Forex Market Commentaries - What Happens if the European Monetary Union collapses?

If the European Monetary Union collapses what happens next?

Sep 14 • Market Commentaries • 1853 Views • No Comments

Amongst the many human characteristics many of us find unpleasant the penchant for saying “I told you so” must rank high. Listening to, or reading commentary from long term opponents of the European Union, who are now basking in their fifteen minutes of revitalised fame as the Economic and Monetary Union of the European Union comes under intense pressure can be excruciating, a stopped clock is right twice a day…

We’re only at the first stage of having to tolerate armies of retired politicians, (who were against integration in any form) selling their agendas (and no doubt books) to anyone who will listen or print. However, given the EMU is reality there is a huge fault in their argument, a question that none can answer, they hastily avoid the question using the tired ‘techniques’ that may have served them well in the past; “what’s the cost of change, how much would it ‘cost’ to break-up the union. Not in terms of the intangible social aspect, or the upheaval, or the fact that certain growing European states would be left rudderless, but in cold hard pounds, schillings and old pennies (or Drachmas), how much would it cost? A trillion Euros, two trillion, if the cost to exit is incalculable and insurmountable then were is the benefit and to who?”

When the question is posed the silence is deafening. The cost of break up is incalculable, similar to creating a super structure skyscraper the foundations are already in place, built and paid for, ripping up the project in order to cater for the badly politically motivated and an equally ignorant minority would be the real disaster.

Whilst the mainstream media have laser focused their attention on Greece the plight of the rest of the PIIGS has been conveniently forgotten. According to the International Monetary Fund, the World Bank and the CIA World Factbook, Italy was (in 2010) the eighth-largest economy in the world and the fourth-largest in Europe in terms of nominal GDP and the tenth-largest economy in the world and fifth-largest in Europe in terms of purchasing power parity GDP. Italy is a member of the Group of Eight (G8) industrialised nations, the European Union and the OECD. Italy has a diversified industrial economy with high gross domestic product (GDP) per capita and a developed infrastructure. With this in mind how does a country, it’s people, it’s business interests form an orderly queue to exit from the Euro? Could Germany, or indeed France?

Comparing and contrasting Italy versus Greece makes for fascinating reading; Greece is the 27th largest economy in the world by nominal gross domestic product (GDP) and the 34th largest at purchasing power parity (PPP), according to data by the World Bank for the year 2009. Greece’s GDP, at about $300 billion, represents approximately 0.5% of world output. Its $470 billion public debt is large only relative to the Greek economy’s size, but less than 1% of global debt and less than half is held by private banks (mainly Greek). Barclays Capital estimates that only a few globally significant foreign banks hold close to 10% of their Tier 1 capital in Greek government bonds, with the majority holding much less.

Reflecting on that data you could be forgiven for wondering why the Greek ‘problem’ is being intensively magnified given the relative small impact it’s singular default would have. The answer could be that Eurosceptics see a once in a decade opportunity to disentangle from political not monetary harmony. The real fear could be from the political isolationists that if Europe gets past this crisis, as a United States of Europe, it will have then become impermeable and the isolationist wails against progress will be echoes in the wind.

 

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European banks are losing deposits as savers and money funds spooked by the region’s debt crisis search for havens, a trend that could worsen economic and financial conditions. Greek banks have experienced a flight of circa 19% over the past twelve months whereas Irish banks have witnessed a flight of circa 40%. It’s fascinating to realise that UK banks exposure to Greek debt amounts to circa €2.5bl whereas exposure to Irish debt is circa £200bl. Ireland is a “friend of the UK who will be helped” according to UK politicians, this despite the huge exposure and risk the UK tax payer ‘owned’ banks have. It would appear that the UK political suspicion of ‘Europe’ doesn’t extend to over the Irish Sea.

The rumour finally came to be reality, as two major French banks were downgraded by Moody’s. Credit Agricole SA and Societe Generale SA had their long-term credit ratings cut one level by Moody’s to Aa2. They may not stop there with BNP Paribas under intense scrutiny. The news has received a muted response form the markets with CA shares actually rising by up to 5% at one stage in this morning’s session.

European stocks have risen in morning trade due to speculation that China may offer support for the region despite Premier Wen Jiabao stating countries must not rely on bailouts. China acting as the bank of last reserve to Europe as opposed to the IMF is an interesting concept. The STOXX index is up 0.3%, the DAX up 0.08%, the CAC up 0.4%. the MIB the Italy bourse and index of the forty most capitalised Italian companies is up
.5%, this index has fallen a crushing 34.44% year on year. The ftse is currently flat, the SPX daily future is suggesting an opening of 0.5% down. Gold is down $5 an ounce and Brent crude down a significant $252 a barrel. In Asian trading the Nikkei closed down 1.14%, the CSI closed up 0.47% and the Hang Seng closed up 0.08%.

The USA dollar has been strong in overnight morning trade having made significant gains versus the Aussie dollar and the Loonie (Canadian dollar). Gains versus the Swiss franc, the euro and sterling have been modest. The yen and franc have made modest gains versus the major currencies.

USA releases of importance this afternoon include wholesale index prices, advanced retail sales and business inventories.

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