Eurozone on the Edge of Breakdown

January 20, 2015

With the euro sinking and broken glass from the Swiss "escape" action flying in all directions, the bankrupt Eurozone is now headed for the start of massive quantitative easing, and then the posing of a Greek demand for writeoff of sovereign debt throughout the European Union. Support for the Greek Syriza Party's Europe-wide debt conference proposal is increasing, as is Syriza's lead in the polls in Greece before this Sunday's election.

Losses in the financial sector from the Swiss National Bank action were in the many billions, and are still mounting, according to a Bloomberg review Jan. 19. Citigroup, the world's biggest currencies dealer, lost more than $150 million; JPM Chase, $120 million; Deutsche Bank lost $150 million and Barclays about $100 million, and so on. Hedge funds lost much more; but what will have shocked these megabanks is the fact that in every case, the forex/derivatives losses on the Swiss move were 5-6 times the maximum "value at risk" which those banks' models told them they could lose in one day. Denmark, Finland, and other non-Euro EU members are being watched to guess who pulls the cord next.

A London Guardian article Jan. 17 reported support for Syriza's Europe-wide debt conference proposal is increasing. The Guardian cites Hans-Werner Sinn supporting Syriza's proposal; the UK group Jubilee Debt Campaign; Franco Caselli of the LSE; and "a growing chorus of experts." In Ireland the Finance Minister Andrew Noonan, and the Deputy Prime Minister, John Burton, both supported Syriza's proposal last week.

IMF Managing Director Christine Lagarde, visiting Ireland, opposed Greece in the most London imperial tones possible: "A debt is a debt and it is a contract. Defaulting, restructuring, changing the terms has consequences on the signature and the confidence in the signature," said Madame.

The European Central Bank, desperately believed by all now to be on the verge of massive purchases of government bonds, has strictly opposed any writedown of Greek debt, and ruled out "QE" buying of Greek debt because it is of "low quality." Spiegel on Jan. 16 reported, without giving any source, that Draghi briefed Merkel and Schaeuble Jan. 14, on his QE plan for the Jan. 22 ECB meeting; "The plan envisages a 20% to 25% percent limit on purchases of each country's debt" — except Greece, of course. That "limit" adds up to the range of $2-2.5 trillion euros.

Sinn, head of the Institute for Economic Research, told CNBC-TV in an interview Jan. 19 that this QE will trigger exactly the "Swiss" volatility in markets, but on a larger scale. "[The banks] will happy to be able to sell the government bonds, which they consider as partly toxic, and they will have a lot of cash. What will they do — they will primarily try to take it abroad. And they have already begun doing that - what you see in Switzerland," Sinn told CNBC. "If we want to help governments that are in trouble let's do it — but let the parliaments decide, rather than this technocratic body, the ECB."