Posted By: Matthias Paul Kuhlmey
We gave you the weekend to fully enjoy the courageous rescue attempt of Euroland. In pre-celebration, the global investment community engaged in a buying party, with markets rallying strongly last Friday. Now that the hangover is cured, we want to bring some order to your thoughts. One big aspect of this ordeal was not really being considered - an aspect as big as 94,060 square miles, to be precise: The territory of the United Kingdom (U.K.). Prime Minister Cameron, of the U.K., created quite a stink, when he walked away from his Euro-partners in refusing to adopt a newly suggested inter-governmental treaty among the EU nations, stating it was “not the right thing for Britain.”
At this point, some education is necessary. First, there is the European Union (EU), which is an economic and political union, with the U.K. being one of 27 member states. The EU dates back to the 1950s and is governed in its current form by the Maastricht Treaty of 1993. One of the most attractive features of this economic territory is that the EU has developed a single market, through a standardized system of laws that apply in all member states; it is not insignificant, with 20% of global GDP creation, and 500 million inhabitants. A smaller group of the EU countries comprise the Eurozone, or Economic and Monetary Union (EMU), with 17 member nations that have adopted the Euro as the common, single currency; the U.K. is not part of this “club,” or it has “opted-out,” in official language.
Here is the catch: Everyone has been so utterly concerned with the currency, the Euro, and its potential break-up (for the right or wrong reasons), but what about the U.K.’s walking away from the very centerpiece of European integration, the EU? In our humble opinion, the fragmentation of Euroland has begun, and this should trigger some more serious concern.
All that was decided last week clearly does not create enough aid (or money). We have EUR 440 billion (USD 588 billion) with the European Financial Stability Facility (EFSF), which is practically dead, and now a credit facility of EUR 500 billion (USD 668 billion) with the European Stability Mechanism (ESM); this is, unfortunately, not sufficient if things should (and they will) become worse. According to GluskinSheff’s Rosenberg, Spain and Italy alone are in need to refinance EUR 550 billion (USD 734 billion) in 2012, not even considering all other problematic “hot spots.” European banks, in addition, need to raise EUR 115 billion by June 2012, not to mention the EUR 15.37 billion capital shortfall of Italian banks, alone. It all is a mess, and, at best, Europe has “bought time” last week.
As hardly any of our blogs would be complete without a good music reference, consider that even members of heavy metal band, Metallica, are preparing for a Euro break-up, having changed their European concert tour to take place in 2012, instead of 2013, to avoid losses from a Euro-crisis. Brilliant.
In conclusion, I recall when “growing-up” in banking, the common joke among traders was to short (sell) everything that starts with “Euro” – namely Eurotunnel/Eurostar, Eurodisney, and the Euro itself… should this, more often than not, rowdy group be right after all?