Forex rebates on every trade - win or lose!

The Demise of the Euro
Avi Tiomkin 04.21.08, 12:00 AM ET



Tensions between inflation-obsessed Germany and growth-hungry Latin countries will spell its end.

It is only a matter of time, probably less than three years, until the euro experiment meets its end. The financial crisis in the U.S. is hastening the process, as investors flee the dollar, pushing the euro to a price of $1.59. But it will not stay high for long. Countries like Spain and Italy will withdraw and return to their old currencies. Once that happens, get ready for the return of the deutsche mark and the French franc.

What will undo the euro: the mounting tension between the inflation-obsessed German bloc (including Austria, Luxembourg and the Netherlands) and the Latin bloc of France, Italy and Spain. The Germans, saddled with memories of the hyperinflation that brought the Nazi Party into power, remain singularly focused on fiscal and monetary discipline. Despite core inflation in the euro zone of only 2.4% and a slowing global economy, the Germans insist that the European Central Bank maintain a tight monetary policy. In direct opposition to Germany, the Latin bloc, joined by Ireland, wants the ECB to lower interest rates.

Spain's worsening real estate slump dramatically illustrates the problem faced by the Latin bloc. For years Spanish home building and buying outstripped that of Germany, Italy and France combined. Now that the boom has turned to bust, the Spanish central bank cannot lower interest rates. Nor can the treasury devalue the currency. Bound to the euro, Spain can only complain to the ECB, while watching its economy circle the drain.

European heads of state and the European business press are making their discontent public in stark language. "We cannot continue to cope with the autism of some bankers who do not understand that the priority is not fighting inflation, which is nonexistent, but fighting for more growth," declared French President Nicolas Sarkozy last year. In October, in response to German Finance Minister Peer Steinbrueck's comment that he "loves a strong euro," leading Italian business newspaper Il Sole ran a headline labeling the remark "a declaration of war." "Italy has lost the ability to grow," the Italian finance minister, himself one of the founding members of the ECB, admitted recently.

The euro has long had detractors, who question the viability of political and monetary union in Europe. Haunted by World War II, the generation of leaders that included Helmut Kohl and Franis Mitterrand was willing to give up sovereign powers and national interests to create a common currency. But with no shared language, customs, culture or political system, the euro zone has never existed except as a construct in the minds of bureaucrats and politicians.

Now, as the divisions increase, insiders are beginning to take a dim view of the prospects for continued monetary union. "We believe the euro will not survive in the long run in the absence of some kind of political support," the president of BusinessEurope, a pan-European business association, stated in early March.

Along with the steep selloff that will precede the disintegration of the high-flying euro, other markets will be shaken. Look for much higher interest rates for prospective euro deserters like Spain and Italy as spreads for benchmark German bonds widen.

What should investors do? Gradually start to hoard dollars and short the euro. Another strategy is to sell investments in Italy and Spain and buy German fixed-income assets.

The political situation in Europe is likely to accelerate the euro's demise. Now that the Spanish elections are over, politicians there no longer feel the need to remain silent about mounting economic woes. If, as Italian polls predict, Silvio Berlusconi becomes that country's prime minister, the man who criticized the euro as "a disaster" would join a common front ready to take action by the time Sarkozy's France assumes the European Union presidency this summer.

The tight-money Germans will not push to preserve the euro. A poll released at the end of 2007 by Dresdner Bank (other-otc: DRSDY.PK - news - people ) showed that 62% of Germans support reinstating the deutsche mark as the country's currency. It appears that their wish will come true.

Look like some good Spanish Property bargains for you soon Hils!

I'd rather wait till I can see the whites of their eyes, JT. That'll be a few years yet.

:o)

I don't know if it's just coincidence but, since Avi Tiomkin's article was published at the end of last week, everything I read seems to be about Spain.

There was an article in Saturday's Torygraph, and today there have been comments from BBVA and Bank of Spain which both say that everything's sh@gged.

( TF ) 04/07 14:36
BBVA cuts Spain 2008 GDP growth forecast to 1.9 pct vs previous 2.6 pct


- MADRID (Thomson Financial) - Banco Bilbao Vizcaya Argentaria SA.'s analysts have cut their forecast for Spain's 2008 GDP growth rate to around 1.9 percent from a previous forecast last autumn of 2.6 percent.

In the bank's April 2008 study of the Spanish economic situation, BBVA said it is forecasting a GDP growth rate of between 1.7 percent and 2.2 percent growth in 2008 and between 0.8 percent and 2.0 percent in 2009.

'We expect Spain's growth rate to reach a low in the first half of 2009 before the recovery begins,' BBVA's chief economist Jose Luis Escriva said during a conference to present the study.

