The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[orangeman]

I always like Robert Peston's articles - they're easily understood for starters - he reckons 2012 will be the defining year in this whole downturn :

I've got some good news, and some bad news.

The good news is that if we get through 2012 without the financial collapse of a big bank or a eurozone government, our economy will probably muddle through, flatlining rather than falling back into acute recession.

The bad news is that 2012 is the year of greatest risk that a bloated bank or over-extended government will be unable to repay its debts - because it is a year when a frightening volume of the loans that were taken out in the boom years fall due for repayment.

In private equity, for example, much of the money that was borrowed to finance the buyouts of big companies from 2005-7 has to be paid back in the coming year.

In practice, it would mean replacing old debts with new debts - borrowing new money to repay existing creditors.

One specialist in this kind of finance told me that he has just been approached by a private-equity firm looking to refinance £2.5bn of maturing debt. His instinctive reaction: fat chance.

Why so gloomy?

Well capital markets are more-or-less closed for highly leveraged companies (businesses with big debts). And banks are strapped for capital and under orders from regulators not to take substantial new financial risks.

So goodness only knows how these big companies will find the cash they need.

Which may of course trigger losses for current lenders.

That said, the amount of debt maturing for private-equity owned companies pales into insignificance compared with the debts of banks that have to be repaid or refinanced in 2012.

European banks in general will need to find an estimated 810bn euros to repay loans that are falling due (according to research by Royal Bank of Scotland). Of this, British banks financing need will be around 110bn euros.

And then, of course, there is the bulge of European government debt that needs to be repaid.

So adding together maturing debt, new borrowing and interest payments, Italy will need to find 400bn euros, France a tiny a bit less, Spain around 220bn euros and the UK approximately 260bn euros (my calculations based on data from Bloomberg and the European Commission).

As I have pointed out before, Italy, France and Spain are more at risk of a funding crisis than the UK, because their central bank, the European Central Bank, will not buy their debts to any substantial extent.

There may be good reasons for the ECB's refusal to be the lender of last resort, not least of which is that any purchase of one nation's debt by the ECB represents a subsidy to that nation from the rest of the eurozone, without explicit or implicit permission being given by the electorates of the other sovereign states (see Tuesday's post, The eurozone's borrowing costs may stay lethally high, for more on this).

Or to put it another way, it's not completely bonkers that the German government does not wish to - in effect - finance the lifestyles of Italians and Spanish people, without checking whether German voters think that's tickety-boo.

But if Germany won't lend to its eurozone partners, who should?

Here's the thing: in a crisis the liabilities of banks and the liabilities of governments are broadly the same thing, as the poor beleaguered Irish government has found to its cost.

And, as I say, when you look simply at the 2012 refinancing needs of financially stressed eurozone states and banks, well it's a big number.

So if you happen to be a money manager in Boston or Abu Dhabi or Singapore, looking after billions of dollars of other people's money, and you can't identify a lender of last resort to interconnected eurozone states and eurozone banks - you can't see who is going to bail out the currency union if it all goes horribly wrong - you may well think that increasing or even maintaining your exposure to the eurozone is something of a sucker bet.

Which is one reason why eurozone governments and banks are finding it harder and more expensive to borrow - and why, with all those debts falling due in 2012, eurozone leaders haven't got long to agree a credible rescue package, if they're to skirt default, banking meltdowns and eurozone fracture.

[thejuice]

Britain on the brink of a modest recession

Britain is on the brink of a modest recession that will be followed by months of stunted growth, a bleak forecast from the OECD said today.

Predicting that the UK will endure another period of contraction, the Organisation for Economic Co-operation and Development said GDP will shrink in the final quarter of 2011 and the first quarter of 2012.

It slashed the UK's 2012 growth to just 0.5% from 1.8% earlier this year and said it expects unemployment to hit 9.1% by 2013, putting another 400,000 people out of work.

The OECD said the eurozone debt crisis was "the key risk" to the world economy and warned the slowdown in global growth is in danger of escalating into a full-blown recession without "decisive action" to shore up the currency bloc.

It said the eurozone already appears to be in a mild recession and it now expects the currency bloc to grow just 0.2% in 2012, down from its previous estimate of 1.6%, in a major blow for the UK's export hopes.

OECD chief economist Pier Carlo Padoan said eurozone leaders had failed to take urgent action to tackle "the real and growing risks to the global economy".

He called for a "substantial" increase in the eurozone bailout fund and for the European Central Bank to play a greater role in shoring up the finances of debt-ridden nations to prevent the crisis dragging the world economy down.

With growth in the UK hit by weak demand for exports, the Government's austerity measures and the squeeze in consumer spending, the OECD expects the Bank of England to pump a further £125 billion into the economy in the coming months, bringing the total to £400 billion.

