I think that’s where the Evans-Pritchard article comes in. The Irish are dead men walking. Portugal is coming next and Spain is too big to bail. So you have to have haircuts for existing peripheral bondholders despite what the European politicians are saying. See Europe’s Monetary Cordon Sanitaire by Simon Johnson and Peter Boone. They argue we are definitely getting to the point where haircuts for existing debt holders is going to make sense for the peripheral governments. The numbers they use suggesting haircuts are very compelling. And everyone knows this; that’s why the debt is selling off. However, If the bondholders get haircuts, or if we see sovereign defaults, do you really think the German and French banks have enough capital to withstand this loss? I have my doubts. Eventually, people may come around to Evans-Pritchard’s view: the only way out of this is via the ECB printing money and monetizing the periphery’s debt. And implicitly that means a competitive currency devaluation for the euro zone.
More on the disappearing euro
Written November 15th, 2010
The folks at Credit Writedowns said it better than I could. The euro’s structural problems, namely a disconnect between fiscal and monetary authorities, mean that any short-term solution will be temporary in nature because eventually Germany will not be able to bail out the entire eurozone, both financially and politically.
There are a lot of unknowns. Will Bernanke fight Europe’s coming debasement? Will China step in to save the euro? If the US is the only reserve currency option, how does that impact Obama and Bernanke’s inflationary plans? Does this necessarily end in war? etc. The list goes on forever, but one thing is clear: the USD has a lot of room to appreciate from here. I also anticipate that gold/euro should break out to new heights as investors flee and yields on anything not explicitly backed by Germany go higher.