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The Europe disaster pill | Advantage 'zyaada'

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Much more is on the cards..

Cleaner sweeps in front of the door of the British prime minister's residence of 10 Downing Street, in central Londo

It has already been named a contagion. It has traditionally been the hotbed of an elaborate plan, as acceded during LTCM and also 2008, to take control of Global Finance and bat for a parochial Euro getting accepted ahead of the liberal and ireesponsible, even racist Dollar. There are many other conspiracies that will actively bring the situation’s discussion to the round table when history beckons and most start with “an orgy of unregulated spending” and lately by the same politicians, “irresponsible and irreverent” investment bankers with flimsy and fragile structures like CDOs and other bets that were the root cause of an overacting financial crisis that opened a big hole.

Moving on from the stereotypes however, and to do justice to history, let us, as always, crisply and actively delineate what has really happened. You have to know that to stem the crisis, the issue on the radar has become bailout or no bailout, to resolve to the greater public benefit simply. In that itself, lies the demise of economic logic and a great extension for the tragedy to a greater area and a greater period than Greece in 2010. The bailout means further credit, allowing Greece to borrow to pay off current creditors.

Aside #1 [It has in large become similar to the much maligned Fed discount window and the similar Repo windows the world over which allow banks to roll over their current credit with fresh credit and for virtually unlimited periods of time. GE for example, has been a corporation which has used this short term window to finance elaborate capital projects and in the last decade this has been known as the CFO’s artful secret in US and Europe]

Once ECB started accepting Greek bonds at cost rather than market price for collatral, it virtually admitted only their illiquidity for accounting purposes and all would seem fine with the EUR110 bn credit line including IMF coffers. But today apart from anecdotal evidence from IMF failures earlier in Latam, it is clear that the same admission by ECB and the fact that Spain and Portugal would be paying off their portion of the handout from their own bleeding balance sheet.

Why is it contagion?

In politico-speak, the issue with the rollover is that creditworthiness has already suffered and the new credit will only go on to beef up creditors without effectively financing any Greek recovery. More importantly, with upto 20% Budgetary cuts, Greek growth is now hostage to debatable cost cutting measures and international grandstanding whichcontrbutes to larges doses of international panic.

German Finance Minister Schaeuble speaks with German Foreign Minister Westerwelle before vote on release of financial aid package to Greece in Bundestag in Berlin

Extinguishing credit would have just shortened the crisis, and now with new rollovers we have extended the pain of the creditless Greece and thus Europe.

Also substantially, ECB has adroitly skipped its non central bank character till now and kept the euro afloat. But with the precarious German export situation and the similar compounding factors in servicing local debt throughout Europe, any backstopping by repurchase of govt bonds will finally impact the central banks that are already suffering the consequences of financing large and growing deficits.

Russia and Singapore in 2009 and Japan throughout recent history have shown the danger of economic contraction and deflation on economic production.

How did the disaster happen?

Railway workers clear snow during a snow storm in Busdongo

Profligate misreporting is still part of the contagion. Public standards on accounting disclosure and random politico speak remain large unattendant risks to critical “Contraction friendly” EU regulation that has been at the center of this EU implosion from the beginning. As we speak, large European Banks are busy shedding profitable businesses to comply with Competition Commission and there lies the seed for the next storm that will take any dreams of recovery and render them “undescribably jingoistic and non-productive” Rating agencies and their lethargy will be much more difficult to defend now that the ship is going down.

This will serve as a reminder for mostly the strict wannabes that wanted to become the new Financial Capital of the world instead of New York. They are thus different from hot money that hovers around new financial arbitrage opportunities that preclude and define infrastructure and investment opportunities in India, China, Brazil and other emerging markets

It will also extinguish a lot of the liquidity in hot money as the Euro enters a large period of weakness

Some good will come out of his crisis

This crisis has surprisingly given focus to “Indiabulls” and ‘Chinabulls’ that have become vocal in defending Asia’s strengths in conservative fiscal policy as the cornerstone of surviving the crisis. Concurrently, these new fountainheads of democracy and growth have also got the opportunity to put reforms in order ahead of the curve. There finally will be regulation for Real Estate sector in China and new financial instruments keep appearing in India and seem to getting a public debate absent earlier.

European banks have largely been sheltered after being excluded from a lot of the sub Prime securities in their earier phase and being secondary feedstock of Capital. These banks thus get one more chance to prove their real worth in this contagion. We are short of a lot of them including Diamond’s Barclays and our own Deutsche Bank, but a proven earlier RBS, BNP and HSBC have been bad boys as well and this time they will not have the cover of allied forces from the US..they also maintain strong links with their governments that make them vulnerable (BNP shoulders more than 50% of the French exposure to PIIGS

Hot money will get regulated in no small measure, with these market actions allowing them to make a series of wild bets and kill themselves..I am sure that will never be admitted by anyone on Bloomberg or CNBC either in the US, but it seems to be the only ay open to them, with Euro, India and China investments all stuck ina hopeless web of contradictions, Brazil completely isolated and without the benefit of IMF cover..We of course, need to explore and verbalise this more lucidly further..

the bottomline however, is just a six month respite for the Dollar or till someone decides to extinguish the outstanding sovereign debt and take up honest restructuring of the existing loans, which ever comes first.

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This entry was posted on May 7, 2010 by in Banking, Emerging Markets, Financial Markets, Financial Services and tagged , , .


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