The UK's slump is set to be modest compared with the 2008/09 recession and the economy is likely to start recovering after two quarters of decline. GDP growth of 1.8% is forecast in 2013.

But there is a risk that the downturn will be deeper than projected, as the eurozone debt crisis has the potential to hit the banking sector and weaken confidence.

It warned that the Government should be ready to pump more money into banks if the financial crisis worsens.

The OECD also said unemployment, which currently stands at 8.3% - its highest since 1996 - will rise to 9.1% in 2013, putting another 400,000 workers out of a job on top of the 2.6 million already unemployed.

Employment is likely to take a bigger hit than in the last recession because businesses have less scope to reduce wages and adjust the amount of time employees' work.

The OECD called on the Government to pump more resources into employment training to help mitigate the impact of rising unemployment, particularly for young people who are already suffering a 20% rate of joblessness.

Chancellor George Osborne may also have to consider easing his programme of spending cuts if the economy worsened but will still have to increase austerity measures later to ensure medium-term targets are met. It suggested the Government could further increase the retirement age to improve long-term prospects.

The Chancellor, who is tomorrow due to report a series of measures to boost the economy in his Autumn Statement, said: "What is clear from the OECD is that these are very difficult times for many countries in the Western world.

"The OECD is predicting deep recessions in many European countries. That is a challenge for Britain.

"What we can do with our policies is take Britain safely through this storm. But we have got to lay the foundations for future economic success."

France, Germany and Italy are predicted to suffer contractions as the eurozone debt crisis worsens.

Emerging nations are growing more slowly than previously thought and there was also a danger the US could slip back into recession amid its austerity measures, according to its forecast.

Prime Minister David Cameron will travel to Paris on Friday for talks on the eurozone crisis with President Nicolas Sarkozy ahead of next week's crunch summit of the European Council.

A Treasury spokesman said: "The UK economy is not immune to the turbulence in the eurozone and its impact on British businesses, but the difficult decisions taken by the Government has made the UK a relative safe haven in the sovereign debt storm and helped to keep interest rates at record low levels for businesses and households.

"The Government is using all levers to protect the UK economy."

PA

[muppet]

http://www.rte.ie/news/2011/1201/eurozone.html

Nicolas Sarkozy set for landmark EU speech

[AZOffaly]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

[passedit]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

Have you any debt (including mortgage debt)? If so start there. Nothing else is a safe investment. As I said before, your next best is probably baked beans and bullets.

[muppet]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

*NB take with a huge health warning

Stirling mightn't be bad but it is hard to see how Britain would escape the fallout given all the debt crossovers. Imagine of Greece defaulted on a Monday, leading to Portugal defaulting the next monday, leading to Spain defaulting the next monday and so on with Ireland then Italy joining in, hard to see how Britain would cope with such a huge amount of their loans being defaulted upon.

The scary phrase we don't want to hear is 'Capital controls' or something similar. That might happen in Ireland in advance of a breakup, but would almost definitely happen everywhere after such a break-up. The danger here is that you might move your money to somewhere safer than Ireland, only to find that particular state imposes capital controls after the Euro collapses and you mightn't be able to get the money out of there, or international transactions by then attract a huge taxes leaving and entering states. Where does that leave you if you buy Gold or foreign currencies? It is all guesswork really.

Personally I want any disposable cash (n.b. but not held as cash) to be wherever Germany is. I would hope to be able to leave it long term until any crisis is over. You mention gold, it is hard to believe that the price nowadays is attractive or sustainable.

But nothing is foolproof. The EU Commission apparently making plans to 'force' Greek money in Swiss banks back into Greek banks: http://brucekrasting.blogspot.com/2011/11/on-capital-flight-and-forced.html

Scary stuff.

[Hound]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

Another option (no idea whether a good idea or not!) would be to open a Danish Kroner account (currently offered by investec.ie).

I've also heard people investing in German Treasury Bills for 6 months to 1 year - but for every 102-103 you put in, you only get 100 back, i.e. they are becoming such a popular hedge they can offer negative yields.

[seafoid]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

Gold is very volatile at the moment. The Euro probably won't break up. It would destroy the global economy for at least 5 years.
Even the 1% don't want that.

If enough people thought that the Euro was unsafe and pulled their money out of the banks the currency would collapse. The job of the authorities is to make sure this doesn't happen.   It all depends on confidence.

[whiskeysteve]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

Gold is very volatile at the moment. The Euro probably won't break up. It would destroy the global economy for at least 5 years.
Even the 1% don't want that.

If enough people thought that the Euro was unsafe and pulled their money out of the banks the currency would collapse. The job of the authorities is to make sure this doesn't happen.   It all depends on confidence.

The volatilty of Gold as it stands should not be a major worry IMO. While it is the finite element that it is, it will always retain value (as it has done for thousands of years). Silver should be considered also (precious for use in industry also).

