Why the Crisis with the Euro Currency Continues to Drag On - Page 2
QE, essentially, is the central banks printing new money (or creating it electronically as the case may be). In QE, a central banks buys financial assets of all kinds in the open market, thereby injecting new money into the economy. QE can also be used in an emergency, for example in lending money to banks which are facing short-term funding issues in a crisis, thereby preventing the collapse of the financial system. That why central banks are frequently called “lenders of last resort”. However, the central bank of the Eurozone – the Eurozone Central Bank or ECB – has no legal mandate to provide economic and financial stability as it focuses only on inflation.
Ideally, the ECB would embark on a massive QE that would involve buying the government bonds of the PIGS countries which would have the effect of driving down the yields of these bonds thereby allowing the PIGS countries governments to borrow money more cheaply and to rollover their existing bonds as they expire, thereby allowing them to avoid being forced into default or bankruptcy. Again though, whilst the ECB has been making small purchases of the PIGS government bonds in the open market, they have so far not been willing to bring out the “big bazooka” of QE so to speak, and the crisis continues to drag on.
Therefore, until these two major issues – intra-Eurozone competitiveness and the lack of a true lender of last resort in the ECB – we believe this crisis in the Eurozone will continue to drag on and on. Eventually, the crisis will explode has the potential to explode and could involve a disorderly collapse in the Eurozone that will make what happened in 2008 after Lehman Brothers collapse seem tame by comparison. Of course, a collapse in the Eurozone will result in new currencies in Greece, Italy, Spain, Portugal and the rest of the EU. Some of these currencies such as a German Deutsch Mark would be extremely strong, whilst the new currencies of the PIGS countries would be extremely week and would depreciate by a huge amount – at least 25-50 pc in our view – against the new Deutsch Mark and other stronger currencies. Both UK and the US financial systems would also face severe crisis.Continued on the next page