Death in Venice, Athens…And New York?

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As noted in yesterday’s Macro Minute, Italian banks face the moment of truth…

The Italian people are no long putting their money in the bank—any bank…they’re taking it out.

The faith in the euro is gone…just as the Italian’s faith in their ability to run their own affairs is gone.

With an unelected, European Central Bank technocrat running the nation by decree, for many Italians, there is no reason to believe in anything anymore…

Certainly not in a currency that exists only in the minds of European leaders with illusions of grandeur…

And certainly not for would-be investors.

The yield on a 10 year Italian bond is now well over 7%, which is not a sustainable rate…

That spread spells disaster for Italy’s chances of financial recovery…And the euro’s.

So, how are banks in Italy staying solvent and liquid with those rates?

The fact is, they’re not.

An Offer You Can’t Refuse

They are now borrowing money from private companies…

This little trick is called “private sector involvement” or PSI for short.

And short is the time that Italy has left.

Even cash transactions are limited to only 1,000 euros.

Anything higher will be illegal.

Is this the plan?  Really?

Is this what is going to save Italy from bankruptcy?

I spoke with my good friend John Frederick Carter about this…

“Were in new territory here,” he said, “No one knows how long it will go on.”

Do you wonder if the private sector involvement was voluntary?

I do…And I doubt that it was.

Technocratic dictatorial regimes are not used to asking, are they?

Will it work?

Or is the simple, last act of one drowning man taking another down with him?

I think I know the answer to that one.

And the most telling part of this?

The money from the private sector involvement isn’t staying in Italian banks…

It’s going directly to “the safety” of the European Central Bank.

Italian banks have been given a no confidence vote by….Italian banks.

But it’s not just Italy that’s wavering from a knock-out punch…

Similar things are occurring in Greece.

Record-breaking runs on Greek banks last fall showed that the Greeks no longer believe in the euro either…

And, like Italy, Greece is now run by an unelected financial technician with a mandate to cut spending to the bone…

But who is also struggling to get anything done in a tough political climate in Greece...

While struggling to avoid a disorderly default of 14.4 billion euros this March.

In another version of private sector involvement, Greece is hoping that a bond exchange with private investors will get them closer to where they need to be by January 30…

In order to qualify for another infusion of euros from the IMF, the ECB, and European Financial Stability Facility…

The amount needed?

About 90 billion, or so.

Greek Drama Continues

Meanwhile, Greece is trying to convince private creditors to take a 50% haircut on 206 billion euros’ worth of Greek bonds…

How’s that for a sale’s pitch?

What does all this say about the euro?

It reminds me of what Gertrude Stein wrote of Oakland…

“There’s no there, there.”

There’s no euro left to save, really.

The euro is no longer a real currency…

It is but a hollow symbol of an aspiration that is no longer credible…

If it ever was.

It began as a counter weight to the US dollar and American dominance of the world.

But, like the many members of the European Union, which itself is a falsity…

The euro was a currency without a foundation.

A half-measure at best.

And half-measures do what half-measures do…fail.

And so what to make of all of this?

Playing For Time

John Frederick Carter also noted that they, the Europeans, “are playing for more time.”

“More time for what?” I replied.

“That’s just it,” he said, “to avoid the hard landing of the inevitable.  The euro is dead.”

He’s right, of course, the euro is dead…it’s on life support, but there’s no alpha waves…

The euro crisis has been playing out like a turgid drama that won’t end in the third act.

But wait…What about the ECB?

Isn’t that going to save the euro just like the Federal Reserve is “saving” the dollar?

As I’ve said before here in The Gorrie Details, and as John Frederick Carter repeated yesterday…

The Federal Reserve is lending dollars to the ECB to keep it afloat…

So the “safety” of the ECB that I mentioned earlier, is really the safety of the Fed.

How would a euro failure effect the dollar?

I talked to our currency expert Jason Fielder about this as well.

His answer?

It was simple and to the point.

“When the euro goes, we all go.  All of us.”

What does that mean?

“The dollar is tightly linked to the euro, as are our economies,” Jason said.

And of course, he’s right.

Because the dollar is so linked with the euro, the euro’s demise would eventually destroy the dollar as well…

With a collapse in the euro, European nations would be thrown into deep recessions…

Demand would shrink dramatically; and therefore, the US would suffer as well.

Because the EU is the largest trading partner of the US…

Political stability, social unrest, and violence may sweep some European countries into deep crisis…

Perhaps even leading to military solutions to quell unrest.

This is one scenario of many.

Some think that Germany would never allow this to happen.

And ironically, Germany is now in the position to dominate Europe politically and financially…

With most of Europe happy to see that come about.

But the question remains…

Is the German economy strong enough and large enough to manage it?

The answer?

No; certainly not alone.

The truth is, there are many scenarios for the death of the euro and its aftermath…

We’ll just have to wait and see.

And by the way, I’m in no hurry for it to happen.

And those are…The Gorrie Details.

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