Monday, July 23, 2012

Gloom Darkens Further

While the world media will be busy reporting the four year carnival called Olympics, the news continues to be grim from European Finance.

Looks like Spain will be needing 'lock stock barrel full state bailout' as it is getting totally priced out of bond market to refinance its regular loans. This means few things:
- Folks with money (Germany & IMF) will start 'sacrificing Greece' to save resources to bail out Spain as that economy is very big.
- So Greece exit from Euro and its subsequent descend to hell looks more and more certain.
- Spain bailout would not 'taste' good to fiscally disciplined countries like Finland so their uneasy in staying Euro 'as is' will increase. Either countries like Finland would need to be accommodated by relieving them in 'not underwriting common European liability' (which I do not know how that can be done); or as Dr. Doom (Nouriel Roubini) is saying, Finland may exit Europe. In itself Finland is a small economy, but the damage from any such exit will be huge as it will send a message to the world that there will be 'life after Euro' while 'healty national balance sheets' no longer find it beneficial to stay in Euro.
- The game theory simulations (as member states loose faith among each other and everyone is on their own) indicate that Italy may find it lucrative to exit Euro while German to stay put. I doubt PM Monti would be a spoiler here instead of being a good European citizen despite bit shaky performance by him lately. On the other hand German unease to 'stay in Euro' will continue to rise even if it would mean more loss to Germany.
- German Constitutional Court is expected to rule on ESM funding by September 12. Till then Spain would become totally 'dry' and will be become the number one priority. I believe eventually ESM will be approved by the German Court. But as usual, this can be 'too late' if not necessarily too little. What all this tells is continent wide finance management by 'legislating and court'; that whole Merkel strategy can be upended here. And if indeed Merkel Political Strategy of navigating through this mess collapses, we would be talking 'end game of Euro' and not the 'end game in Syria' (as there is no end for Assad brutality...)! 

Any such chaos will shake American Economy thoroughly making President Obama's re-election attempts miserable. The only thing at that point left for President Obama is to hope that Americans will understand that 'persistent negative news from Europe' essentially torpedoed American Recovery for the third year. Once Olympics are over in next three weeks, European chaos will get played all over global Media; given that it may not be such an outlandish 'hope' for Obama Campaign.

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