's attention is focused on remembering the 10 year anniversary of the terrorist attacks of September 11th, 2001.

But tomorrow attention will return to Europe and the impending collapse of the Great Greek Domino.

The focus will be preventing these 'time bombs' from destroying the entire economic system.

 Can you say: "Ramp the paper money Printing Presses up even higher?"

Sure you can.

It is inevitable.

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Marching headlong down the road to Q.E. to infinity

Some interesting comments to the last post about the stock market's wild ride. Thank you to those who emailed and posted.

Agree or disagree with my comments, here's a thought for you from Jim Sinclair.

When the DOW is down 500 points in the blink of an eye, this is considered extremely bad and needs to be investigated. And in this flash crash all Market orders placed are considered bad and are cancelled!

But on a day when the Dow is up 500 points in the blink of an eye, this is considered good and congratulations are in order. Yet in this flash boom, all Market orders placed are considered good?

Uh-huh.

Yesterday European leaders committed to do “whatever it takes” to defend the single Euro currency.

This is a repeat of what US policymakers were forced into in the wake of the Lehman Brothers collapse. Not until the US Treasury and Federal Reserve promised (in effect) to bailout every bank and financial institution that looked like it was sinking did the hurricane begin to abate.

Europe will be hope for a similar result from yesterday’s initiatives and the initial response of markets is encouraging, but this is not an entirely done deal and there is still much to come.

Euro nations have in effect taken another giant step down the road to fiscal and political union by agreeing to cross guarantee the loans of weaker nations. What is even more significant is that the European Central Bank has been dragged kicking and screaming into conducting a programme of quantitative easing – buying up public and private debt securities – similar to that already carried out in Britain and the US.

What is becoming increasingly clear is that all national debt is now going to be bailed out.

Next... all debt of individual US states will be bailed out.

Regardless of the first knee jerk market reaction, the fact of the matter is that we have taken the nuclear option of adding more debt to entities failing because of debt.

Steel yourself for more unrest, in markets and in currencies.

The reaction you saw in the markets is being spun as a mystery... and there for it's branded an anomaly.

No one wants to admit that it was a selloff of significance... and therefore indicative of further problems.

The truth of the matter is that what you saw here was a combination of computer based flash trading, below the horizon computer based exchanges, and algorithms gone wild.

It's proof that computer markets lack specialists and are ticking time bombs of illiquidity. This condition remains and you can be sure we will be looking for more repeat performances.

With the $350 billion the US Federal Reserve threw in to support the EU, we had about One trillion in Quantitative Easing initiated today.

And when you consider how much more will have to be thrown at currency markets to sustain the Euro at $1.29 (at which it must be sustained to declare any market success), and it's clear we are inescapably down the road to Quantitative Easing to Infinity.

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