Jump to content
House Price Crash Forum
Sign in to follow this  
interestrateripoff

Weak Economies Tempted To Quit The Euro Face A Fate Worse That The Current Squeeze

Recommended Posts

http://www.telegraph.co.uk/finance/breakin...nt-squeeze.html

Monetary policy in the eurozone is relatively tight. The same goes for fiscal policy in Germany, the largest and strongest economy. As a result, the euro has been relatively strong. Not surprisingly, the eurozone's weak economies - Spain, Ireland, Italy, Portugal and Greece - are hurting. In Spain, unemployment is already 13.9pc.

If only they could bring back the peseta, punt, lira, escudo and drachma, one might think. In the "good" old days, when these economies got into difficulty, they allowed their currencies to fall - giving local industry a breathing space. They weren't constrained by a one-size-fits-all monetary policy that seems best tailored to Germany's needs.

Such thinking is seductive but fallacious. The eurozone's weak economies are drowning in debt. In Italy and Greece's case, the government's debt is hovering around 100pc of GDP. In Spain and Ireland, which had liquidity-fuelled property manias, there's debt in the private sector.

And of course, there's the debt in the banks.

The lion's share of these debts are denominated in euros. They certainly aren't denominated in pesetas and punts. If any country quit the euro, its new currency would sink - perhaps something of the order of 30pc-50pc.

Although that would give a fillip to exporters, the value of its debts when translated into the new devalued currency would soar. Governments, private-sector borrowers and banks would find "hard currency" debts virtually impossible to service. The end result would probably be bankruptcy - a fate far worse than the current squeeze.

Politicians driven can, of course, make errors. But pulling out of the euro would be so crass the even populist politicians will surely avoid it.

A rock and a hard place?

However if you where going to exit the Euro surely you ensure that all debt get converted into your own currency to stop this from happening? Or wouldn't that be possible?

Share this post


Link to post
Share on other sites
However if you where going to exit the Euro surely you ensure that all debt get converted into your own currency to stop this from happening? Or wouldn't that be possible?

Doubt it. Debts usually have to be paid out in the currency that they're taken out in (although when the Euro came in they paid out in Euros - but they had previously been fixed currencies for years).

Share this post


Link to post
Share on other sites

They'd have to convert their debts from euros into 'neuros' by fiat (and if done by one of the weaker economies, this would have to be announced and implemented overnight, IMO).

It could be done (and has been done before):

- creditors in the old eurozone currencies had their assets converted by fiat into euros

- holders of US debt in 1971 had their debt switched by fiat from gold to paper

- holders of UK debt in 1967 had their debt switched by fiat from one fixed-rate to a lower fixed-rate.

- etc...

If it was Germany pulling out in disgust at the behaviour of the PIGS, then it could be done at a more leisurely pace because it wouldn't cause a run on their debt.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.