Escriva said both international and domestic factors had led to a sharper slowdown in Spain than was initially expected, though added that the bank's growth forecasts have an 'unusually high margin of uncertainty.'

External factors weighing on Spain's economy include higher risk premiums, lower global growth, the appreciation of the Euro to the dollar, high oil and raw material prices and a 'delay' in European Central Bank interest rates.

Within Spain, a harder-than-expected fall in residential housing sector investment has added further uncertainty to growth prospects.

Investment in Spain's housing sector will fall by 7.5 percent from a year earlier and by 14.5 percent in 2009, BBVA said.

The bank also raised its forecasts for Spain's unemployment rate in 2008 to 9.5 percent and in 2009 to 11.0 percent.

Spain's GDP grew 3.5 percent in 2007, while Spain's unemployment rate stood at 8.60 percent in the fourth quarter of 2007.

I also read something over the weekend from DBk, saying major European Banks were dumping their Spanish MBS at something approaching 40% of face value because they know the value is going to fall a lot further in the months ahead, and they want what they can get now. I have a friend buying some property in Spain, and I have been telling him to wait, but the pressure from 'she who must be obeyed' seems too great! Still time is on our side Hils (I think!). JT

The thing with Spanish property, JT, is that there has never been any real supply constraint. There's always been enough land for them to just build a new village whenever they've wanted. That's worked for the developer, but it just serves to devalue the market further when you get a crunch as there is now.

Anyway, cable is clearly falling on the 4 hour chart and is continuing to make lower highs and lows on the 15 minute chart.

Although the 4 hour chart suggests it's got further to fall, it's now approaching the rising blue support line which currently sits 10 pips or so below $1.98. There's still another 2 days to wait till the MPC, so I suspect it might well bide its time ahead of the Fed minutes tonight and then make a decision on direction once they're released.

08:00 *UK MARCH HOUSE PRICES DOWN 2.5 PERCENT VS FEB - HALIFAX

That's forced it down to nigh on support.

TF ) 04/08 08:17
UK March house prices down 2.5 percent vs Feb - Halifax


- LONDON (Thomson Financial) - UK house prices registered their biggest monthly fall in over 15 years in March, the country's leading mortgage lender said.

Halifax, which is part of the HBOS banking group, said house prices dropped 2.5 pct month-on-month, the biggest fall since September 1992 and much worse than the 0.4 percent fall analysts had expected, following February's fall of 0.3 percent.

The average house price in the UK in March was 191,556 pounds, down from February's 196,649 pounds, Halifax said.

In annual terms, March's prices slowed to a rise of 1.1 pct from February's 4.2 percent. The March increase was the smallest since March 1996 and below analysts' forecasts for a 2.3 percent rise.

House prices fell 1.0 percent in the first quarter from the previous quarter, the biggest fall since the second quarter of 1995.

Deleted. Posted twice. Board broke.

Hils, perhaps all the news is now reflected in the price and we will get a bounce. JT

Maybe, JT, but it's neither bouncing nor punching through support just now.

It's nothing more than a 50-50 call for the gamblers.

Agreed Hils. GBP/CHF tasty today!

Morning all. Was short cable yesterday looking at pretty much the same chart as Hils this morning, but got stopped out for -25. Short this morning again from 1.9833, stop now in at 1.9805, looking for 9765

Weekly S1 at 9755.....

Thanks JT. Now closed by limit for +68. Looks like strong support around here so will wait and see with cable. Got the day off so going to go and do something else now.

3 month Sterling Libor has been edging lower these past few days and the BoE have now announced that it is to increase the amount up for 3 month auction next week to 15bln from 10bln in an attempt to improve liquidity.

I wonder if this is a precursor to them leaving rates on hold on Thursday???

Doesn't seem to be the consensus amongst currency traders - at least not today, after the March house price data.

Cable's dropped 100+ pips since the bank's announcement.

I realise that, Chocopops, and I'm not suggesting that anyone go out and buy a falling market. It wouldn't be the first time that the market got it wrong though. And it sure won't be the last.

But ....... as I see it, the BoE are torn between the two evils of soaring inflation and a weakening economy.

Top of the list is their remit from the Chancellor to control inflation. That's in black and white on their website. By providing liquidity to the interbank market, I wonder if the MPC might be looking to get the best of both worlds by leaving rates on hold.

It's just a hunch. I'm probably wrong.

:o)

Sorry, Hil - I didn't think for a moment that you hadn't noticed ;)

Fwiw I do think the MPC will cut on Thursday, and this morning's announcement might serve as a gag for the 50 BPers on the board.

In the end, whatever they hand out is just another placebo.