Banking/Sovereign debt crisis PT II

Wookster

Buckle your seat belts Dorothy cause Kansas is going bye bye.

Really hope it doesn't imlode in Europe but it is looking ever more ominous with Italian & Spanish bond yields close to tipping point.

gagahouse

Wookster wrote: »

Buckle your seat belts Dorothy cause Kansas is going bye bye.

Really hope it doesn't imlode in Europe but it is looking ever more ominous with Italian & Spanish bond yields close to tipping point.

Yep, we're getting close, seeing signs of stresses in Euro interbank market now.

vivatifosi

gagahouse wrote: »

Yep, we're getting close, seeing signs of stresses in Euro interbank market now.

Interesting you should say that gagahouse, I've been watching that too. Also the dollar's has lost about a cent against the pound since the initial euphoria that a deal had been done as well. Will be interesting to see where both currencies end up.

Generali

Well the next obvious crunch time is in September. Italy has to repay EUR46,000,000 of debt in September and the European Financial Stability Fund is about out of cash.

gagahouse

vivatifosi wrote: »

Interesting you should say that gagahouse, I've been watching that too. Also the dollar's has lost about a cent against the pound since the initial euphoria that a deal had been done as well. Will be interesting to see where both currencies end up.

If we go into crisis mode I'd expect dollar would be the safe haven, in fact am seeing spreads narrow in dollar interbank market and a premium for borrowing in dollars over euro in euro/dollar basis swaps.

If Euro sovereign debt collapse commences, I'd also expect £ to get hit due to UK banks exposure to Europe.

Alternative safe havens currencies are CHF and NOK, although the SNB has reacted this morning to the over valuation of the franc this morning by effectively cutting rates near to negative territory to counter franc strength.

http://ftalphaville.ft.com/blog/2011/08/03/641791/le-plan-negatifs-taux-dinteret/

It remains to be seen whether this will stick, previous direct currency interventions failed, this has slightly more chance to work as it costs people money to park their money in CHF effectively.

Having said that though, I also see people happy to park their money in negatively real yielding US treasuries. It's all about the return of capital rather than the return on capital at the moment.

vivatifosi

Thanks gagahouse. My interest in currencies is based on holidays and buying things abroad rather than anything else so I'm no expert though I often keep xe.com open to keep an eye on currencies as I find it interesting.

The more this situation goes on, the more I'm convinced that the UK will keep interest rates low in order to a) inflate away some of the problem and b) try not to incentify a stronger pound which will have a detrimental effect on UK manufacturing and tourism among other sectors as well as making exports cheaper. I'm getting very cynical in my belief that there is a huge unsaid subtext in what all governments are doing now.

Generali

vivatifosi wrote: »

I'm getting very cynical in my belief that there is a huge unsaid subtext in what all governments are doing now.

It's still basically a bailout.

For example, everyone knows the Greeks can't repay their debts and the Germans are going to have to one way or the other. The trouble is that no German politician can say this so they 'extend and pretend' in the hope that the Greeks can sort themselves out.

The alternative to the Greek bailout is the Greeks default and the banks take the hit. That 'requires' another bailout from sovereigns which mean Italy and Spain are sucked in to the picture. They default and then it's France and the UK next. Then the Germans and Chinese have no markets left to sell to so they go bust too.

The whole bailout thing has not made things better, far from it. I hate to say it but I did say that this was going to happen and now it is actually happening. Compare the situations in Ireland and Iceland as an example of bailout vs let the banks go to the wall.

Iceland had a torrid year. It was very hard to buy imported goods such as nappies and pharmaceuticals, a humanitarian position made far worse by the actions of the British and Dutch Governments. Now the economy of Iceland is growing , the Government can borrow at reasonable rates (inflation + 1.5%ish) and things have stabilised.

Ireland on the other hand can't borrow except from the IMF and other Governments from whom they have had to borrow 65% of GDP. Their GDP has fallen by about 12% in the period 2008-10 and it may still have further to fall as payments to foreign creditors start to bite.

If the solvent take on the debts of the insolvent then they end up insolvent too. It's a rubbish catch-phrase but unfortunately it's true.

Wookster

The problem Generali is if we have a chain of systemic bankruptcies then we end up with no banking system and collapse of society as we know it.

Iceland was able to preserve their banking system, but if the entire western banking system collapses then we'll be getting dinner from soup kitchens...

Have you seen the road?

Generali

Wookster wrote: »

The problem Generali is if we have a chain of systemic bankruptcies then we end up with no banking system and collapse of society as we know it.

Iceland was able to preserve their banking system, but if the entire western banking system collapses then we'll be getting dinner from soup kitchens...

Have you seen the road?

That appears to be happening anyway.

Wookster

[STRIKE][/STRIKE]

Generali wrote: »

That appears to be happening anyway.

In this sense the Euro is the kiss of death as you can't print money. The UK is fortunate in this regard.

Generali

Wookster wrote: »

[STRIKE][/STRIKE]

In this sense the Euro is the kiss of death as you can't print money. The UK is fortunate in this regard.

Maybe. I can't see printing hundreds of billions of pounds as being a long term solution either. What sort of interest rates would the market demand in future do you think?

The problem the world faces is that the mistakes have already been made. There isn't a solution.

Don't just do something, stand there should be the politician's motto.