Preparing for the Demise of the Euro

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stopsareforwimps
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Preparing for the Demise of the Euro

Post by stopsareforwimps » Fri Nov 25, 2011 3:02 pm

Until a few moments ago I had a long position in the Euro, as a partial hedge against short positions on various Euro country stocks.

I live in a country with a very volatile exchange rate, thus the hedge. If I am long a country's index I need a short position on the country's currency as a hedge and the reverse when I am short.

It seems clear that someone is going to lose a large amount of money coming out of the Euro area's problems. The argument now seems to be about who that someone will be. I am keen that it is not me.

If a debt cannot be repaid, it will not be. So it won't. Add to that the austerity measures which will make the problem far worse in the short term, as they always do in a balance sheet recession.

One scenario being actively discussed is that countries will leave the Euro and deem all their country's debts to be repayable in whatever they decide to call their worthless trash new currencies. They will then inflate their way out of debt.

Other ways to default include "voluntary" rescheduling, controls on capital flows combined with interest rate controls, etc etc.

I think that as long as I don't hold any Euro denominated bank accounts or bonds, or assets in banks from the Euroland, or investments in companies that have heavy exposures to Euroland countries, I should be fairly safe from these predations.

I'm not sure about my short positions. When I close them out it is I who have to pay for the stocks, which should not be a problem.

I'm just worried I have missed something. Any thoughts? Even somewhat unlikely scenarios are welcome here. But no conspiracy theories please.

Picture is a German who preferred to live in the South, where the sun shone and the living was cheaper.
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akhoury
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Post by akhoury » Fri Nov 25, 2011 6:33 pm

A couple solutions for a resolution I have seen around that seem to be gaining traction with the "thinkers" of the world: 1) The Fed buys EFSF bonds in size so to prevent the Euro from tanking against the buck, and 2) the IMF steps in with it's SDRs in size.....

Oddly in scenario #1 holders of the buck are compromised in a pretty big way....(see zero hedge from today)

In scenario # 2, where a supra-national issues it's fiat I don't know who gets hit... (Jim Richards author of Currency Wars from interview on KWN)

Both of these are alternatives to the ECB doing the printing which I agree is still the most probable; but they have me looking over my shoulder a bit....

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Post by drm7 » Fri Nov 25, 2011 6:49 pm

One scenario which may leave the "Euro" intact is, ironically, the wholesale abandonment of the "Euro" by Southern Europe. In this case, the Euro starts to look something like the "Deutschefranc," which would be relatively stable. While the transition would create severe volatility in the short-term, the "northern Euro/Deutschfranc" may restrengthen as the Germans apply the Teutonic discipline they wished they could have done with the current Euro.

The newly-hatched Lira, Drachma, Peso would be about as stable as...the old Lira, Drachma and Peso.

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Post by rhc » Fri Nov 25, 2011 9:59 pm

It would seem that you're not the only one worried about eurozone problems & the possible demise of the Euro.

from Reuters;
http://uk.reuters.com/article/2011/11/2 ... 2K20111124
"Britain's banks are drawing up contingency plans in case there is a disorderly break-up of the euro zone or exit of some countries from the single currency as the sovereign debt crisis rages on, the Financial Services Authority said on Thursday."

Also from this link (from halfway down after the charts of the Euroland credit market)
http://www.acting-man.com/?p=11952
There is a question and speculative answer that follows which might be of interest to you as well since it mentions equities/stocks
Question:
would somebody like to speculate what actually happens with the paper euros in my wallet if the euro collapses?
Perhaps they will be exchangeable into local currencies, but only for a maximum of 10,000 euros per citizen?

What’s the best strategic action now if one believes in a break up of the euro zone? Buried gold for sure.

Are we likely to see equities vanish into thin air as banks in receivership use share certificates registered in the bank’s name on behalf of their clients to pay debts? I checked with my bank and in Switzerland this is not permitted, but in the US shares are pooled and guaranteed up to 0.5 million USD. The rest are the property of the bank it seems….
Answer:
If I had to guess, the paper Euros would for a period of time still have value because we are watching the death of credit or at least a trip to the intensive care unit. Banks without capital can’t make loans or at least I would suspect their paper would be in doubt and they would immediately run into funding problems. The US currency states “This note is legal tender for all debts, public and privateâ€

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Post by Chris67 » Sat Nov 26, 2011 1:03 pm

the answer- as Ive said many times lies in Germany leaving teh Euro - not the weak countries - that way the Euro could head down to 50 Cents on the Dollar and that would resolve many issues - The problem for Germany of a strong Deutscmark would be short lived here as Germany now faces huge problems of its own in a World where Exports are about to fall off the edge of a cliff
I wouldnt listen to too many analysts as what is needed here is a thorough understanding of European politics and history - I think many in teh USA truly lack the understanding of the history of Europe when making predictions about the Euro's future - The Germans will not bankroll the rest of Europe from this point on - Merkel may agree to but she doesnt represent Germany at this point and she wont last long - right wing politics is about to re-emerge !!!

