If Europe Should Fail

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It has to be said that up until now we - and most of the rest of the world - have blithely assumed that, confronted with catastrophe, European leaders will overcome their differences and solve Europe's problems by printing up a few trillion euros to paper over the cracks, US style, and keep the show on the road for a year or two longer, but it is now becoming increasingly apparent that the scale of the problems is so gargantuan that there may be no credible or workable solution. The sad fact of the matter is that the bungling, discordant self-serving buffoons who run Europe may well have left it too late. If Europe should fail - and the markets look set to pass judgement on it next week, after a weekend of crucial meetings, then the consequences will be unthinkable, yet think about them we must.

If Europe should fail this is what we can expect to happen - European banks will crash and burn and take down major US banks, which are already walking wounded basket cases anyway. We are likely to see a lengthy unscheduled "bank holiday" - banks will slam their doors and if your money is still inside their vaults then you are out of luck. Major disruptions in supply and distribution of food and fuel in particular will trigger general panic, and riots and mob violence will spread rapidly - what we have seen on TV happening in Greece will suddenly happen on the streets of the US and many other countries. Stockmarkets will crash in a manner that will make 2008 seem like a "walk in the park". Virtually every asset class and investment will crater - especially commodities, stocks and Real Estate. The euro will be vaporized. The tidal wave of funds liberated by this mass panic are going to have to go somewhere and normally we would expect them to go into the US dollar and Treasuries, but with US banks failing even this cannot be relied upon. The one surefire investment category that will shine - provided that is that the markets or brokerage houses etc involved with these transactions don't themselves fail - is "misfortune securities", meaning bear ETFs and Puts.
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Major decisions require an 85 percent supermajority. The United States has always been the only country able to block a supermajority on its own. The following table shows the top 20 member states in terms of voting power (2,220,817 votes in total). The 27 member states of the European Union have a combined vote of 710,786 (32.07 percent).
On October 23, 2010, the ministers of finance of G-20, governing most of the IMF member quotas, agreed to reform IMF and shift about 6 percent of the voting shares to major developing nations and countries with emerging markets.

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Europe’s leaders urgently need to convince the market that they can prevent financial distress in Greece and elsewhere from bringing down the banking system and infecting bigger countries such as Italy and France.

Instead, as they meet today for their second summit in four days, they’re engaged in a high-stakes game of chicken.

On one side, French President Nicolas Sarkozy has proposed raising the money needed -- at least 3 trillion euros ($4.2 trillion), by Bloomberg View’s calculations -- from the European Central Bank, the only institution that can credibly pledge such a large sum.

On the other side, central bank officials, with the backing of German Chancellor Angela Merkel, are holding out. They don’t want to pony up for a full rescue without first fixing key flaws in the euro area, such as the lack of a unified fiscal authority with the power to impose budget discipline on member countries. Such reforms require treaty revisions that could take years to push through, suggesting the ECB won’t be providing the firepower Europe needs to end its crisis anytime soon.

As a result, barring some miracle, Europe’s leaders will test markets’ patience with yet another inadequate bailout -- if they reach a deal at all. Early reports suggest private creditors might be pushed to write down Greece’s debt by about 50 percent, not quite the full reckoning required to draw a line under sovereign defaults. Plans to enhance the European Financial Stability Facility might boost its lending or guarantee capacity to 1 trillion euros or so, far short of what is needed to recapitalize banks and protect solvent governments from market attacks.

Keeping Armageddon Alive

Central bank officials may be hoping that by keeping the threat of financial Armageddon alive, they can coerce the region’s people and governments into moving toward the deeper union that the euro’s creators envisioned. If so, they’re making an extremely risky bet. Market turmoil is pushing up borrowing costs for banks and companies at a time when economic indicators are pointing toward a recession, making the financial positions of otherwise solvent governments increasingly precarious.
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