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Morgan Stanley: A Eurozone Collapse Is Now Far More Likely,


Illustro

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The latest Global Monetary Analyst raises the notion of stronger Eurozone nations ditching the euro in order to form a stronger, smaller currency union.

Morgan Stanley’s Joachim Fels believes that the eurozone/IMF financial backstop for Greece, plus the European Central Bank’s recent backing-down on collateral rules for Greece have substantially, and ironically, increased the long-term risk of a eurozone break-up.

Joachim Fels at Morgan Stanley:

… which gives rise to moral hazard: The bail-out and the ECB’s softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time. If so, countries with a high preference for price stability, such as Germany, might conclude that they would be better off with a harder but smaller currency union. And because the Maastricht Treaty does not provide for the possibility of expelling euro area members, the only way how Germany could achieve this would be by leaving the euro to introduce a stronger currency.

…

Obviously, we have not reached the end-game yet. However, with the recent developments, such a break-up scenario has clearly become more likely, for two reasons. First, the lesson for other euro area members from the Greek bail-out package that no matter how badly you violate the SGP guidelines, financial help will be forthcoming, if push comes to shove. This introduces a serious moral hazard problem into the European equation. Fiscal slippage in other countries has now become more rather than less likely.

Moreover, the central bank’s credibility has been massively eroded.

Second, the ECB’s climb-down on its collateral rules regarding lower-rated bonds, which ensures that Greek government bonds will still be eligible as collateral in ECB tenders beyond 2010, adds to this moral hazard problem and confirms that the ECB is not immune to political considerations and pressures.

Most importantly, what to watch for that might signal the beginning of the end of the currency union as we know it:

What are the signposts that would indicate our break-up scenario is in fact unfolding?

First, watch fiscal developments in other euro area countries closely: Our suspicion is that the aid package for Greece lessens other governments’ resolve to tighten fiscal policy, especially in an environment of ongoing economic stagnation or recession.

Second, watch ECB policy closely: If the ECB turns out to be slow in raising interest rates once inflation pressures return, this would be a sign of a politicisation of monetary policy.

Third, watch the political debate in Germany: Support for Greece has been extremely unpopular and fears that the euro will turn into a soft currency abound. If the aid package for Greece, which so far is a backstop credit line, becomes activated, eurosceptic forces would receive a significant further boost. And, needless to say, if other countries also needed financial support, this would further strengthen euro opposition.

Morgan Stanley is at strains to say that they don’t necessarily support a break-up of the union nor are they blind to the fact that a Greece crisis (without Eurozone/IMF support0 could lead to a crisis for Europe today. They just seem to be saying that the the most recent Greece-backstop solution only increases the long-term risks of the entire system simply ending, even though it papered over near-term problems. You’ll have to hunt down the full piece for details.
Morgan Stanley: A Eurozone Collapse Is Now Far More Likely, Here Are The Canaries To Watch Out For
 


SKELLY

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Its ironic in a way. The bureaucrats in Brussels looking for increased integration; lisbon, now have to put up or shut up with regards to Greece or face their grand plan falling apart.

A unified Europe is looking increasingly unlikely.

If the Germans go it alone which imo is the best option, the project is finished.
 

orbit

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I think the analysis is simplistic in some ways. Eg. I don't see any sign of a change of heart towards fiscal rectitude in this country, just because Greece seems to have struck some kind of deal. Also, there's no way that countries like Spain will be drawing much comfort from Greece's position either.

But, the contradictions at the heart of the euro are gapingly obvious now, and
a two speed Europe is looking ever more likely in my opinion - with a common currency (and fiscal policy) only in the core.
 

QuizMaster

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I said this a very long time ago on here on one of those "let's leave the euro" threads, I'll have to dig out the link.
The only people who could leave the euro are the "rich", "central" countries. They could gang together and form a new "super euro", throwing the ordinary euro to the sharks.
Presumably Ireland would not be invited to join the club.

I'm no economist, but I'm thinking if this were to happen, it would happen overnight.
 

SKELLY

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I said this a very long time ago on here on one of those "let's leave the euro" threads, I'll have to dig out the link.
The only people who could leave the euro are the "rich", "central" countries. They could gang together and form a new "super euro", throwing the ordinary euro to the sharks.
Presumably Ireland would not be invited to join the club.

I'm no economist, but I'm thinking if this were to happen, it would happen overnight.
This is the best option imo, if germany and france leave, we can devalue "our" euro and its happy days! well......hopefully!
 

He3

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Its ironic in a way. The bureaucrats in Brussels looking for increased integration; lisbon, now have to put up or shut up with regards to Greece or face their grand plan falling apart.

A unified Europe is looking increasingly unlikely.

If the Germans go it alone which imo is the best option, the project is finished.
Olli Rehn has an idea -

"We should use the first months of the year, say January to July, to request draft national budgets," he said.

"Not budget-line by budget-line ...but the overall budget, so that the commission would analyse and the eurogroup [of euro area finance ministers] would make a peer review and recommendations on national budgets, before they are presented to national parliaments," he added.

