Irish cash famine threatens euro, world markets

I tried shorting the Euro earlier this year b/c there is a catastrophe waiting to happen. I even made a little money (by luck -- it was momentum, not fundamentals). But it is impossible to time. This stuff is nothing new. Ireland has been on radars for a while. As is Spain, Portugal, Italy, of course Greece.

What is going to be interesting is that they can buy time, but there will be no political will (or money) to keep lending to these countries that are in trouble. At that point, there will be a country that defaults on its sovereign debt. And then we will find out just what kind of exposure some of the European banks have to the debt of these troubled countries. I think it is an enormous amount. No one knows yet, though, and won't unless there is a meltdown. But you will see someone like a Societie Generale leading the way on this, the way Lehman Brothers led the way here on the CDO meltdown. And then a host of banks could start falling like dominoes. And the Europeans are not going to pony up cash to keep them in business, because they all have different agendas.

The big problem with the Euro is that you have a single currency, but dozens of different cultures and relationships with money/debt. That gets tested in tough times. Not when things are going well. You really have one strong EU country, Germany (there is a big drop off in GDP to France, which is next largest), which is being asked -- and will continue to be asked -- to give up a lot to boost up some of these weaker countries. And they are just not going to do it.

One other thing that amazes me is how the markets follow the shiny object. Two weeks ago, it was all about how the U.S. is shitting all over its currency and its monetary policy of easing. No one was focused on the European problems, which have been there for anyone to see for a few years now. Then the focus turns to Ireland, and that gave (until today, when it reversed) the dollar a boost. The crazy thing to me is that the dollar is no stronger than it was. And Europe is no different than it was 3 months ago. Yet, the markets are so reactive. It's kind of fascinating to me.

I wish there was a way to time the meltdown of the Euro. There just isn't, at least for a small investor. Because if you could, it is almost a certainty that it is going to happen in my opinion.

 

Biggest effect from your standpoint comes down to who owns that debt. If it is banks all over Europe and Asia mostly (and it is), it will be another financial crisis. Bigger than the one we precipitated. Gee minimized the effects of a "small" country like Ireland defaulting (and they won't -- they are going to get bailed out). But there is conservatively several hundred billion dollars of exposure to Ireland sprinkled around Europe. British banks alone have $150 billion worth of Irish debt. Germany another $130 to $140 billion or so. It will be enough to take down some banks, and once that starts, there will be a domino effect, which in turn will drag down the other debt-ridden countries that are on the brink. They won't be able to sell more bonds. With the U.S.'s debt load and monetary policy that has weakened the dollar, the spillover will reach here, unfortunately. When the Euro is weak, the dollar typically is a beneficiary. But we have really hurt the dollar and our treasuries are not very desirable. Maybe foreigners buy them as a "safer" alternative. Or maybe they see the U.S. as just as vulnerable, albeit to a lesser degree.