(By Darrel Whitten) It's generally considered common sense to prepare for the worst and hope for the best. What is bizarre about the Euro crisis is that there has been a lot of hoping for the best and woefully little preparing for the worst, especially among EU officials, Eurozone banks and the ECB. Even ECB and EU officials are warning that the Euro's survival is at risk, but just can't seem to get the hard decisions made that would be a real game changer for the crisis. Instead, the EU, the U.S., Japan and other countries' default choice is to hope that extraordinary central bank monetary policy will somehow allow them to muddle through.
What Needs to be Done is Not Politically Feasible
Socgen, via FT Alphaville, has a handy cheat sheet of the possible countermeasures, and their possible impact, on the crisis. In Socgen's view, the real game-changers for the crisis would be,
1. An ECB mandate to act as the lender of last resort to Eurozone sovereigns.
2. A European redemption fund.
3. Euro bonds.
4. Full Eurozone banking union with deposit guarantees.
Unfortunately, the above countermeasures that would have a real impact are the least politically possible, given the North (Germany)-South (from the Club Med countries to France) divide, and the need for treaty changes or all but impossible unanimity.
Measures that would greatly improve investor sentiment but not necessarily solve the problem include,
l SMP (Securities Markets Program, ECB sovereign bond purchases) reactivation
l An ESM (European Stability Mechanism) capacity boost
l An ESM banking license
l Banking resolution
l EIB project bonds
While the hurdles for these measures are not as high as the game changers, they are
nevertheless lower on the Eurozone political decision tree. Further, while investors are looking
to ECB action as the default choice, the ECB by itself cannot solve the crisis, especially not
while it is playing a game of chicken with the fiscal authorities.
|Source: Societe Generale, Hat-Tip: FT Alphaville|
Since the real game changers as well as the investor sentiment changers would theoretically only be possible after months and months of political wrangling--if ever, the Euro is much more likely to collapse under the weight of a Spain or an Italy sovereign/banking crisis before the EU could forge a consensus on the right thing to do, and actually implement it. Hyper-Hedging Has Supercharged the Potential Impact on the Global Financial System
If this were circa the 1960s and the global banks were not chock-a-block with hyper hedging that has resulted in the nominal amount of outstanding derivatives being USD$600 trillion or some 43 times the U.S. GDP, investors could just write Euroland off, experience some market turbulence, but basically go on with their business. In the new world, as has repeatedly been demonstrated by the blow-up of Long Term Capital Management in 1998 and of Lehman Brothers 10 years later, "hyper hedging" by the world's largest deposit-taking banks has created deep and pervasive fingers of instability in the global financial system, where an on-the-surface relatively insignificant stress point has the potential to bring the whole house of cards tumbling down. The Real Key is Buying Enough Time to Adequately Prepare for the Inevitable
Thus the real key to the Euro crisis is not finding the silver bullet that solves the crisis, but of buying enough time for the global financial system, businesses, investors and individual savers to adequately prepare for the inevitable.