Felix Zulauf has continued to be accurate about the European
debt crisis. Here is another voice,
Sean Egan, in part as interviewed in Barrons. The link to the whole article
follows.
Barrons [Jack Willoughby]:
We've been moving from crisis to crisis -- first Ireland,
then Greece and now Italy. What's going on?
Egan [Sean Egan, Presidant of Egan-Jones
Ratings]:
Think of it as a bunch of political problems that are being
driven by one central economic problem -- the inability of Europe and its banks
to handle and contain the damage sustained in the 2008 financial crisis. The
resolution of this sovereign-debt crisis will remake the face of Europe over
the next few years. This is going to be one truly big story -- on the scale of
the instability of Germany's Weimar Republic after World War I -- and I can't
see the political will or politicians with enough clout to forge a broad
consensus. Everything seems to point toward instability, leaving democracies
open to strong-arm government.
(for more, see) http://online.barrons.com/article/SB50001424053111904637304576434180949687522.html
From Felix Zulauf (Derived from Barron's
January 24, 2011).
Felix again emphasizes that the situation in Europe is an epic drama. There are more chapters to come. He believes that the euro has been a "misconstruction" from its birth.
Here is my interpretation of what he said:
Different economies, structures and productivities have joined together and forced a single currency upon themselves. There is also a single interest rate and a single monetary policy. Since some countries generate surpluses, and others generate deficits, imbalances are created, which formerly would have been expressed in the increased or decreased value of each country's individual currency. When forced however to share a common currency (euro), the imbalances have no such outlet for expression, and instead, weigh heavily on the deficit-countries, which must service their debt in euros, which for them have an ever-increasing real cost.
Following the implementation of the euro, as yields from bonds of different countries converged, their bonds became mispriced over time by the bond markets. Now [January, 2011] spreads are widening again because of Germany's strength and the weakness in the peripheral euro-zone economies. The financial crisis demonstrated that Greece was essentially broke.
In order to avoid another European banking crisis the European Union could not allow a default by Greece. Thus Greece received more credit in exchange for austerity measures, such as cutting expenses and raising taxes. This likey means an economic recession in Greece for years to come. There is no way out of a deflationary spiral, and ultimately Greece will have to default. Greece's finance needs have been taken care of for two years, so the next chapter of the Grecian tragedy is due to unfold in 2013.
read the original text |
Seven months earlier, I posted this article:
Felix Zulauf speaks. (Condensed from Barron's
June 14, 2010.)
He says that the world is at a crossroads.
Some countries are at the end of a dead-end street. Greece has hit the wall. Spain and Hungary could be next. Markets may no longer be willing to finance
irresponsible public-sector indebtedness.
The Greek debt crisis was evidence of that. This unwillingness is now
on the periphery, but will travel toward the center in the coming years. What do the three recent crises (1) the U.S.
housing crisis, (2) the euro crisis and (3) the banking crisis have in
common? Industrialized economies carry
too much debt. These crises show that
the system is flawed, and needs to be rewritten.
"We have been living a fiction for the past 20 years in order to enjoy a greater
stndard of living."
The steps that Europe has taken to contain the crisis are a signal for similar bad
times ahead.
[Greece was forced on May 11, 2010, to adopt an austerity
plan to reduce its budget deficit by 30 billion euros over the next three years
through wage, benefit, subsidy and pension cuts, slashing social programs, and
an increase in value added tax (VAT).]
This means stagnation for many years to come, but it could be much worse.
"Deflationary pressures will increase."
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