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What Is There To Stop A Run On The Euro?

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First Greece, now Ireland. Looking like Portugal next, and eventually maybe we'll get round to Spain and Italy. So far, thats 2-0 for countries needing bailouts vs countries that fix themselves (if thats even possible).

My question is, since all of these countries in question are part of the Euro, whats there to stop a total run on the Euro (and a flight to USD)?

Or is my question too simple, due to the spread of the contagion of the MBS in the banking system?

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The Euro rose in value vs. the $ on the back of extremely negative news concerning Ireland. The Pound soars on every snippet of bad news for our economy with the sharpest uptick following the OECD downgrade last week. The US do not want a rising $ as it will crimp exports. The higher the Euro the better for the Tech companies (70% of Ireland's exports are Intel-HP-Dell-Microsoft), the defense and aircraft industry and chemicals.

If Portugal falls next the Euro may rise to 1.40 if the same pattern as Ireland is in place (debt is good). Spain falling may send the Euro to 1.50 and so on.

We are in a very powerful contrarian vortex in the currency markets where bad news in the form of sovereign is a positive.

It will all come to grief when the wind changes and debt is seen as a liability. When is the big question.

To understand the madness in the FOREX market, here is an example:

http://www.bloomberg.com/news/2010-11-22/dollar-bulls-send-bears-into-hibernation-as-qe2-attacks-prove-unfounded.html

“The dollar has found a bottom,” said Lane Newman, director of foreign exchange in New York at ING Groep NV, the largest Dutch financial-services company.
Strategist forecasts for the dollar to weaken have all but ceased. Since mid-October, the average of 38 estimates in a Bloomberg survey has been for the currency to trade at about $1.36 to the euro by mid-2011. It ended last week at $1.3673.

$1,36 next year? It was already 1.36 last week!

Edited by Realistbear

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@1 "My question is, since all of these countries in question are part of the Euro, whats there to stop a total run on the Euro (and a flight to USD)?"

Answer = The dollar is worth even less.

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The Euro rose in value vs. the $ on the back of extremely negative news concerning Ireland. The Pound soars on every snippet of bad news for our economy with the sharpest uptick following the OECD downgrade last week.

This morning's tourist rate £1 = €1.145. Not exactly soaring...

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Because everyone is as screwed as each other.

Debt is the problem.

Plus the US doesn't want you to flee to the $ and make it uncompetitive. If that happens the Fed will just print even more monopoly money.

+1

This is just the currency traders doing their rounds, will probably be Sterling's turn again soon, funny that the Dollar never seems to get any seriously frightening news despite the fact the American economy is a nightmare right now. (We don't have that many repossessed ghost towns or ordinary families living in tent cities, or storm drains in the UK or Europe....yet)

Edited by madpenguin

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First Greece, now Ireland. Looking like Portugal next, and eventually maybe we'll get round to Spain and Italy. So far, thats 2-0 for countries needing bailouts vs countries that fix themselves (if thats even possible).

My question is, since all of these countries in question are part of the Euro, whats there to stop a total run on the Euro (and a flight to USD)?

Or is my question too simple, due to the spread of the contagion of the MBS in the banking system?

My guess is that the more eurozone bailouts there are, the stronger the euro becomes. Each bailout is accompanied by yet more tightening of monetary policy in the country being bailed out.

Or put it another way: more bailouts = more power to Germany = stronger euro

AFAICS the only thing that would cause a run on the euro is if Germany loses the political will to keep bailing out other countries and decides to leave the euro instead.

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AFAICS the only thing that would cause a run on the euro is if Germany loses the political will to keep bailing out other countries and decides to leave the euro instead.

Not likely, Germany has been doing very nicely from a weak Euro, a recent report I read said that Germany industry was in "party mood" over the weak Euro, means bumper exports, also you will notice that where other European countries have problems German banks are usually fairly well represented among the creditors.

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Not likely, Germany has been doing very nicely from a weak Euro, a recent report I read said that Germany industry was in "party mood" over the weak Euro, means bumper exports, also you will notice that where other European countries have problems German banks are usually fairly well represented among the creditors.

Which currency are you referring to when you say the euro is weak?