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Re: Preparing for the Demise of the Euro

Post by Asamat » Sat Nov 26, 2011 1:21 pm

One scenario being actively discussed is that countries will leave the Euro ...
This will not happen. It is not in a broke country's interest to do so, as numerous studies show. So why should they choose to?

This might be difficult to explain to a mob of people in case you want to go for a referendum. Similarly, you won't get daily papers and TV talk shows to explain advanced economic topics, when you always get more circulation predicting catastrophes. However, the people in power or coming to power are not stupid (or get appropriate advice). Without exemption they quickly grasp this. There have been five governments toppled by the crisis so far, and in each and every case they have been replaced by a new one, which a) not only don't intend to leave, but are b) rather equipped with a mandate for more strickt austerity measures than the previous lot, and c) they started to implement such measures in each case.

I don't see any real-world possibility for a break-up, despite the politicians best efforts to further one ...
I think that as long as I don't hold any Euro denominated bank accounts or bonds, or assets in banks from the Euroland, or investments in companies that have heavy exposures to Euroland countries, I should be fairly safe from these predations.
I think this would be too optimistic. You would also need to keep away from any stock index and any individual stock of the developed world (and probably beyond). A major break-up (not just a tiny country leaving, which would resolve nothing) would trigger a financial crisis (by liquidity dry-up) easily larger than the 2008/Lehman one. Look at any index around the globe from that time, and draw your conclusion.

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Post by Asamat » Sat Nov 26, 2011 1:37 pm

Chris67 wrote:
I disagree with your assessment. Mrs Merkel will not want to be the politician which let's the Euro unravel. Nor anybody else. Europe is too valuable for that to happen (and I don't mean any monetary value).

She is using threats to influence the behaviour of the other governments. That will go on for a long time, as economic measures implemented by governments take long time to work. Meanwhile they (Europe's politicians together) will counter any real problem with country funding or bank balance sheets by creative law-making.
Chris67 wrote:right wing politics is about to re-emerge !!!
I don't see or hear any of that in Germany. On the contrary, Mrs Merkel follows the social democrats to the left, in order to win the next general election. There is no right main-stream politics of any strength in Germany.

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Post by AFJ Garner » Sat Nov 26, 2011 1:41 pm

There is no right main-stream politics of any strength in Germany.
Whether of the right or the left, extremism is the main danger. Let us fervently hope we manage to avoid that, throughout Europe. A resounding no to the return of the Colonels.

stopsareforwimps
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Post by stopsareforwimps » Sat Nov 26, 2011 10:14 pm

akhoury wrote:A couple solutions for a resolution I have seen around that seem to be gaining traction with the "thinkers" of the world: 1) The Fed buys EFSF bonds in size so to prevent the Euro from tanking against the buck, and 2) the IMF steps in with it's SDRs in size.....
Hmm there are more scenarios to consider here. There seems to be a hardening of opinion in the US against money-printing; this would be money printing on an epic scale. With IMF money comes real austerity.

On a lighter note...

An economist friend sent me this on the abandonment of Euro.

http://en.wikipedia.org/wiki/Euro,_Western_Australia

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Post by AFJ Garner » Sun Nov 27, 2011 5:02 am

[quote]British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain.
As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.
Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.
The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.
A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.
“It’s in our interests that they keep playing for time because that gives us more time to prepare,â€

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Post by Chris67 » Sun Nov 27, 2011 3:15 pm

This really shouldnt be a surprise should it ?
Best analogy is simply this and I seem to have been banging out this idea for years - a heroin addict will never live until his underlying problems are resolved - all Europe has done for 2 years is stick a plaster over teh wound and give teh addict another shot in teh arm. So what is the Euro / Europes underlying problem = its totally flawed from top to bottom
Talk of changes to teh treaty are an impossibility to see through

All the talk of bail - outs / The IMF / Euro bonds - their all based on more debt i.e. more heroin - none of them will solve the problem - teh problem will never go away until they dismantle Europe - ITS SO OBVIOUS

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Post by Moto moto » Mon Nov 28, 2011 3:54 am

in a weekend discussion a slight alternative was considered....
The euro goes up - if the euro is really just an amalgamation of European countries and a standardized format of many various nations, then it is largely made up of Germany/France. So if you think that a break up of the currency occurs, and that these stronger currencies will rally, then the EURO will rally - a bit like a market weighted stock index....the stronger stocks by market cap naturally become a larger part of the index.

what this would mean is that when it comes to stocks, you really need to understand where the liabilities and the assets of the stock is. If its liabilities are in exiting crappy countries but the assets are in currencies that would appreciate then that is a good thing......anyway this is all talk....scarier is if the Euro breaks up, most countries will also have to close their borders as well, and the social unrest internally will be scary. There is more to the eurozone, than just the currency

Otherwise, back to the original post....a lot would then depend on which currency you have your account based in and how the account is actually accounted for.....


When it comes to accounting you need to understand where the assets and liabilities of your account lie. eg; if you are long stocks in a different currency - does you broker do this as a swap (a loan), an automatically hedged currency exposure or is it effectively an investment in another currency.
This will make a massive difference to the individual account.
Who holds the assets, who wears the currency risk, is that for the full amount of the assets purchased, or is it just for the margined amount and any future PL moves? These should be answered first.

eg; here is a question, that a lot of people cant answer.
If you are in based in currency AUD (ie money will be repatriated there) and you have a short in the country that has a currency EUR(eg an Australian, with DAX shorts, or Greek stock shorts) do you have a long or a short currency exposure in currency EUR?

