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Thursday, 1 December 2011

Euro survival rests on too many dilemmas

Either: every Euro-zone nation agrees to surrender some national fiscal responsibility; or the Euro will disintegrate. Survival of the Euro requires complete market confidence in the individual fiscal responsibility of every Euro-zone nation and its sovereign debt. That dilemma ostensibly ensures Euro dissolution.  But there is a greater dilemma.

Global confidence in the Euro can only be restored with pan-European fiscal prudence, which can only be achieved with constitutional, legislative, political or cultural changes in every Euro-zone nation. That probably can’t happen within the time required to restore confidence in the Euro before its impending demise.

However, overshadowing that dilemma, and potential Euro demise, stands the threat to the survival of very large US financial institutions which insure trillions of Euros worth of effectively failed European sovereign debt. They’ve earnt very large premium income selling “insurance cover” over European sovereign debt to clients who don’t even own that debt. Their clients have made very large “bets” that Europe would default. The large US financial corporations, having taken the premium income, now have positions so large they appear unable to meet their obligations should a European government default. What happens when the insurer goes bankrupt? 

Either:  more large US financial institutions will fail; or bankrupt European nations will be prevented from sovereign default. Progressive dismantling of US financial oversight has resulted in this greater global dilemma. European sovereign debt default might crystallise their trillion dollar “over the counter derivative” contingent liabilities. Lehmans’ failure finally prompted wider US awareness of the serious consequences to the US economy of imprudent deregulation.

I acknowledge Jim Sinclair's Mineset for helping me understand this facet of these financially very strange times.

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