Category Archives: Euro

Leaving the Euro…

A guest post by Small Town Man…

Whilst Europe’s eyes have been focussed on the situation in Cyprus, it is interesting that William Hill are now taking bets not on whether the Euro will survive, but who will be the first country to leave. The front runners are Cyprus, Italy, Greece, Spain, Portugal and Ireland.

So what are the implications for a country quitting the Eurozone?

To answer this, we need to understand how exchange rates are determined. There are basically two types of exchanged rate : pegged and floating.

Floating is easiest. In order to buy or sell currency, you have to go through a financial institution set up for the purpose – normally a bank. Like any commodity, there will be a buy and sell spread and the rate you get will depend on the simple rules of supply and demand. If you want it and the supply is limited, then you will have to pay more. But if you want it and no-one else does so that demand is low and the supply is plentiful, then you get it cheaper. Obviously, there are other factors that come into play but that is basically how it works.

Pegged or fixed rates are different. A country will decide to fix its exchange rate against a major or ‘hard’ currency such as Sterling or the US dollar. A government has to work hard to keep their pegged rate stable. Their national bank must hold large reserves of foreign currency to mitigate changes in supply and demand. If a sudden demand for a currency were to drive up the exchange rate, the national bank would have to release enough of that currency into the market to meet the demand. They can also buy up currency if low demand is lowering exchange rates.

So what would happen to a country inside the Euro if it left, presumably because of economic problems?

First, the country would have to print a supply of currency. Once that’s done they would have to issue that currency to it’s residents at whatever rate they decided against the Euro. Following the rules of supply and demand, one would assume that demand for the new currency was low, so you wouldn’t have to pay much to buy it.

As a result the price of your imports becomes considerably higher because nobody wants your low value currency. Perversely, this is good for your exports because they are cheaper.

Typically, you get high inflation. An example would be Argentina where the currency was pegged but then allowed to float after the junta fell. At one point, inflation hit 2000% a month. Turkey had a similar problem with the Lira. Zimbabwe currently has a worthless currency and is actively using the US Dollar instead. Black markets thrive.

To stabilise a floating currency, you need economic stability. This means that any country leaving the Euro would almost certainly have to peg it’s new currency against a hard currency in order to avoid disaster. The real killer for the residents would be hyper inflation which would wipe out savings and salaries overnight. You need to avoid that at all costs, but of course that’s easier said than done because if you weren’t in economic difficulties, you wouldn’t be leaving the Euro in the first place.

Ironically, there is no exit plan for anyone leaving the Euro because it was considered as unsinkable as the Titanic – and look what happened to that? Personally, I find it hard to understand how anyone could have thought that a group of such diverse countries could ever have made it work in the first place.

Ideology over economics and just look where it’s got us!

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Time to leave…

As the date for the Scottish referendum is announced and the Fourth Reich continues to self destruct, we look on in amazement at the situation in Cyprus, reflect on a lack lustre budget and listen open mouthed as Cameron pretends to get tough on immigration.

Well, over on ISAC, commenter Alf Garnet has come up with a four point plan which I think just might have a lot going for it :

  1. Our illustrious leaders should take a pay cut
  2. End all foreign aid and reasses the situation when we are sorted
  3. Tell the EU to go fuck ’emselves and stop the £35 million + we give them daily
  4. Pull out of the middle east and let ’em sort their own shit out!
Sounds good to me. 
Every man, woman and child in this country gives the EU around 50p of their dosh every day. Well, Mrs D and I want our quid back.
And if Cameron is serious about tackling the immigration problem that is sure to come and bite him in the backside next year as all the Romanians and Bulgarians come flooding in, then it’s no use tinkering around the edges.
If you really want to curb immigration, then there is only one way to do it, Mr Cameron…
It’s time to leave!

The Great Cyprus Bank Heist

Things are moving so quickly in Cyprus at the moment that I’m not even going to try and keep up because by the time I’ve written this piece. it’ll probably be out of date. So let’s look at the situation in generic terms.

The majority of large deposits in Cyprus are Russian money put there because the Cypriot money laundering rules, shall we say, leave more than a little to be desired. Top this off with the fact that the deposits on their banks amount to many, many times their national GDP. I’ll keep it like that because estimates of exactly what that multiplier is vary between ridiculous and unbelievable. Let’s just say they are pretty big.

The Cypriots can’t pay their bills and the Russians have already given them substantial loans. So what this really comes down to is a testbed of economic warfare between the Fourth Reich – i.e. Germany – and the Russian Federation.

