Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelertoing Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Euro Zone’s Debt Crisis Timeout Is Expiring!

Economics / Euro-Zone Nov 27, 2010 - 09:02 AM GMT

By: Bryan_Rich

Economics

Best Financial Markets Analysis ArticleLast year’s Thanksgiving weekend was an unusually active holiday news cycle.

Of course, it was when Tiger Woods had his bizarre car accident outside of his home. That saga would dominate the news for months to come. The lesser-followed news item of that weekend came out of Dubai when the emirate announced it would restructure its sovereign debt.


As we now know, both events would ultimately snowball. And both would result in the loss of a lot of money.

Dubai, once promoted to be the up-and-coming financial hub of the world, was warning of default. And as much as it was a surprise to global investors, it was equally underestimated.

At that point, the world markets were abuzz with ideas that the global economy was in a sharp, robust recovery. And Wall Street was telling Main Street that a return to normalcy was underway for global economies, i.e. put your money back in the market or get left behind.

Back then, based on the roadmap laid out from historical financial crises, I said …

“Expect more news like we received from Dubai. And expect markets to be surprised by the domino effect such news can create.”

Thanksgiving weekend 2009 marked the beginning of the sovereign debt crisis.
Thanksgiving weekend 2009 marked the beginning of the sovereign debt crisis.

As it turned out, the next domino in line was Greece, the weakest member of the European Monetary Union (EMU). And Greece’s ballooning budget deficit and growing financial problems quickly spread the spotlight of scrutiny to the many other weak countries in the European Monetary Union — including Portugal, Italy, Ireland, and Spain.

All of a sudden questions were raised about the prospects and implications of a debt default … a departure of a member state from the euro … and perhaps even a break-up of the euro.

That uncertainty quickly took the high-flying euro back down to Earth.  In fact, from the date of Dubai’s announcement, the euro plunged 21.5 percent in six months.

With the lifespan of the euro in jeopardy, European officials stepped in. They tossed out the rule-book on the euro that prohibited bailouts, and presented a shocking response … a threat to throw $1 trillion at the problems.

The Euro Leaders Had No Choice

The European banking system was (and still is) too exposed to the sovereign debt of its weaker brethren. Consequently, a default of a euro member country would deal a crushing blow to European banks and likely set off another wave of global financial crisis — only this time, it would have been even worse.

In 2009 the European Central Bank was flooding the banking system with unlimited loans for a paltry 1 percent interest. What did the banks do with all that money? They bought government debt — most specifically, debt from the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).

In all, European banks owned $1.5 trillion worth of debt from fiscally challenged euro-zone countries. So the strategy was to buy some time until the banks shed some of the threatening debt.

Now, at the anniversary of last year’s kick-off event in Dubai, the euro zone’s timeout is expiring. The myth that the Greece rescue might have been enough to ward off the sovereign debt crisis in Europe has now been dispelled.

The ECB first tried to rescue Greece, now it has to bail out Ireland.
The ECB first tried to rescue Greece, now it has to bail out Ireland.

This time it’s Ireland that’s requiring a handout from its neighbors. And it’s becoming increasingly evident that the $1 trillion bluff that European leaders crafted earlier this year will be called.

With the amount required to curb the bleeding in Ireland still yet to be determined, once again other candidates are lined up to be next, namely Portugal and Spain.

But with political tensions growing, the question is: When will backlash in the euro zone take over?

When push comes to shove, we’ll likely find that all of the $1 trillion worth of promises made to stabilize confidence in Europe won’t materialize. And we’ll see the weak countries continuing to live with tough austerity and the strong countries, which have committed to transfer taxpayer monies to their fiscally less responsible brethren, saying “no more.”

We’ve already seen the cracks in the euro zone’s attempt at solidarity. Slovakia balked on its promise to give up tax-payer money to Greece. And Austria has threatened the same.

Flaws of the Euro …

Countries that have joined the euro currency have unique challenges when economic times are tough. That’s because the monetary union in Europe consists of a common currency and a common monetary policy. But fiscal policy is determined by each individual country.

Milton Friedman foresaw the problems with the euro.
Milton Friedman foresaw the problems with the euro.

And to patrol those fiscal decisions, the European Union established its Growth and Stability Pact that, among other things, sets two criteria for member countries:

1) Deficit spending by its member countries cannot exceed three percent of GDP, and

2) Total government debt cannot exceed 60 percent of GDP.

These limits were shattered and disregarded long ago.

Now, the euro-member countries are in trouble for all of the reasons Milton Friedman, one of the most influential economists of the 20th century, cited prior to that currency’s inception a decade ago.

He said:

  • A “one size fits all” monetary policy doesn’t give the member countries the flexibility needed to stimulate their economies.
  • A fractured fiscal policy forced to adhere to rigid EU rules doesn’t enable member governments to navigate their country-specific problems, such as deficit spending and public works projects.
  • Nationalism will emerge. Healthier countries will not see fit to spend their hard earned money to bail out their less responsible neighbors.
  • A common currency can act as handcuffs in perilous times. Exchange rates can be used as a tool to revalue debt and improve competitiveness of one’s economy.

Friedman predicted the euro would succumb to these flaws and fail within 10 years. If Ireland represents the catalyst for round two of the European sovereign debt contagion, his timing may not have been too far off.

Regards,

Bryan

P.S. This week we gave an encore presentation of one of our favorite Money and Markets TV episodes. We looked at an asset class that anyone buying supplies for Thanksgiving dinner is very familiar with: Soft commodities.

If you missed Thursday night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules