Sunday, June 3, 2012

Never Underestimate...

From an article in today's NY Times...

“The market is massively short Europe,” said a hedge fund trader based in London not authorized to speak publicly. “There is just a feeling that it’s too late for steps like deposit guarantee schemes to help Greece or Spain.”

In the last couple of years I have learned - the hard way - to never overestimate the ability of European politicians and EU mandarins to agree on a rational way to deal with the Debt Crisis.  The stubborn dogmatism of Germans and the flip-flops of the EU Commissioners alone can fill a book (and they will, when the postmortem is eventually performed).

Yet, things are clearly coming to a showdown: Spain is now on the ropes, a country that simply cannot be allowed to fail catastrophically as it will drag down the entire world with it.  No, I am not exaggerating - Spain is the world's 12th largest economy at $1.5 trillion (by comparison, France is at number five with $2.8 trillion).  

Spain's benchmark 10 year government bonds are at 6.53%..

 ...when Germany's 10 year Bunds are at 1.17%..!!

It is beyond obvious that these two countries can't possibly share the same monetary policy, they can't possibly use the same currency - unless...  they can also cobble together a common fiscal policy, i.e. agree on common tax, pension, labor, etc. laws.

It's showtime, folks... if the Eurozone countries can't agree on fast and concrete steps to deal with the debt/monetary crisis the entire EU will fall apart.  Notice I say EU, not just Eurozone, and I firmly believe this.

There is a glimmer of hope that European leaders will finally grow up and lead - as opposed to just preach dogma ex-cathedra and/or wring their hands. Again... the European Union was founded to establish peace in a continent ravaged by continuous wars for centuries.  The euro - enfin - is all about peace, not specie.

If (big if) there is real movement towards rational solutions (again, not dogmatic ones), the market is going to react violently upwards - and that's the reason for the NY Times article excerpt... that "massively short Europe" bit is darn intriguing...

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