Currency Guru Stephen Jen Gives 4 Reasons The Euro Crisis Will Only Get Worse


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Can’t get enough Eurozone crisis? We’ve got you covered with the most recent commentary from Stephen L Jen, the former Morgan Stanley currency guru who’s know running SLJ Macro Partners.He spells out four non-cliche reasons why the situation in Europe is so challenging, and will only get worse.

We summarize:

  • The PIIGS — or GIPS as he refers to them — are not vaguely competitive on a global scale. They’re not even competitive in Europe, lacking both the proper institutions or the cultural mindset to become competitive.
  • There is a limit to how much more in aid they can get from core countries. It’s getting to the point, where if the GIPS were to default on loans from the European Stability Mechanism, it would put the sovereign debt rating of France at risk. Money from the core is not unlimited.
  • Meanwhile, the ECB owns 50 billion EUR worth of Greek bonds, and has loaned 90 billion EUR to Greek banks. A Greek default would compromise the balance sheet of the ECB.
  • Even if an EU-wide fiscal union were formed, it may not be AAA-rated.

His full comment on the situation at the ECB is worth digesting in whole:

The ECB possesses around EUR50 billion worth of Greek bonds, and has lent around EUR90 billion to Greek banks.  In the event of a default by Greece, not only would the ECB’s balance sheet be compromised, but the ECB would need to make a decision on whether Greek and other GIPS bonds would be accepted as collaterals.  This was the very fear of Mr Weber, and the very reason why he objected to being forced to undertake quasi-fiscal operations.  The threats from Messrs Stark and Bini-Smaghi that the ECB would stop accepting defaulted Greek bonds is not 100% credible, as that would certainly trigger a collapse in the Greek banking system.

The ultimate gist, really: Even a political solution may not work, especially given the threat to the ECB/France, etc.