My understanding is that German industry will happily tolerate a stronger currency because the raw material imports are cheaper and the export volumes for high quality goods are not too badly damaged. The increase in the margin outweighs the loss in volume. Basically if a banker wants to buy a Porsche, he will buy a Porsche, regardless of whether it costs 50k or 100k.

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First Greece, now Ireland. Looking like Portugal next, and eventually maybe we'll get round to Spain and Italy. So far, thats 2-0 for countries needing bailouts vs countries that fix themselves (if thats even possible).

My question is, since all of these countries in question are part of the Euro, whats there to stop a total run on the Euro (and a flight to USD)?

Or is my question too simple, due to the spread of the contagion of the MBS in the banking system?

The fact that USD isn't much better will stop a flight to USD. As long as you stick to German Euros, I can't really think of a better currency.

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Which currency are you referring to when you say the euro is weak?

My understanding is that German industry will happily tolerate a stronger currency because the raw material imports are cheaper and the export volumes for high quality goods are not too badly damaged. The increase in the margin outweighs the loss in volume. Basically if a banker wants to buy a Porsche, he will buy a Porsche, regardless of whether it costs 50k or 100k.

Germany makes a lot more than Porsche's, It's the Worlds 2nd largest exporting country behind China :

Biggest exporters

By the CIA fact books reckoning the EU is the worlds largest exporter!, almost double the earnings of the US (yeah 2007 vs 2009 figures but still, makes a convincing argument for keeping the EU together as a trading area)

If the Euro is low against other currencies = increased exports, goes up and down as the speculators shift their attention but German industry in particular doesn't cry when the exchange rate drops, makes their salesman's jobs that much easier

Edited by madpenguin

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I doubt there will be much movement of the euro until Spain starts to tip. Greece and Ireland are not big enough to really damage the euro, less than 5% of Eurozone GDP I think. Portugal can easily be bailed out as well.

The real problem going forward is going to be growth and unemployment in Ireland, Greece, Spain, Portugal and possibly Italy. They need rapid tax revenue / gdp growth to pay off the debts they have accumulated.

Stuck with a strong currency and large public spending cuts further recession is inevitable. They are in a debt spiral, cutting spending will hammer tax revenues, more unemployment and further recession. There are no policy options that will improve the situation. The only long term answer will be to restructure the euro zone allowing part of the zone to devalue and start growing again.

No economy in history has been able to do the kind of fiscal adjustment required by Ireland, Spain, Greece etc without a giant devaluation simultaneously.

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Germany makes a lot more than Porsche's, (It's the Worlds 2nd largest exporting country behind China, Biggest exporters, by the CIA fact books reckoning the EU is the worlds largest exporter!) if the Euro is low against other currencies = increased exports, goes up and down as the speculators shift their attention but German industry in particular doesn't cry when the exchange rate drops, makes their salesman's jobs that much easier

Again, which currency are you referring to when you say the euro is weak?

And since, as you say, Germany is a big exporter, why do you think it has tended to use tighter monetary policy (i.e. go for a stronger currency) in comparison to large importers such as the UK and the USA?

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Again, which currency are you referring to when you say the euro is weak?

And since, as you say, Germany is a big exporter, why do you think it has tended to use tighter monetary policy (i.e. go for a stronger currency) in comparison to large importers such as the UK and the USA?

Ok bad choice of words I am not saying the Euro is weaker per se, just that when it's exchange rate goes down against other currencies German industry doesn't cry, but then that's true with most countries their industries.

Edited by madpenguin

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The Bernak needs the Euro to fight off the Yuan. The Bernak is supporting the IMF side of the bailout scenario, whether US taxpayers like it or not. This is probably the main reason the Euro will not fail, and is also the reason why the US will turn the Euro and the Yuan into subsidiary currencies.

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I'd be less worried about capital flight away from the Euro and more worried about flight from one Euro country to another. Why would you keep your money in struggling banks in one country, when there are plenty of other Euro banks in other countries? There is no currency exchange risk, Internet banking may be just as easy and you can just keep a float in your local bank.

When the government of one of those countries is trying to backstop this flow of Euros, the taxpayer is going to get a huge bill when these banks start to buckle. Watching the situation in Ireland unfold is the perfect demonstration of this.

A rush out of a currency devalues it (less demand), giving an incentive to hold, rather than crystallise any paper losses. Flight between Euro zone countries does not have this same relationship, leaving struggling banks (and therefore any taxpayers backing them) potentially very exposed.