The Finnish politician with a passion for football repeatedly referred to Article 136 of the EU's new Lisbon Treaty during his discourse, under which euro area members can vote by qualified majority on measures "to strengthen the co-ordination and surveillance of their budgetary discipline."
EUobserver.com says:

Greece's ongoing fiscal crisis has increased member state appetite for greater budgetary surveillance however, with the EU executive confident its proposals will find a favourable audience.
Up tomorrow at the FinMins Council meeting.

@skelly -
'if germany and france leave, we can devalue "our" euro'

Change euro to eiro?
 

CookieMonster

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Typical american "Morgan Stanley" wanting to dump all over poor lovely Europe... they have office is London too... filled to the brim with little englanders no doubt.
 

QuizMaster

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This is the best option imo, if germany and france leave, we can devalue "our" euro and its happy days! well......hopefully!
I don't think we'd need to devalue it. It would go sleeping with the fishes of its own accord.
 

FalseFlag

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It's morally wrong to allow a sucker to keep his money.

Although Morgan Stanley are basically correct, these slimy snakes are working hard towards their aim of creating a single dominant currency they can manipulate and control for their own ends.
Is it too late to stop them? Maybe, but its always worth trying to thwart f**cůnts!!!!
 

QuizMaster

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I'm not sure what they can do now. Last week the euro was sliding against all currencies. Then on Friday it bounced by over 1c against sterling, on the Greek bailout deal. But all this week it was moribund, and today it is sliding again.
Perhaps the Eurozone countries have shot thier bolt and can do nothing to prevent a further slide. Bar putting up interest rates, but the ECB doesn't seem keen to do that. How independent are the ECB anyway?
 

Squire Allworthy

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Typical american "Morgan Stanley" wanting to dump all over poor lovely Europe... they have office is London too... filled to the brim with little englanders no doubt.
They are probably at their work, be it from London or elsewhere.


Strange to think that no one seems to have though up a mechanism whereby one region, through its own mismanagement or other causes, can opt out, devalue, and opt back in. Basically devaluing amounts to taking a pay cut and having most assets and liabilities also reduced in value. A slap on the wrist for incompetence. Region or country becomes poorer in relation to the rest, but does that improve the competitive edge?

The same problem arises not just in the Euro zone, but within virtually every country I know. There are regions that are clearly out of sync with the rest of the country. Common enough problem, but solutions seem few.

IF the scenario were to follow as outlined in the article then the old Euro could well go into free fall and the new Euro would likely rise in value. This would have all sorts of consequences in relation to current liabilities. Also I am not so sure that Germany wants a rising currency that makes it uncompetitive. There is serious enough unemployment in parts of Germany. The Germans would be plain stupid to follow this course.

Ireland is in the economic state it is for no other reason than bad financial management. I don't think there is a quick fix. How often does devaluation solve a countries financial problems?
 
T

The_Big_Fellow

I said this a very long time ago on here on one of those "let's leave the euro" threads, I'll have to dig out the link.
The only people who could leave the euro are the "rich", "central" countries. They could gang together and form a new "super euro", throwing the ordinary euro to the sharks.
Presumably Ireland would not be invited to join the club.

I'm no economist, but I'm thinking if this were to happen, it would happen overnight.
But they can't do that it is not in the treaty. etc etc etc some will inevitably say (Generation Yes type Yes men)

People are obsesssed with the fecking treaties. If Germany and France need to ensure the survival of the EU project and themselves, then a way will be found. There always is, it doesn't mean its anti-eu on my part. It is just reality baby.

The Euro came in to existence decades to early. The med countries like ourselves are not going to be able to devalue our way out, and cutting the economy back to the bone will be deflationary, making our debt harder to pay.

This may not come to pass, but if this is a double dip recession. Which I believe it will be as it has been the passing of debt on to the state, which has helped the world economy rather than a resolving of the problems to any real degree. Britain is a bad a state as Greece, how long before our leading trade partner goes back in to recession.
 
T

The_Big_Fellow

I'm not sure what they can do now. Last week the euro was sliding against all currencies. Then on Friday it bounced by over 1c against sterling, on the Greek bailout deal. But all this week it was moribund, and today it is sliding again.
Perhaps the Eurozone countries have shot thier bolt and can do nothing to prevent a further slide. Bar putting up interest rates, but the ECB doesn't seem keen to do that. How independent are the ECB anyway?
Problem is their "bolt" was not too impressive. 30bn is only buying time, it is not near enough to restore Greece to a firm financial footing. Greece should start negotiating with its bond holders. The first one to do so will have all the advantages, as the markets will no longer judge a European Sovereign guarantee as solid. That is all Govt's are doing they are keeping things afloat and hoping that things go back to normal, what ever that is.

Also the bailout might not get past a legal challenge, that is currently being planned by a group of German Academics.
 

QuizMaster

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Euro in freefall against sterling today.
I've seen this before many times. Too many. And it has always bounced back.
But maybe, just maybe, this is the one.

(I need weak euro and strong sterling for personal reasons)
 

TradCat

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I don't think we'd need to devalue it. It would go sleeping with the fishes of its own accord.
One of the reasons we can't leave is because our debts are in euro. If Germany leaves our debts would be right down there with the fishes. It would be the greatest escape of all time.
 

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