When the Euro Busts Who Benefits

Jeff  Carter
Posted: Nov 18, 2011 12:01 AM

A raggedy debt auction in Spain rattled markets. LIBOR rates continue to escalate. ($GE_F) French bonds don’t get cheaper and forget about the Italians.

As customers in Europe pull money out of banks, there is huge short term cash financing problems. The bazooka clearly wasn’t big enough, and I doubt seriously there is a bazooka big enough to temper the crisis.

The only stable country on continental Europe is Germany. The Brits must breathe a sigh of relief every morning that they didn’t join the EU, even though their economy is closely tied with it. Already, there are black markets starting up on old currencies. If you search hard, you can find a value of a french franc, lira, german mark, drachma and peso.

I only see two ways out.

First, Germany decides to relent and print enough money to handle the crisis creating inflation. At the same time it does that, all EU countries cut spending and reform their governments. Austerity. What are the chances of this happening?

Second way is to break up the euro, and keep some remnant of the EU monetary policy committee to serve as a mediator for trade and policy coordinator. Each government goes back to its own currency and the great experiment is over.

If it’s the second way, which I think is increasingly becoming more likely by the day, who might make some hay out of it?

Ironically, even though the banks would be hurt because of haircuts on loans, individual governments would bail out sovereign banks, keeping them solvent and operating. Banks trading operations would go into high gear, because now there would be more trading opportunity with several new currency pairs and arbitrages to play with. With the “winks” they would get, they might be able to pay off their debts in a few years.

The prime brokerage operations of all international banks would benefit. Any operation/exchange that traded foreign currency should see volume rise($FXCM). Ask individual traders what it was like to trade currency back in the 1980's and 1990's. Happy days are here again for them! Banks would also make more money writing OTC derivatives to manage currency risk. Jobs would be created at multi-national companies that dealt with international trade issues. They would need more people to work on their currency desks to manage risk.

Interest rates in Europe would increase dramatically as governments inflated their currency to handle the debt. This also would benefit banks, and places that traded interest rates because increased rates lead to higher volatility. Again, risk management would become an attractive job market to hedge the increased action in interest rates.

Short term, there would be lots of pain in Europe. A worldwide recession would grab a hold as they struggled with their financing issues. But, if they let the free market work, after a year or so the kinks in the system would work themselves out. Capital would flow readily and quickly again.

No doubt, the European, and worldwide stock markets would get hit. But some of that short term pain is already being priced in. I don’t think markets are hopeful that a crisis won’t be averted.

The other segment of the population that would benefit is economic historians. They could research and write about the folly of the Euro, and the poor decisions that lead to its demise.