Enter stage left Gazprom – Russia’s largest company and the world’s largest extractor of natural gas. There are huge deposits offshore in Cyprus waiting to be exploited and Gazprom wants to get it’s hands on them. €10 billion is nothing to Gazprom. Just petty cash. So Gazprom offers to dig the Cypriots out of an EU bailout by restructuring its debt.

Needless to say this doesn’t go down too well with the Germans. In Germany, the Cypriot bailout is seen as vote winner because it’s seen as an alternative to pouring German money down the crapper. Interestingly, the approval of the German Parliament is required before the bailout deal can be ratified – so we are back to the Fourth Reich v Russia scenario again.

I might be wrong, but I see the ancient Greek martial art of brinksmanship coming into play here. The Cypriots can’t have failed to notice that their Greek cousins are experts in doing nothing until the last possible moment and then watching the Eurozone knuckle under in a desperate attempt not to totally fuck up its ailing currency.

And, on the other hand, there is Vladimir Putin jumping up and down because there are an awful lot of rich Russians who stand to lose and awful lot of money if this legalised theft goes through.

The people I feel sorry for are the citizens of Cyprus because they are stuck in the middle of this political chess game. They are pawns. They are the people how have most to lose because they had the least to start with.

This post goes out at 8am GMT in the morning. When I started writing this, I was contemplating that by the time it appeared there would already be queues a mile long outside Cypriot banks as the great rush began to get their money out, resulting in the banks closing their doors as the cash runs out and riots in the streets. Think London and then multiply it.

But then to avoid this happening, it was announced that the banks would remain closed until Thursday. So, basically, for the few days, Cyprus has no banking system. Like I said – brinksmanship!

The Americans love neither the Russians nor the Reich and are clapping their hands together in glee as the drama unfolds. It’s doing the dollar no harm at all on the currency markets as investors flee the Euro in terror. One U.S. commentator summed it up as the biggest financial disaster since the 1930s depression, and potentially he’s not wrong.

So is Cyprus to become a Russian or German sub-state? Unless something very clever happens, it sure as hell isn’t going to stay Cypriot.

To paraphrase MacBeth : “If it were done then ’twere well it were done quickly” The problem is that no-one is quite sure what is to be done.

Maybe “Something wicked this way comes” would be the better quote…

Fear of Flying…

I don’t often post twice in a day, but the unmitigated chaos caused by the work shy bastards in Europe who think that it’s only them that are feeling the pinch coincided with the arrival here today of a new piece of music by my musical friend ChasC called ‘Fear of Flying’ which is all about the joys of air travel – not that there’s been much of that in Spain and Portugal today!

Which is a bit of a bastard, as I’m off on my travels on Friday via the doubtful joys of Gatwick and Monarch. Hopefully they will have calmed down by then?

So this is rather poignant and I’ve not had time to put a video to it (sorry, mate) but it’s too good to let go on a day like this!

If you cannot see the audio controls, your browser does not support the audio element

Right click here to download this track

About time, too!

“Look – I’ve had it up to here with you lot…”

I seldom agree with the Labour party – in fact it’s so rare that it’s worth a special mention.

Yesterday the Commons voted against the government and insisted that if the UK is being forced to introduce cuts and austerity measures, if the other EU countries are being forced to introduce cuts and austerity measures, then how the hell can the Fourth Reich sit there with a straight face and ask for an increase in the EU budget?

Cameron says that he would insist on a freeze in the budget “in real terms”. Well, Dave, that simply isn’t good enough is it? Basically that, in layman’s terms, means an increase no higher than inflation. This is insult to people like myself who live on interest on their savings which are lower than the rate of inflation.

The Tories, of course, point the finger at the Labour party and accuse them of playing party politics. but that doesn’t wash either because the reason they lost the vote was because quite a few people on their own side think it’s wrong as well.

And it get’s worse. Senior Tory Eurosceptics, who declined to support the rebels because they did not want to vote in the same lobby as Balls, said they would have no qualms about rebelling if Cameron refused to change his position at the summit.

Cameron is under no legal obligation to comply with the vote. The prime minister’s negotiating position would allow the EU budget to rise in line with inflation which would lead to a 2% increase. But the EU budget will have to be approved by MPs. Interestingly, one senior Tory gave notice that “when a budget deal is put to the Commons I will vote against it if there is any increase in EU spending” – this from someone who said that he did not vote against the government yesterday because he could not stomach being in the same division lobby as Ed Balls!

Let’s hope that when Cameron does get to the summit, he will take note of that rarest of political beasts in this day and age – democracy!