Fall of the Euro -- from british yahoo

Originally posted by skipper2666
How much exposure do JP and Goldmans etc have in respect to eurozone bonds and the like?

I'm sure they'll make a few bucks - unpicking the financial mess.

I'm not sure the Eurozone has issued bonds per se (individual nations fund their deficits individually) - but I know what you mean.

However your original article is just contingency planning by the banks - normally what they plan for does not happen.

Originally posted by invigorate
I'm sure they'll make a few bucks - unpicking the financial mess.

I'm not sure the Eurozone has issued bonds per se (individual nations fund their deficits individually) - but I know what you mean.

However your original article is just contingency planning by the banks - normally what they plan for does not happen.

I hope that you're right on that but I'm sure I've read a few times that the Euro and it's whole set up was a safe system, very strong and would never fail or be close to failing??

Originally posted by skipper2666
I hope that you're right on that but I'm sure I've read a few times that the Euro and it's whole set up was a safe system, very strong and would never fail or be close to failing??

You may very well have read that, but the person who wrote it was tragically wrong.

Originally posted by skipper2666
I hope that you're right on that but I'm sure I've read a few times that the Euro and it's whole set up was a safe system, very strong and would never fail or be close to failing??

How is that even possible? You have a standardize currency among many different nations and cultures with wildly disparate economic development and purchasing power. These sorts of problems were destined to arise sooner or later. Ultimately, the success of the Euro relies on willingness of the people of Hamburg being willing to subsidize the lifestyle of the people of Athens. If people of rich Europe are not willing to eventually bail out and subsidize poor Europe then the euro is a failure waiting to happen.

Originally posted by sh76
How is that even possible? You have a standardize currency among many different nations and cultures with wildly disparate economic development and purchasing power. These sorts of problems were destined to arise sooner or later. Ultimately, the success of the Euro relies on willingness of the people of Hamburg being willing to subsidize the lifestyle of the pe ...[text shortened]... g to eventually bail out and subsidize poor Europe then the euro is a failure waiting to happen.

It's not a matter of poor or rich. Greece has a higher GDP per capita than Slovenia, but the latter's public finances are fine.

The differences in GDP per capita between Eurozone states are comparable to the differences between US states.

The problems arose because Eurozone members (most importantly, Germany and France) were not willing to implement strict(er) fiscal rules when they still had ample opportunity to do so.

Originally posted by sh76
How is that even possible? You have a standardize currency among many different nations and cultures with wildly disparate economic development and purchasing power. These sorts of problems were destined to arise sooner or later. Ultimately, the success of the Euro relies on willingness of the people of Hamburg being willing to subsidize the lifestyle of the pe ...[text shortened]... g to eventually bail out and subsidize poor Europe then the euro is a failure waiting to happen.

It might work with Fiscal Union and goodwill - but Fiscal union needs political union and thats not going to happen!

Democracy in Europe is already dying.

Originally posted by KazetNagorra
It's not a matter of poor or rich. Greece has a higher GDP per capita than Slovenia, but the latter's public finances are fine.

The differences in GDP per capita between Eurozone states are comparable to the differences between US states.

The problems arose because Eurozone members (most importantly, Germany and France) were not willing to implement strict(er) fiscal rules when they still had ample opportunity to do so.

I have heard various Euros try to imply that the Euro-zone concept is basically the same as the Federal System in the US, but this is simply incorrect. I recall Paul Krugman discussing the much lower labor mobility across national borders in Europe than there is between States in the US. And this article points out how dissimilar the Euro banking structure is to the American one:

The segmentation of Europe's banking system along national lines risks overburdening the European Central Bank.

A central bank always has a crucial role to play in a financial crisis. But the role played by the European Central Bank (ECB) within the eurozone nowadays is even more ‘central' than that of the Federal Reserve or the Bank of England.

A key difference between the eurozone and the United States is that lending between two banks located in two different member countries is still perceived as carrying quite different risks than ‘domestic' lending (between two banks in the same country). This is not the case in the US, because it has an integrated financial system, and support for banks (deposit insurance or outright bail-outs) is administered at the federal level.

As a result, the fact that California might be closer to bankruptcy than some eurozone countries has no influence at all on the credit rating of banks headquartered there, or on their ability to obtain funds on the inter-bank market. In Europe, by contrast, the fate of all banks depends upon their home governments.
Lack of trust

During the credit boom before 2007, enormous cross-border inter-bank claims built up, because banks trusted one another. Then, in 2008, the inter-bank market suddenly froze as that trust evaporated. This was a generalised phenomenon, not focused on particular countries, because it was still assumed at the time that all eurozone governments would be able to bail out their own banks.

Now that the ‘southern' eurozone governments' solvency no longer seems assured, distrust has grown along national lines. German banks continue to lend to each other (and to other banks in northern Europe), but they are no longer willing to lend to Italian, Spanish, or other banks in southern Europe.

A sudden withdrawal of inter-bank funding has the same consequences as a bank run. A bank that suddenly has to repay its inter-bank debt must cut credit to its own customers or sell off other assets, leading to large losses. This is precisely what happened when the inter-bank market froze after Lehman Brothers collapsed in 2008.

