Forget what you’ve seen in the news about crisis being averted in the eurozone. Nothing has changed. All the latest deal has achieved is to allow the eurocrats to “buy more time”.
It would be laughable if it weren’t so serious. And when I say serious I don’t mean for bondholders, bank shareholders, or even the poor old Greeks, Italians and Spaniards who are now facing economic depression.
I mean for us too…
There’s only one solution to this whole mess. But nobody dares mention its name. That’s OK. I reckon that this ominous silence is going to lead to some serious opportunities at some point. So let’s go out and find them.
Europe’s leaders have no solution
You see, I reckon European leaders are looking in all the wrong places. They’re asking all the wrong questions.
The so-called solutions presented yesterday are centred around who pays for the inevitable losses on Eurobonds. Today the argument is over Greek debt. Next time it’ll be Italian and Spanish.
To understand what’s going on here, we need to step back a bit.
In May 2010, the 27 members of the European Union clubbed together to create the 440bn euro European Financial Stability Facility (EFSF). It’s a bail-out fund – designed to provide financial assistance to eurozone member states in trouble.
The problem is that this fund now looks woefully inadequate. It can’t possibly back-stop all the bonds that are now starting to look dodgy.
What’s more the German courts have ruled that they’re not stumping up any more cash.
So where does the money come from? Ah, well that’s where things get interesting.
How Europe’s leaders can magic new money out of thin air
Though the deal announced on 27 October hasn’t been finalised yet, this is roughly what’s intended…
Instead of using the 440bn euro fund to buy the bonds of the various countries in trouble, the EFSF now plans to “insure” the first 20% of losses on these bonds.
That means they can leverage up the whole fund – they can stretch it out to cover many more bonds. Well over a trillion they reckon.
So instead of buying dodgy bonds, the EFSF now plans to insure dodgy bonds. And in my opinion, claims are almost certain to be made against this particular insurance policy.
And guess what – once all the ‘insurance’ money has been paid out – we’ll be back in exactly the same position again. And this time, the EFSF will be completely empty.
So that’s the flawed solution for the looming crisis in Italian, Spanish, Portuguese and Irish debt. But for now, the immediate concern is Greece.
The last time the Greek debt solution was ‘hammered out’, bond holders were told they’d take a 21% hit on their capital. But now the IMF wants them to take a 75% ‘haircut’ or write-down to the value of their investment. The eurocrats are gunning for 50%.
But I say: “Who cares?”
It makes little difference. However much they cut the value of these debts, they’ll grow back soon enough. And then bondholders will come back to the politicians looking for more bail-outs.
How can I be so sure? Because what they’ve come up with isn’t a solution at all.
The real problem with Europe
The problem is quite simple really. Greece shouldn’t be in monetary union with Germany. Neither should Spain, Portugal, or Italy. I’m going to cut Ireland some slack here… they’re about the only member of the GIIPS that can possibly trade their way back out of this mess.
But as for the rest of them, as for the European project as a whole, I think all that the latest solution will do is put off the inevitable: the slow collapse of Europe.
There are simply too many dependents and too few paying into the system. And as for that growth – well it’s gone – the Greeks, for one, have been completely priced out of the market…
Greece, as a business model didn’t and doesn’t work. Put simply, Greece cannot compete with the likes of Germany on currency parity. It makes her workers too expensive.
To get back on track, Greece needs to devalue its wage bill and it needs to devalue the price of its exports, be it for tourism, or anything else.
But when businesses and government try their hand at austerity and devaluing the labour bill they’re met with walkouts and protest. There is no easy way to play this, but at least there is a solution…
The only way Greece can get out of this hole
There is no easy way out of this mess. And that’s why you can be damn sure the politicians won’t find it.
But as I see it there is a realistic way that the Greece (and any that chose to follow her path) can trade her way out of this hole.
The answer is simple: return to the drachma!
There’s no need for bondholders to argue about the value of their bonds and what ‘haircut’ should be imposed. Simply convert Greek euro debt into Greek drachma debt. One for one and then let the new currency float.
See how much the currency devalues – and that’s the haircut bondholders take. No need for complicated negotiations.
Put the new drachma into circulation. One for one, remember – so Greek wages stay the same. Only now, they get drachmas for every euro they used to get.
Sure Greek imports will suffer a nasty bout of inflation. The public will get squeezed. But hey – that’s what needs to happen. BMW and Mercedez-Benz imports get expensive… but at least they can sell their stock of second-hand Mercs back to rich Germans and pocket any currency gain.
And with Greek holidays costing less, tourism will bounce back, and Greek olive sales too.
Should Greece exit the euro club, then businesses and individuals with Greek euro debt may profit. If the debt gets written down into devalued drachmas, then there could be a one-off gain. It would be particularly handsome for anyone with Greek debt but foreign income.
Why gold should remain in favour
For the moment, trying to pick out the winners is a dangerous gamble. Who knows how this will play out and how long it will take?
But as Europe plays the slow game of gradual disintegration, it’s bound to make gold an attractive prospect for European citizens.
As we head into the inevitable endgame for the euro, citizens will realise what currency devaluation will mean for their savings. And as they do, they’ll seek out gold – the currency that can’t be devalued just because of political expediency.
Stick with your gold. As long as Europe’s problems continue, the case for gold is intact.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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