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The Bernak needs the Euro to fight off the Yuan. The Bernak is supporting the IMF side of the bailout scenario, whether US taxpayers like it or not. This is probably the main reason the Euro will not fail, and is also the reason why the US will turn the Euro and the Yuan into subsidiary currencies.

The US will try to turn the Euro and the Yuan into subsidiary currencies.

China in particular may have it's own ideas, and if the deterioration in the US economy gets worse the US may not have the opportunity to dictate terms.

No Empire lasts forever

Edited by madpenguin

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When the government of one of those countries is trying to backstop this flow of Euros, the taxpayer is going to get a huge bill when these banks start to buckle. Watching the situation in Ireland unfold is the perfect demonstration of this.

Or some banking behemoth like Santander moves in and picks up a bargain like they did with the weaker UK banks, even debt is worth something to someone.

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The US will try to turn the Euro and the Yuan into subsidiary currencies.

China in particular may have it's own ideas, and if the deterioration in the US economy gets worse they may not have the opportunity.

No Empire lasts forever

If you look at Russia and Japan, dollar monetary policy was used, and is still being used to undermine them. Japan, in the end has become somewhat submissive to US interests. I know that is not a nice thing to say and I am sorry if some find it upsetting, but the Japanese banking system has become supranational just as US banks and European banks have. I don't think that the Euro is going disappear or have a run, but the structure of Europe will have to change one way or the other. Bernanke's policies right now have lit a bomb underneath the Chinese economy. I am not that optimistic about China's future prospects; there are only two ways that China can take a significantly larger share of the economy (global gdp): (1) if there is tremendous growth globally (resource restrictions here), or (2) if they can take share from others (this is going to be increasingly difficult, especially if the US and Europe do not cooperate).

Of course, this could all change if there is a major war, as history shows that the US has the most to lose and I hope that they are smart enough to stay out of one.

Edited by Toto deVeer

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I'd be less worried about capital flight away from the Euro and more worried about flight from one Euro country to another. Why would you keep your money in struggling banks in one country, when there are plenty of other Euro banks in other countries? There is no currency exchange risk, Internet banking may be just as easy and you can just keep a float in your local bank.

....

That's why the Irish banks have been bailed out. The media keep telling people its the government that's in bother but it isn't. The Irish government made the mistake of saying they would support the Irish domiciled banks so the bankers carried on looting. This whole problem was and still is essentially a banking problem. The risk of sovereign default is due to the bailout or support of the banks by the government of the country in which the bank pretends to be based and pays its tax. The loss of bank tax revenues plus the bailout is too much for the taxpayers to bear.

Both Greece and Eire have had huge bank runs and the bailout money was to stop that from reaching its logical conclusion. Nationalisation of the banks in all the troubled countries has also put a government guarantee under the depositor's cash. Ergo as the banks continue to fail the country fails with them. The banks' property loans based on loony prices underpin the banks' liquidity. The more proeprty falls in price the tougher it gets for the banks and so in turn for the governments.

This will not end well.

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Of course, this could all change if there is a major war, as history shows that the US has the most to lose and I hope that they are smart enough to stay out of one.

This is something I'm doing my best not to think about but is a recurring fear for me too, I too hope we get out of this without any real bloodshed.

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Ok bad choice of words I am not saying the Euro is weaker per se, just that when it's exchange rate goes down against other currencies German industry doesn't cry, but then that's true with most countries their industries.

Fair enough - but there is a bit of an "enigma" in that Germany, a large exporter, generally prefers a strong currency compared to say the UK and US. There may be occasional moments when she would like her currency to be a bit weaker, maybe now even, but on the whole the Deutschmark tended to be strong, which implies the "Euromark" will be as well.

The only explanation I can think of for Germany tending to want a strong currency in comparison to the UK and the US is that Germany is a high end exporter - as I said before - the loss in export competitiveness from having a strong currency must be outweighed by the increased profit margins from having cheaper raw imports. I used Porsche as an example, but AFAIK there are plenty of other German exports aimed at the top end of their respective markets (they don't make cheap tat). It's the only explanation I can think of.

So, getting back to the subject of this thread, I don't think there'll be a run on the euro while Germany is running the show. And the more bailouts the more control Germany will have over the running of the euro.

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  • 140 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%



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