When the cross-border inter-bank market stopped working this summer, a similar economic collapse was avoided only because the ECB, without much fanfare, became the eurozone's central clearing-house. German and other northern European banks that no longer trust their southern counterparts parked their funds at the ECB's deposit facility, whereas southern European banks used the ECB's lending facilities to make up for the loss of private inter-bank funding.

Regional imbalances in inter-bank funding can, of course, also arise in the US Federal Reserve System. But they are mostly intermediated within nationwide financial institutions. For example, hi-tech firms in California might deposit cash surpluses with local branches of a large bank operating throughout the US, which might then choose to lend to oil companies in Texas.

Adjustment to shocks is also independent of location in the US. If the price of oil falls, oil companies become less creditworthy and receive less credit – not because they are in Texas, but because they are oil companies.
National differences

In the eurozone, however, banking is still predominantly concentrated along national lines. A savings surplus in Germany is recycled to Spain mainly through inter-bank lending (German to Spanish banks). Moreover, although the EU is supposed to have an integrated banking market, the few existing cross-border banking groups are not even allowed to operate as integrated international banks, because national regulators and supervisors are ‘ring-fencing' the liquidity and assets of foreign banks' local subsidiaries. For example, an international banking group headquartered in Italy was recently barred by supervisors from using the cash surplus of its subsidiary in northern Europe to fund the group's operations elsewhere.

That would have been impossible in the US, given that the supervisors are federal. Moreover, the Federal Reserve System's regional organisation is based on nine districts, each of which encompasses several states. Payment imbalances between Federal Reserve districts thus cannot represent imbalances between states.

A further difference between the eurozone and the US is that the Federal Reserve normally lends only against public debt, and accepts only federal debt (T-bills) as collateral. Banks thus cannot use any holdings of California or Texas state debt to obtain central-bank funds. The ECB, on the other hand, accepts private assets and, in the absence of federal debt, national debt as collateral.

This puts the ECB in a very different position from the Fed, because the quality of its collateral is determined along national lines. For example, Greek banks have received more than €100 billion in ECB financing, which is secured by a mix of private Greek assets and Greek government debt. If the Greek people decide in a referendum to default, the ECB will incur large losses, as much of its collateral would become worthless and the Greek banking system would collapse.

The imperfect integration of Europe's financial markets and supervisory structure thus risks overburdening the ECB, which has had to become the central counterparty for cross-border lending. But in this function it has accumulated large risks, concentrated along national lines, thus leading to conflicts among member states.

A common currency and a common monetary policy cannot work properly with a banking systems that is segmented along national lines. The most urgent step to stabilise the euro is not to follow the chimera of ‘euro economic government', but to create the underpinnings of a truly integrated banking market with a common supervisor, a form of ‘federal' deposit insurance, and a ‘euro bank rescue fund' for large cross-border institutions.

Daniel Gros is director of the Centre for European Policy Studies. © Project Syndicate, 2011.


The structures in Europe just do not meaningfully approximate the US ones.

Originally posted by no1marauder
I have heard various Euros try to imply that the Euro-zone concept is basically the same as the Federal System in the US, but this is simply incorrect. I recall Paul Krugman discussing the much lower labor mobility across national borders in Europe than there is between States in the US. And this article points out how dissimilar the Euro banking structu ...[text shortened]... The structures in Europe just do not meaningfully approximate the US ones.

Of course there are significant differences, but there are similarities as well. The key one is that central banks in general, including the Fed, endeavor to inoculate national economies against the natural punishment that markets inflict on over speculation, and over extension of credit.

They also enable governments to spend money without the unpleasantness of raising taxes, which normal turns off voters, unless the politician can sell the idea of taxing someone else, or that they will give back more than they take. National banks dramatically postpone that need, and the tax comes in the form of inflation, which they may blame on an opposition party, or on the rich. Politicians love deception, and confusion.

Originally posted by skipper2666
Should we bale out Banks, doesn't this go against The Free Market..... isn't that a communist/ socialist ideal?

Why should my tax money, future tax money go to keeping these people in business when they can't do a simple thing like run a bank correctly?

unless you have your money under a matress, even your bank may eventually run out of money and you'll have none.

Banks are only required to keep between 5-9% of the cash you deposit with them. The rest they "loan" out to people. So if those people (other banks) don't pay it back, that means at best you'll get only 5-9% of your money back.

You okay with that?

Originally posted by uzless
unless you have your money under a matress, even your bank may eventually run out of money and you'll have none.

Banks are only required to keep between 5-9% of the cash you deposit with them. The rest they "loan" out to people. So if those people (other banks) don't pay it back, that means at best you'll get only 5-9% of your money back.

You okay with that?

After the Great Depression the US government guaranteed money placed in banks. I think the max amount the US government will guarantee is more than $100K these days.

No need to make a run on the bank to get your money before the bank runs out, at least here in the US.

Originally posted by skipper2666
Should we bale out Banks, doesn't this go against The Free Market..... isn't that a communist/ socialist ideal?

Why should my tax money, future tax money go to keeping these people in business when they can't do a simple thing like run a bank correctly?

Because they are "too big too fail" and, well, you're just not.