How will the never-ending eurozone crisis finally end? All roads lead to the printing press…
Recently, I have said, "watch the bond market." The action in U.S. Treasury bonds makes for a good risk barometer. If bond prices rise and yields fall, that means "risk off" is back on the menu.
The big spike in yield came as markets soared in the final week of June. That was the burst of stock market euphoria coupled with a "problem solved" verdict for
But yields have tanked again — and bond prices round-tripped back to recent highs — as
A ways back in these pages, we argued that
If you look at the cycles of crisis coming out of the eurozone, they are getting faster and tighter. More countries are getting sucked in. The breathing space between problems is getting smaller.
This week
Throughout Europe’s debt crisis,
But the contagion that started in the euro zone’s smaller countries is suddenly moving to some of its largest. As Greece teeters on the brink of a default, the game has changed: Investors are taking aim at any country suffering from a combination of high debt, slow growth and political dysfunction — and Italy has it all, in spades.
In recent days,
As we have said before in these pages, the eurozone’s sovereign debt problems are getting bigger, not smaller. Proposed solutions are either fiendishly complicated, logistically impossible, or a mix of both.
Even worse, the crisis grows as time goes by. Dialing back the clock, a small country like
But now the gangrene has spread from the patient’s big toe to infect his entire leg.
So at what point does
Some observers have predicted the euro itself is on its deathbed — that the euro currency will not last another year. This prediction is often coupled with a bullish argument, that
Others argue that the euro will almost certainly survive no matter what… even if it survives in a different form. We could see the euro continue to exist even if a handful of countries are kicked out, or if a two-speed
In this particular case, your editor does not support as dramatic a forecast as all that. The euro currency itself need not die within a year. Not when the simpler solution of a much, much lower valuation could do the trick.
There are really only two options in
European leaders are paralyzed because both options are so bad.
Allowing default would risk a catastrophic domino chain of follow-up consequences. Not only might a number of big European banks fail (thanks to derivative exposure), depositor banks in multiple countries might experience a "run" as the public withdraws all its cash. (This happened to Northern Rock, a British bank, earlier in the financial crisis.)
Monetizing the bad debt, on the other hand, would make the Germans very, very angry. The Germans hate and fear inflation so much that the very idea practically makes their heads explode.
(This also explains why Jean Claude Trichet, the head of the ECB, is a knee-jerk raiser of interest rates even as the peripheral eurozone economies crumble all around him.)
The hope of eurozone politicians has been, "If we stall for time, economic growth will help us out of this jam." They have been pushing off the reckoning and hoping for a global recovery, or a miracle cash infusion from
But neither of those is coming. The recovery is stalling out, not picking up speed. Meanwhile
This is why, most likely at some point, they will have to "monetize" the bad sovereign debt. Either the ECB or the European Union will have to buy up huge chunks of the toxic debt, paying euros for it, much as the Federal Reserve bought toxic debt with dollars after the 2008 meltdown.
This forced action could cause the euro to fall sharply and dramatically. We could see a return to $1.30 or $1.20 levels, if not lower — at which point uncertainties surrounding the "ugly contest" with the U.S. dollar would kick in again.
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