Euro collapse contingencies at Davos
The sense of frustration amongst the world economic elite at the Eurozone inertia is beginning to crack. International investors are, off the record, confirming to us the remarkable extent of their plans to cope and mitigate a Eurozone collapse.
This is deeply problematic for those running the Eurozone. The understandable experiment with putting the horse of reining in PIIG debts before the rescue cart is running out of time.
A leading European bank has begun to account for euros differentially, by nation state. That is to say, they are differentiating a risk to euros that originate in a potentially defaulting country from that of a euro-cert. They, in effect, have invented the concept of a German, Greek and Irish euro.
Now we accept that government debts from these nations are different. The idea that a bank treats cash differentially, is an incredible development. I understand that this would allow this bank to account for an “internal exchange rate”, within the euro, between a strong country and a weak one. And the bank in question suspects they are not the only one.
In theory each euro note is marked with a letter, showing its country of origin. Euro notes tend to migrate south from Germany Holland, to Spain and Italy (where they are spent). The ECB convincingly rubbishes stories that individuals were accepting or not accepting euros with different letter markings. My information about this bank is about electronic money. It would make sense, if you believed there was any material risk of a country leaving the euro. I believe this is just an accounting contingency so far. But if the banking system generally starts to make contingencies for the notions that not all euros are equal, then this could start to be rather self-fulfilling.
That is just the start. I spoke to the head of one of the most impressive institutional investors in the world. He told me with regret about the lengthening list of Eurozone banks that have been taken off their “approved counterparties list” for derivatives trading. This is the reality right or wrong of the lethargic response. The Eurozone financial system is being slowly cut off from the world, certainly from dollar funding. “No matter” you might say, as these banks have three years of practically free money from the ECB via the LTRO bazooka fired in December.
Let me be clear: this is not a prediction of imminent euro or banking collapse. Far from it. Regulators suggest that these are reasonable contingencies, or insurance against so-called “tail risks”. Another UK financial CEO told me that he had heard of this stuff, but that it wasn’t going to be needed. Saving the euro will cost a horrible €500bn, but not saving it will cost a calamitous €3tr. And they will save it, eventually.
The ECB’s half trillion euros is ample to keep its banks muddling along as the worlds biggest bridging loan. But where exactly is this bridge heading? Very important players in the global financial system are starting to make contingencies that should horrify Frankfurt and Berlin. My real fear is that Frankfurt and Berlin haven’t even had the conversations that I have just had here in Davos.