How the Eurozone Crisis Will Play Out

by | published October 21st, 2011

The global markets are likely to remain within a narrow range of light trading today.

That's due to the now almost certain extension of the European discussions over the debt crisis.

But the meeting in Brussels on Sunday will not resolve the matter…

What's required is an accord between France and Germany. And for that, with such political opposition in both countries, some rather fancy dancing is needed.

German Chancellor Angela Merkel is facing something just short of a full rebellion within the ranks of her ruling coalition. The problem is so bad, she delayed meetings in Frankfurt in advance of the Brussels summit to attend a closed-door budget meeting with her own party.

In an action that lifted eyebrows on both sides of the Atlantic, the German government, on short notice, canceled today's statement on the E.U. summit – a sure signal that the disagreements continue to run deep.

Meanwhile, in Paris, French President Nicolas Sarkozy is fending off his own political problems, including the undercapitalized French banks, with toxic assets still on their books and a continuing reticence to lend money.

At stake is the future of the Eurozone – a future that will largely be decided by Merkel and Sarkozy.

Proposed Bailout is Not Enough

The current proposal on the table – a bailout package of some €440 billion (the European Financial Stability Facility, or EFSF) – is clearly insufficient.

Without leveraging that amount through issuing securities, the plan falls flat on its face.

Yet this is one of the major points of disagreement.

The positioning of the European Central Bank (ECB) in the leveraging that's required is a significant flashpoint. Without the ECB imprimatur, the essential paper will not succeed.

So which gets thrown under the bus – sovereign debt in periphery E.U. countries, or the banks?

Now, there is an obvious way out: using the existing apparatus that allows the European Investment Bank (EIB) to issue paper.

But whether leveraging the EFSF to the trillions of euros required is even possible remains an open question.

It is also the issue over which France and Germany remain bitterly opposed.

At stake for Germany is additional debt encumbrance, as its own economy – Europe's leading economy – begins to slow down.

For France, its AAA rating is in jeopardy, as the weakness of its commercial banking sector is exposed.

But even so…

The Brussels Meeting is Mere Window Dressing

Those who are expecting a resolution from the meeting Sunday will be disappointed. In a joint declaration late yesterday, Merkel and Sarkozy even said a second summit will be necessary later in the week.

However, two important developments have taken place.

First, facing an unraveling social order in Athens, the Greek government has now lined up sufficient support in Parliament to pass the next package of austerity measures.

This will hit hard those in government service.

The package will cut public sector jobs (a significant portion of the nation's overall employment), thrusting civil servants out into the streets to join the hundreds of thousands already there.

Greece still faces a fiscal mechanism that has never worked, along with a broken system of taxation, but the passage of the new austerity measures will probably be enough to secure another tranche of assistance and stave off default. (At least for now.)

Second, in the joint statement from the German Chancellor and the French President was a very significant guarantee that a resolution would be found, possibly by Wednesday. The wording was quite clear. If it does not happen, both leaders are in political limbo, and the situation will deteriorate fast.

There is a G20 meeting in France November 3 and 4. The last thing Sarkozy wants is to host a meeting at which the Greek debt crisis upstages French wine, so…

Asian markets have been tap-dancing all night with little tangible information on what will transpire today, as E.U. finance ministers actually begin the meetings in advance of the Sunday session.

Oil prices are following suit, exhibiting little reflection of actual market conditions and opting for volatility fueled by headlines.

However, it appears the markets have finally stopped being spooked by each rumor and innuendo arising in the European media.

So who's going to take what haircut, buy which kinds of bonds, and write off whose debt?

Here's How It Will Play Out

Leaders will leverage EFSF – because leverage they must – using a provision from the 1957 Treaty of Rome. And the paper will come through the EIB, not the ECB (at least not directly).

The haircut will be greater, with banks having to write off a greater percentage of bad debts than the EFSF currently allows. (Remember, you can't short European banks at the moment, so this write-down will be less costly than if it took place over here, at least in the short term.)

Under this format, selective default of sovereign debt (without triggering cross default provisions) will be followed by an application of Brady Bond clones. This will cancel some debt. The remaining debt will be refinanced.

The approach parallels the bailout of emerging countries (mainly Latin American) in the 1980s from a wave of debt defaults.

The task facing Brussels amounts to the political equivalent of herding cats.

And for that, Merkel and Sarkozy will need to exercise some decisive leadership.

Meanwhile, the rest of us sit and watch. And hope.



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  1. Alexander
    October 21st, 2011 at 11:42 | #1

    The Eurozone will survive, but certainly not in its current form. The best thing Europe could do on this path of transition is to avoid the Bush/Paulson error of throwing good money at casino bank insiders.

    I have lost on bad investment choices but the taxpayer did not pay me for it. Governments in Europe ought to compensate depositors and let the rest of the casino shell go to hell. Greece will still collect taxes, but it won’t use them to pay stupid and corrupt banks.

