The Euro: "There’s no stopping what is now a downward spiral."
February 27, 2009
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"There’s no stopping what is now a downward spiral"
That's what one savvy investor recently said about the European Union. Many people believe that the EU and in turn the Euro are doomed. The theory behind this is that there are too individual economies to manage with just one currency. If for example, Italy or Greece had their own currencies they would be able to do much more easing than other members of the EU like Germany will currently allow.
Bloomberg had an interesting article on this subject this morning. A firm called Hayman Advisors LP, which raked in half a billion dollars making bets against U.S. subprime mortgages, believes that the EU is doomed.
The company's a managing director for global markets, Richard Howard recently stated that he believes Germany may choose to fix up its own economy rather than using its money to help bail out fellow EU members like Austria, Italy and Spain. The theory continues that if any of these countries begin to default on their debt, which is a distinct possibility without aid, that Germany might decide to "renounce the euro." The likelihood of it focusing on itself rather than fellow union members is made even more likely by the fact that this is an election year in Germany. Howard went on to add “There’s no stopping what is now a downward spiral.”
The cost to insure against European defaults, has soared six-fold since last summer. Credit-default swaps on Ireland have risen to 395.8 basis points from a below 50 basis points as recently as September. Austrian swaps are now at 265 basis points, versus below 25 half a year ago.
The spread between 10-year bonds for the haves like Germany and the have-nots like Greece, Austria, and Spain are the largest that they have been since the creation of the Euro.
Recently German officials have reiterated their support for the weaker countries in the Union and the savvy investor George Soros said several weeks ago that he does not believe the European Union will break up. European Central Bank President Jean-Claude Trichet recently was quoted as saying "there is no weak link of the euro area."
Still, many like Howard believe that given the depth of the current recession and the likelihood that things will get worse before they get better that the stronger EU members like Germany and France may be hesitant to bail out weaker countries like Spain and Italy.
Time will tell what is going to happen. This certainly is an interesting test for the EU. I certainly am not personally ready to say that it will collapse yet, but nothing would surprise me right now.
A lot off intelligent investors hang out here on CAPS. I would love to hear all of your thoughts on what the future holds for the European Union. Thoughts?
Euro Area Risks Breakup on Bank Woes, Subprime Bear Hayman Says
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