Emperor's New Clothes: Resurrection of Eurozone Crisis Imminent?

London, UK - 31st October 2011, 8:55 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

How fine are the emperor’s new clothes? How beautifully spun is the yarn? Eurozone crisis may resurrect in the coming weeks because:

Resurrection of Eurozone Crisis

1. China may only make a token contribution, rather than ploughing in the exorbitant amounts they are expected to invest, in the trillion euro common pot;

2. Italian 10-year bond yields are at the highest level since the third largest industrial economy joined the Eurozone, which is a sign of stress increasing not decreasing as contagion spreads;

3. “Voluntary” write-downs of 50% of Greek debt have not triggered credit default swaps and the amounts written down are still less than what the market value suggests, indicating further write-downs in future;

4. European Financial Stability Fund – EFSF – may guarantee 20% of losses on future debt issuance but the potential for deeper haircuts, as witnessed in the case of Greece, would still require abnormally high yields to attract investors;

5. Solution of the Eurozone crisis demands new money on the table in trillions of euros and all that has been provided to date are old promises, smoke and mirrors and no new cash to contain the crisis;

6. Fundamental assumptions in regard to economic growth and cost of servicing national debt are overly optimistic and may have to be substantially revised in the wake of intensified austerity measures;

7. If the banks have to improve their tier-1 capital to asset ratio, for many it will be more attractive to reduce lending and jettison parts of the loan book than to seek tier-1 capital increases in tough market conditions, thereby inadvertently slowing their national economies; and

8. All the 13 previous Eurozone summits, prior to the latest one, have mostly enjoyed short-lived stock market rallies in their aftermath which lose steam; why should this latest “solution” be any different?

Fundamental Question: How many times can European leaders present ultimate “comprehensive” solutions to solve the Eurozone crisis once and for all, only to find that “solution” was inadequate in a matter of weeks? At what point does the credibility of European leaders get questioned by financial markets?


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