All sorts of warnings, hints and implications thereof are hitting the news on Europe. Watch out for your hair standing up on end. Here is a round up of the latest.
Pulling Old Currency Trading Gear Out of the Basement
The Wall Street Journal is reporting Inner Workings of Market Readied for Euro Breakup:
Companies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies.
ICAP PLC, which operates the biggest system for enabling currency trades between banks, said Sunday that it is prepping electronic-trading systems for a possible exit by Greece from the euro zone and a return of the drachma, the country's previous currency.
CLS Bank International, whose platform enables banks to settle their currency trades, is running "stress tests" to prepare for a dissolution of the euro, people familiar with the matter said.
We noted earlier that the Federal Reserve had increased, on the 23rd, an other fund by $88 billion. This fund could be used for emergency foreign currency exchange intervention, among other purposes, such as the IMF.
IMF & ECB Offer Italy a $600 billion bail out
We kid you not. Credit Writedowns seems to be verifying the source in this post:
According to a media report, the International Monetary Fund (IMF) is preparing an assistance program with a capacity of up to 600 billion euros for heavily indebted Italy. Appropriate credit could be awarded for a period of twelve to 18 months in order to stabilize the financial situation of the country, reported the Italian newspaper "La Stampa " on Sunday, citing an IMF official. With interest rates between four and six percent, it would be much cheaper than current two-and five-year bonds with interest rates of more than seven percent.
Now Dow Jones is reporting the IMF $600 billion bailout isn't credible.
A report that the International Monetary Fund could offer Italy between EUR400 billion and EUR600 billion in financial support is not credible, people familiar with ongoing international discussions on the European debt crisis said Monday.
The report is "not credible," one of the people told Dow Jones Newswires.
"I think it is baseless," another source also told Dow Jones Newswires. "There has been no talk on something like that among (Group of Seven) authorities."
No surprise on any of these new events for there to be rumors, denials and then confirms. The situation is in constant flux.
The Eurozone Collapse is a Matter of Days
The Financial Times is reporting economic Armageddon with a twist. Disaster can be averted, but only if three major points of a deal are struck within days, a Euro bond, a fiscal union and some sort of ECB backstop, intervention in the current bond markets, also to provide short term liquidity.
If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression. So even if the European Council was able to agree on such an improbably ambitious agenda, its leaders would have to continue to outdo themselves for months and years to come.
French Budget Minister Speaks
The French Budget Minister is claiming progress:
Valerie Pecresse said Sunday that France was working to change European Union treaties in a bid to further consolidate the euro zone.
What Happens if a Country Drops Out of the Eurozone?
Jared Bernstein has a simple explanation on what happens to the currency and debt:
What would happen if a country broke away? Well, the problem is all in the transition. Contracts between creditors (lenders) and debtors (borrowers), including everything from bonds to cheese deliveries, have to be renegotiated, and done so at the value the world decides to assign to the new currency, e.g., the ND ("new drachma"). And one can imagine that assignment will not be flattering to the dropout country.
Bank runs are a worry -- those holding euros in Greek banks will be assigned the new value in "NDs," and account holders will want to avoid that devaluation.
As weaker economies dropout, their currencies will fall relative to those of stronger ones, like the US dollar or the euro, as currency markets once again can vote on an individual country's currency, as opposed to that of a currency block. This could help them adjust through exports, but we're probably not talking about gentle devaluation here; we're talking systemic shock.
Basically, the transition is by definition a huge devaluation event. You leave the currency union because you can't achieve solvency within it, and once you're free, the world casts judgment by revaluing your currency in ways that reflect the conditions of your exit. Any support you enjoyed from being a weaker player of a stronger team vanishes.
European Financial Stability Facility
MarketWatch is reporting an agreement on the EFSF (European Financial Stability Facility) fund for leveraging:
Finance ministers from the euro zone are slated to meet Tuesday and expected to sign off on rules for borrowing against the European Financial Stability Facility (EFSF), as well as guidelines for intervening in the euro-zone bond markets and providing credit lines to governments, according to a Reuters report Sunday.
Such an agreement would mark a key milestone for the 440-billion-euro-strong ($586 billion) EFSF, after European leaders agreed to leverage the fund last month.
Tighter Economic Integration...for 17
Reuters is reporting France and Germany are moving towards tighter economic integration for countries who use the Euro:
Germany and France are exploring radical methods of securing deeper and more rapid fiscal integration among euro zone countries, aware that getting broad backing for the necessary treaty changes may not be possible, officials say.
Germany's original plan was to try to secure agreement among all 27 EU countries for a limited treaty change by the end of 2012, making it possible to impose much tighter budget controls over the 17 euro zone countries -- a way of shoring up the region's defences against the debt crisis.
Here Come the Credit Ratings Agencies (Again)
No surprise, now Moody's is threatening downgrades of EU member countries sovereign credit:
Moody's Investors Service warned on Monday the rapid escalation of the euro zone sovereign and banking crisis threatens the credit standing of all European government bond ratings.
The story is moving quickly to the point this article has been revised and updated.
Bottom line, What's the answer to stop the Eurozone from becoming the Twilight Zone? Batten down the hatches and hold onto your hat, something is clearly brewing and it ain't long now before this storm comes ashore.