    The shells of corrupt and bankrupt banks might be restricted along the ultra-successful model of the early West German Landesbank concept. The state banks were incredibly successful in furthering small business and job growth. The giants from Deutsche Bank to Dexia were envious and wanted competition out of the way so they too could print money according to the Anglo casino model.

    Angela, let them fail. Godspeed to casino banks.

  2. Robert P. Hansen
    October 21st, 2011 at 11:50 | #2

    Dr Kent. Thank You for spelling this out. You are the first to do this. Keep it going. Bob

  3. October 21st, 2011 at 12:47 | #3

    Don’t make any mistake.. the crash of the eurozone will never be allowed to happen The world’s economic existence is at stake.. the demise of the eurozone will crash markets particularly in th US and Asia because of exposure to Eurozone sovereign debt. China is desperate to get out of USD reserves because the US is in just as bad a state as Europe { if not worse} for instance.. if the USD were not the currency reserve of the world banking system.. The US would be bankrupt by now.. the US government can not even keep up the interest payments on it’s borrowings… much like Greece… so how will it play out.. the answer is simple.. the UsS dollar can not be allowed to fail as the Euro can not… many rabbits will be pulled out of the hat.. but be assured.. the dollar and the euro will survive.. and just in the nick of time.. if this situation had happened 2 years ago.. both might have collapsed.. but and here is the essential point… both the US and Europe dominate the financial world.. China and the other emerging economies whilst they have the wealth don’t have the confidence of the world’s financial sectors { and quite rightly so} so to play this present round of economic russian roulette.. you must support the euro against the dollar.. but very short term.. go long term against the dollar and you will commit financial suicide regardless of the monetary problems in the US

  4. October 21st, 2011 at 15:36 | #4

    I still don’t see Paulson or Bush or Barney Frank or Dodd or any of the others in jail for any of this. They robbed the entire world in broad daylight and got away with it. This puts new meaning to the quote “The Great Train Robbery”.
    This is the best example ever, in the world, that there is NO Justice systems in place for corrupt leaders of the world. In our country, the Supreme Court Justices should be put on trial and hung in the middle of town square, as they are as corrupt or none of this would be happening. They are all pawns in the Global Elite game of citizenry plundering. All citizens, of the world, should quit working and pull all of their money from the banks and let their loans, if they have any, go to hell. That will collapse the entire system in less than a week. Then the bankster Rothschilds will get what is coming to them, along with their followers. And the beat goes on and on and on and………

  5. Gordan Finch
    October 21st, 2011 at 16:15 | #5

    Bank Stimulus, Quantitative Easing, Bailout, Intervention, whatever you call it.
    It is a Bailout of the Banks using Taxpayer Money. ITSFRAUD the Banks are being rewarded for Corruption, Betting Taxpayers Money on the wrong Horse, Bribery, Deception and Rigged Accounting.

    The latest attempt at Bank Bailouts will only delay the crisis several weeks before it reappears again to destabilize World Markets. Delays to the fallout are no longer possible the German and French public are aware and do not believe the hype fed to them by corrupt Government any longer.

    As a direct result of Corporate Greed and Corruption, EU countries are stuck with an irrevocably fixed and manipulated overvalue Euro. This is fuelling anger public unity and Bailout Protests in towns and cities all over the World.

    There will be no recovery even with further Fiscal Stimulus for the Banks, because it will never be enough. The Banks do not trust each other and certainly will not lend Money to anyone else. They will just buy Gold and hoard the Cash again.

    The stimulus that would have immediate effect is Fuel, removing the vat and duties would boost manufacturing and lower raw material and direct costs dramatically.

    This would be like a rocket up the rear end of industry. Rather than Governments reliance on the Financial sectors Corrupt Banks that will fail, taking everyone with them. But they wont release their reigns until forced by insolvency.

  6. bikerron1
    October 21st, 2011 at 17:40 | #6

    It’s game over,Turn out the lights,Fat lady getting up to sing.
    If you owe more money the you can ever pay back,your bankrupt. It’s as easy as that. Most likely it well take the next 10 years to move pass the monetary problems coming up.
    So it’s GOLD,OIL,GAS and an AK-47 that you need to own.

  7. Dayton Rogers
    October 22nd, 2011 at 03:11 | #7

    The Spanish Banks have yet to recognize and write down all the toxic assets attributed to overlending to finance real estate projects. These are hidden because much of the money went to regional development authorities. This by the way is how China has financed regional development thru the Central Bank. Another Story! Compare it to washing clothes. The US is in the drying cycle. The others?

  8. Kevin Beck
    October 22nd, 2011 at 07:46 | #8

    Just remember the words of our Dear Ruler: “We are no more special than France or Greece.” What we see unfolding over there will make its way over here pretty quickly.

  9. Roswitha
    November 1st, 2011 at 16:37 | #9

    I loved the “herding cats” remark.

  10. March 14th, 2012 at 11:34 | #10

    Thank that you lot! Your focus is helpful! And no great surprise there mainly because your artical is very brilliant. You help make me determine what is happening within the creative society of connecting via online. Thanks for that which you do. Amazing products. Kind relation.

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