With the central banks around the world now consigned to printing money, debt and fiat currency could well be on an exponential curve (e.g. by the time you know the currency is about to fatally debased, its too late):

http://www.youtube.com/watch?v=8WBiTnBwSWc

The above is a fascinating presentation on the economy, energy and environmental challenges of the coming 20 years. Doesn't look good for us.

Fiat currency is backed by nothing and throughout history has been shown to be anything but sacred. Why couldn't the dollar or euro become worthless at some point in the future with our politicians as short-sighted and divided as they are (in europe at least)?

In my opinion, one of the ways to protect yourself in the coming years (if you have savings) would be to secure your energy requirements or lack thereof. Never pay any heed to broad brush verdict on micro renewables for example, they depend entirely on your circumstances.

We have a micro hydro generator installed on a piece of land for example and it is turning out to be a great investment (the house is totally off-grid for several thousand quid of capital and you earn a tariff for everything you generate, moreso if it goes back into the grid)

Putting yourself and your family in the position of being as self-sustainable as is practible in terms of energy and food requirements is not a bad move, sure even if everything turns out grand with the economy you are adding to the value of your land/property.

Invest in self-sustainability if you can or precious metals if you can.

[Orangemac]

If the Euro is to be saved it seems as if some sort of deal involving the ECB helping out with sovereign debt alongside greater integration of fiscal management is on the cards

Any new treaty which may include corporation tax will have be ratified by the Irish people. Would the further concession of control over budgetary/taxation measures to Europe be worth getting a significant proportion of the EU/IMF loan paid//written off?

[Declan]

Get your new punts!!
http://www.independent.ie/national-news/irish-designer-comes-up-with-a-cheeky-take-on-images-for-punt-nua-if-euro-collapses-2952523.html?start=6

[seafoid]

What would ye think of buying gold with any savings you might have? Safe? Crazy? Obviously I'd discuss with a Financial Advisor, but just wondering if anyone else has gone down this way, especially if you have a few bob in a savings account? If the Euro collapses, and we revert to a devalued Punt, I don't want to be left with stuff that can only be used as toilet paper.

How about buying Yen, or Dollars, or even Sterling?

Gold is very volatile at the moment. The Euro probably won't break up. It would destroy the global economy for at least 5 years.
Even the 1% don't want that.

If enough people thought that the Euro was unsafe and pulled their money out of the banks the currency would collapse. The job of the authorities is to make sure this doesn't happen.   It all depends on confidence.

The volatilty of Gold as it stands should not be a major worry IMO. While it is the finite element that it is, it will always retain value (as it has done for thousands of years). Silver should be considered also (precious for use in industry also).

With the central banks around the world now consigned to printing money, debt and fiat currency could well be on an exponential curve (e.g. by the time you know the currency is about to fatally debased, its too late):

http://www.youtube.com/watch?v=8WBiTnBwSWc

The above is a fascinating presentation on the economy, energy and environmental challenges of the coming 20 years. Doesn't look good for us.

Fiat currency is backed by nothing and throughout history has been shown to be anything but sacred. Why couldn't the dollar or euro become worthless at some point in the future with our politicians as short-sighted and divided as they are (in europe at least)?

In my opinion, one of the ways to protect yourself in the coming years (if you have savings) would be to secure your energy requirements or lack thereof. Never pay any heed to broad brush verdict on micro renewables for example, they depend entirely on your circumstances.

We have a micro hydro generator installed on a piece of land for example and it is turning out to be a great investment (the house is totally off-grid for several thousand quid of capital and you earn a tariff for everything you generate, moreso if it goes back into the grid)

Putting yourself and your family in the position of being as self-sustainable as is practible in terms of energy and food requirements is not a bad move, sure even if everything turns out grand with the economy you are adding to the value of your land/property.

Invest in self-sustainability if you can or precious metals if you can.

the gold price hit a record in 1980 . When gordon Brown sold the Uk's gold around 10 years ago the price was 30% or so of what it had been in 1980.
It's like any asset. The price you buy in at is crucial.   

[bcarrier]

"Gold gets dug out of the ground... we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." – Warren E. Buffett, 1998

http://www.forbes.com/sites/greatspeculations/2011/05/11/what-if-warren-buffett-is-right-about-gold/

We are now at the shoeshine boy stage for gold imo.

Whisky Steve's energy rec is a good one.

[Hardy]

This is how a people with a sense of nationhood, democracy and self respect asserts its sovereignty against any and all forces, domestic and foreign, acting against its interests:

[passedit]

This is how a people with a sense of nationhood, democracy and self respect asserts its sovereignty against any and all forces, domestic and foreign, acting against its interests:

It's a bit more complicated than that Hardy. Have a wee read at

this thread