Many would assume they have a short currency exposure in EUR - but not necessarily so.

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Post by rabidric » Tue Nov 29, 2011 4:34 am

i endorse moto's thinking.

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Post by Chuck B » Tue Nov 29, 2011 12:49 pm

In the worst case scenario, wouldn't the "value" of a Euro rapidly approach the estimated conversion ratio of say Euros to D-marks? Or Euros to (x*D-marks + y*Francs)? In other words, the Euro becomes a "when-issued" D-mark instrument? One would think a country like Germany would *have* to have some conversion ratio of what they would honor in terms of D-marks. Is there a black market already trading individual EU member native currencies in relation to Euros?

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Post by Chris67 » Wed Nov 30, 2011 1:38 am

yes there is already a black market for domestic currencies and in fact there are regions in Germany that dont use the Euro
Unfortunately as we hear all day every day teh Euro zone will not be breaking up so therefore teh Euro can only go one way which is down
When it breaks up / when Italy / Spain / Greece leave - then maybe your argument becomes valid
Trouble is European leaders like Merkel are so utterly clueless they wont do the right or sensible thing so they will carry on till the very end rather than lose political face which means Germany gets deeper and deeper into recession - the French Franc ? to be honest Id rather hold Bolivian Pesos

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Post by stopsareforwimps » Wed Nov 30, 2011 4:38 am

Chuck B wrote:In the worst case scenario, wouldn't the "value" of a Euro rapidly approach the estimated conversion ratio of say Euros to D-marks? Or Euros to (x*D-marks + y*Francs)? In other words, the Euro becomes a "when-issued" D-mark instrument? One would think a country like Germany would *have* to have some conversion ratio of what they would honor in terms of D-marks. Is there a black market already trading individual EU member native currencies in relation to Euros?
There seems to be an assumption here that all existing Euros would continue to be Euros. But what if a country secedes from the Euroland and declares that all Euros held within that country are suddenly now pesos?

This happened in Argentina (literally "the land of silver") where all USD accounts were unilaterally turned into peso accounts at the official exchange rate. A few days later the peso was devalued by a large factor. The mother of a friend of mine lost her life savings this way.

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Post by Moto moto » Wed Nov 30, 2011 6:09 am

stopsareforwimps wrote:
Chuck B wrote: There seems to be an assumption here that all existing Euros would continue to be Euros. But what if a country secedes from the Euroland and declares that all Euros held within that country are suddenly now pesos?
Dont hold me to the exact numbers, but it is that sort of memory that is the reason why so many South Americans export money from their countries into off shore funds and accounts (estimated at about 60-70% when speaking to IFAs from the region). The nationalisation of bank accounts and forced devaluations destroys wealth faster than you can imagine. (Southpark episode mentioned elsewhere - poof and its gone).
In the case you mentioned.....I would imagine that only occurs in accounts in the country that does that. If your account is in the US, and has a EUR denominated currency, then it should still be subject to what the EUR is trading at.....if some governement declared all EUROs in their country to be non EUROs, and an exchange rate gets set, then it should not actually affect what other people will exchange EUROs for out side of that country.....I would hope.
I dont have enough South American or Eastern European fall in the late 80s experience to understand, or know.

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Post by rhc » Wed Nov 30, 2011 6:28 am

Moto moto wrote:(Southpark episode mentioned elsewhere - poof and its gone).
Extended version (runs for 2 minutes) . . . very amusing
http://www.southparkstudios.com/clips/2 ... ving-money

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Post by stopsareforwimps » Wed Nov 30, 2011 5:37 pm

rhc wrote:
Moto moto wrote:(Southpark episode mentioned elsewhere - poof and its gone).
Extended version (runs for 2 minutes) . . . very amusing
http://www.southparkstudios.com/clips/2 ... ving-money
It is frightening how accurate that episode is as far as many of these financial intermediaries go.

I recently went back through my records and realized that every single investment I have ever made through a financial planner has cost me money.

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Euros ain't Euros

Post by stopsareforwimps » Fri Dec 09, 2011 4:52 pm

http://globaleconomicanalysis.blogspot. ... -cash.html
Bloomberg reports European CEOs Move Cash to Germany

Grupo Gowex (GOW), a Spanish provider of Wi-Fi wireless services, is moving funds to Germany because it expects Spain to exit the euro. German machinery maker GEA Group AG is setting maximum amounts held at any one bank.

"I don't trust Spain will remain in the euro zone," said Jenaro Garcia, founder and chief executive officer of Madrid- based Grupo Gowex, which provides Wi-Fi access in 15 countries. "We moved our cash and deposits to Germany because Spain will come back to the peseta."

Expect Capital Controls

As I said in regards to Greece, the sane thing to do is get your money out of any troubled countries. If everyone does the sane thing, it will bring the crisis to a head quicker. In response, expect countries to impose capital controls.

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