Tags: ECB | Stop | Debt | Contagion

Europe Can’t Stop Its Debt Contagion

By    |   Monday, 14 November 2011 10:36 AM EST

It’s funny when we hear politicians talk about their central banks like they have a red “S” on their chest. It’s a bit distorted.

Central banks are powerful. Don’t get me wrong. However, if they could stop a crisis or contagion, then we’d never really have them.

They’re simply not quite that powerful. But tell that to Mr. Silva, Portugal’s president, who said: “The European Central Bank can stop the spread of the continent’s financial crisis with foreseeable and unlimited purchases of Italian and other government bonds.”

Wishing and being able to do something about it are two different things.

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Of course, President Silva wants this to be able to happen. They’re almost in as bad of shape as Greece. They need someone to “save” them too.

But even ECB officials are disagreeing with him. For instance, ECB Governing Council member Klaas Knot from the Netherlands said that the central bank can’t do much more to stem the 17-nation euro region’s debt crisis. Now there’s some brutal honesty rather than wishful thinking.

Then Executive Board Member Peter Praet, of Belgium, along with council member Jens Weidmann, of Germany, have also said that the ECB can’t legally buy bonds to bail out a debt-strapped member state.

So the eurozone is in between a rock and hard place. Unfortunately, this crisis that has now spread into a contagion will have to play itself out.

As you know, I’ve been bearish on the euro for these reasons and I believe the EUR/USD downtrend will remain intact.

But now, Morgan Stanley is joining me in this call. On Friday, they reported that they were shorting EUR/USD at 1.3750. Their reasoning?

They said that they believe that yields above 6 percent are unsustainable for their debt market of 1.9 trillion euros (which is the third-largest debt market in the world).

They went on to say that Italy would have to spend nearly 10 percent of its annual GDP on interest payments alone. Then they said that they believe that EUR/USD will retest 1.30 and that Italy runs the risk of being “too big to save.”

I’m glad to see others coming over to seeing the dire circumstances of the euro. That’s why there have been times where I’ve been short EUR/USD lately. I’ve also been in a paired-trade since around July that is “long gold/short euro” which has worked out rather well too.

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They can’t print more gold. They can’t monetize more gold. But this could be done with the euro like it’s been done with the dollar. Both the dollar and the euro are very fundamentally flawed at this point.

However the dollar has gotten a boost in the near-term due to its defensive nature as the world’s reserve currency. But even those days are numbered.

In fact, I believe that in the coming years, more central banks will have to hold more gold and more Aussie dollars and Canadian dollars than most any of them do now.

Right now central banks have huge positions still in dollars and in euro. Eventually, they’ll have to start going to more sound currencies fundamentally now that the pools of liquidity are beginning to deepen in these other currencies.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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It s funny when we hear politicians talk about their central banks likethey have a red S on their chest. It s a bit distorted. Central banks are powerful. Don t get me wrong. However, if they couldstop a crisis or contagion, then we d never really have them. They re...
Monday, 14 November 2011 10:36 AM
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