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Does the E.U. Bailout Signal the Euro’s Death?

Currencies / Euro May 13, 2010 - 06:10 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJason Simpkins writes: Does the European Union (EU) bailout signal an end for the euro currency?

Investment icon Jim Rogers and lauded economist Nouriel Roubini think so.

And they may be right.

Eurozone governments were forced to spring into action on Sunday to defend the besieged euro. The currency has come under tremendous pressure as investors wonder if Greece's fiscal crisis will spread to other heavily indebted nations.

Greece's deficit-to-gross domestic product (GDP) ratio is a staggering 13.6%, but Greece is No. 2 on the list of over-spenders. No. 1 is Ireland, whose deficit-to-GDP ratio is 14.3%. Spain comes in third at 11.2%; and Portugal is fourth at 9.4%.

The euro in the past six months has dropped by about 17% against the dollar, as investors rushed to ditch the currency.

News on May 10 that the EU would step in with a $962 billion (750 billion euros) Eurozone bailout package helped the euro to a 2.7% recovery, but the currency is losing steam as more economists begin to view the rescue as a temporary band-aid for the sovereign debt crisis.

After surging to $1.31 on Monday, the euro yesterday (Wednesday) dropped to $1.2639 in midday trading in New York.

The EU rescue plan includes $77 billion (60 billion euros) from an emergency fund (the first lifeline to be tapped for aid), $562 billion (440 billion euros) from Eurozone governments, and $320 billion (250 billion euros) from the International Monetary Fund (IMF) to be disbursed on an as-needed basis.

But there is still a question over whether or not even that much money will be enough to spare the region from an economic collapse.

"I was stunned" at the bailout, Quantum Fund co-founder Jim Rogers told Bloomberg News in an interview. "This means that they've given up on the euro, they don't particularly care if they have a sound currency, you have all these countries spending money they don't have and it's now going to continue."

Rogers said that all paper currency is being "debased," and that the euro and its collective of users risk being dissolved - something he told Money Morning in an interview in Singapore in 2008.

The dollar was in a freefall at the time of that interview, as investors and foreign holders of the currency diversified their reserves away from the beleaguered greenback. Speculation had arisen then - and persists even now - that the dollar would be abandoned as the world's main reserve currency.

Rogers told Money Morning Chief Investment Strategist Keith Fitz-Gerald that if the dollar were displaced in the short-term, the euro would be the only viable stand-in. However, China's Renminbi would be the most probable replacement candidate in the longer-term.

"If it happens in 20 years it might be the Renminbi," said Rogers. "It's the currency that's big enough and sound enough that it could work.  I don't think the euro will be around in 20 years."

"Someday it might be gold, but I don't think gold would last very long," he added. "So the only thing I can see - and, again, it's theoretical because the Renminbi is a blocked currency - would be the Renminbi in 20 years."

Recent developments prove Rogers' remarks were prescient, and his stance on the matter has hardened.

"It's a political currency and nobody is minding the economics behind the necessities to have a strong currency," he told Bloomberg. "I'm afraid it's going to dissolve. They're throwing more money at the problem and it's going to make things worse down the road."

That sentiment was largely echoed by economist Nouriel Roubini. Roubini is a professor at the Stern Business School at New York University and one of the few economists credited with foreseeing much of the economic turmoil of the past few years.

He says that Greece and other "laggards," such as Portugal, Italy, and Spain, may be forced to abandon the euro in the years ahead.

"The challenge of reducing a budget deficit from 13% to 3% in Greece looks to me like mission impossible," Roubini told Bloomberg Television. "I would not even rule out in the next few years one or more of these laggards of the euro zone might be forced to exit the monetary union."

Like Rogers, Roubini is skeptical of the EU's trillion-dollar lending plan.

"The markets are not convinced because while there is $1 trillion of money on the table, that money is going to be disbursed only if these countries do massive amounts of fiscal consolidation and structural reform," he said.

A Big Bank Bites the Dust?

Money Morning Contributing Editor Shah Gilani agrees that the euro could be in trouble, particularly if another EU country stumbles.

"No euro-member country can 'print' euros, like the United States can simply print the dollars that it needs. So whether or not the Union itself decides to print euros to hand out to members, or whether it lets interest rates rise because demand for limited euros will cause rates to spike, the euro is toast," he said in a recent column.

A collapse in the euro isn't the only potential catastrophe lying in wait, either. A more immediate concern would be the collapse of a major European financial institution.

"While the stability of the euro is front and center, the real fear is that a big bank will teeter or need to be bailed out," says Gilani. "Analysts who say that Sunday's European bailout amounts to a bailout of all Europe's banks aren't exactly correct... Any fear of a bank failure will result in another interbank liquidity-and-funding panic. If that happens, the whole banking and credit-crisis-contagion fear within the larger European contagion scenario will sound like the bell to start Round Two of another fight to save the financial systems of the world."

Of the European banks that are most at risk:

•Fortis NV (OTC: FORSY) holds $5 billion in Greek bonds.
•Dexia SA (PINK: DXBGY) holds $4 billion.
•Société Générale (OTC: SCGLY) holds $5.2 billion.
•BNP Paribas SA (NYSE ADR: BNPQY) holds $8 billion.
•ING Groep NV (NYSE ADR: ING) holds $4.6 billion.
•Barclays PLC (NYSE ADR: BCS) holds $6 billion.
•And Deutsche Bank AG (NYSE: DB) holds $2.6 billion.
Together, that's a total $35.4 billion in Greek bonds.

"There's plenty of opportunity in shorting some of the big European banks and then getting long them after they've taken their hits and prove they can survive," said Gilani. "It might eventually look like March 2009 all over again, at some point. The too-big-to-fail banks will be bargains."

Source :

Money Morning/The Money Map Report

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