Thursday, February 26, 2009
eurozone defaults "a matter of time"
"The first will certainly be a small country, so that can be managed by the bigger countries or the IMF,” he said in an interview with Sky News. “I think there are countries in Europe which are considering the possibility to leave the eurozone. But this is practically not possible. It would be very expensive."
Poehl suggests that Germany or the IMF will be forced to deal with the default... However he does not account for just how much cash it would take to pick up the pieces after the intertwined European dominoes start faltering left and right. Last time we checked, Germany couldn't issue bonds to save itself, let alone the entire Eastern European region which is on the precipice every single day. ...
And while practically speaking Germany bailing anyone out is a pipe dream, even the theoretical proposition is not assured. Former ECB Chief Economist Otmar Issing told Frankfurt Allgemeine Zeitunglast week that saving a profligate member would be“catastrophic” and undermine the monetary union framework. Current ECB Executive Board member Juergen Stark calls the no-bailout rule an “important pillar on which the European Union was founded.”
germany and france also shot down the idea of jointly-issued euro bonds. this could be a titanic storm in a few weeks' time.
UPDATE: a tech ticker interview with john mauldin on the topic of eastern europe and possible solutions. here is some of mauldin's letter that puts a scale on the problem:
Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
it's even worse than i had thought. as mauldin notes, potential solutions are being roadblocked by either intentionally-erected insitutional barriers or political unwillingness. and if there is no solution found before the dominoes start toppling, we may well quickly find ourselves in another terrible deflationary liquidation cycle. mauldin is ringing the bell hard. is anyone listening?
UPDATE: ft alphaville with some humorous (so far) photographic evidence connecting of eastern europe's position on the desireable side of the collapse gap.