Banks warned to prepare for Euro Break-up

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The 17 finance ministers of the countries that use the euro converged on EU headquarters Tuesday in a desperate bid to save their currency — and to protect Europe, the United States, Asia and the rest of the global economy from a debt-induced financial tsunami. The ministers were discussing ideas that would have been taboo only recently, before things got as bad as they are: countries ceding fiscal sovereignty to a central authority; some kind of elite group of euro nations that would guarantee one another's loans — but require strong fiscal discipline from anyone wanting membership.

The fear is that the crisis — which has already forced bailouts of Greece, Ireland and Portugal — could engulf bigger economies such as Italy, the eurozone's third-largest. If Italy were to default on its debt of euro1.9 trillion ($2.5 trillion), the fallout could spell ruin for the euro project itself and send shockwaves throughout the global economy. In a reminder of the urgency, Italy's borrowing rates shot up Tuesday to rates above 7 percent, an unsustainable level on a par with rates that forced the others to seek bailouts.

At the top of Tuesday's agenda is finding a means to more fully integrate the eurozone's disparate nations — ranging from powerful Germany to tiny Malta — both politically and financially. And the ministers must do it fast, without the delays caused by democratic niceties like referendums that have led many EU reforms to take years to implement. France's finance minister, Francois Baroin, said Tuesday on France-Info radio that countries should integrate their budgets more closely and monitor one another's spending.

"We have to modify eurozone governance," Baroin said. "We definitely have to move toward more integrated budgetary consolidation, fiscal convergence with our neighbors." He said France and Germany — which have largely been calling the shots on efforts to overcome the crisis — will make proposals on how eurozone countries can monitor one another under such a new system.

The 17 ministers are expected to discuss jointly issuing so-called eurobonds — an all-for-one, one-for-all way of having the different countries guarantee one another's debts. Right now each nation issues its own bonds, meaning that while Italy pays above 7 percent, Germany pays about 2 percent. Having stronger countries like Germany stand behind the general European debt would lower Italy's borrowing rates — and perhaps avoid a debt spiral that leads to a national bankruptcy. At the same time, it would raise Germany's cost of borrowing, and that's why Germany has been fiercely opposed to the eurobond proposal.

A French official said Tuesday that France may propose joint bonds among a subset of eurozone countries — those with "triple A" credit ratings — although Germany has said it opposes the idea. The French official said discussions about such so-called "elite bonds" is under discussion ahead of a summit of European Union heads of government in Brussels next week.

The official spoke on condition of anonymity because the sensitive, closed-door talks are still under way.
Proponents of elite bonds say the proceeds could be used to help the eurozone's weaker countries deal with their debts, in return for strict conditions being imposed on their budgets. Critics argue that further fragmenting the eurozone into strong countries and weak countries would benefit no one.

On Monday, German Finance Minister Wolfgang Schaeuble dismissed reports that such bonds were under serious consideration. The whole world is watching the developments. It's not just a currency used by 332 million people that is at stake. As German Chancellor Angela Merkel and others have said, if the euro fails, so too does the 27-nation European Union, a rousing diplomatic success that united a continent ripped apart by two world wars.
Poland, for one, is urging Germany to be bold and use its strength to support the euro and in turn the future of Europe.

"The biggest threat to the security and prosperity of Poland would be the collapse of the eurozone," Poland's Foreign Minister Radek Sikorski said in a speech in Berlin late Monday. "And I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it."
"I will probably be first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity," Sikorski said. "You have become Europe's indispensable nation."

If the euro fails, bank lending would freeze, stock markets would likely crash, and Europe's economies would crater. Nations in the eurozone could see their economic output fall temporarily by as much as 50 percent, according to UBS forecasters. The financial and economic pain would spread west and east as the U.S. and Asia get ensnared in the credit freeze and their exports to Europe collapse.

In all, it's a scenario far more dire than even the devastating 2008 credit crunch after the U.S. mortgage debacle. "If Europe is contracting, or if Europe is having difficulties, then it's much more difficult for us to create good jobs here at home," President Barack Obama said Monday as he met EU officials in Washington.

(Reported by AP. Angela Charlton in Paris and Melissa Eddy in Berlin contributed to this report.)


It was only a matter of time.
 
well they had serious discussions about the break-up of the Euro for weeks so not a suprise by any standards and with Germany and France refusing to cooperate earlier did not help matters in any way
 
Wonder if Britain would join the Eurobond scheme, with our strong rating, to help save it.
 
Honestly this might very well be Angela Merkels' fault, that nothern european mentality,"all in debt countries are lazy bums that do not work and deserve to suffer and pay immense taxes". This could probably be avoided if the European Central Bank bought the debt, it would be quite like the US, the richer states pay the poorer states and the system goes on. If this happens, and many countries cease to pay, Germany goes down too, it's a domino effect.

And Sarkozy is an embarassement to France, he looks Merkel's lap dog.
 
Honestly this might very well be Angela Merkels' fault, that nothern european mentality,"all in debt countries are lazy bums that do not work and deserve to suffer and pay immense taxes". This could probably be avoided if the European Central Bank bought the debt, it would be quite like the US, the richer states pay the poorer states and the system goes on. If this happens, and many countries cease to pay, Germany goes down too, it's a domino effect.

And Sarkozy is an embarassement to France, he looks Merkel's lap dog.

So countries who didn't self-destruct from irresponsible spending deserve tax hikes to fund the ECB, to pay for other country's mistakes?
 
well they had serious discussions about the break-up of the Euro for weeks so not a suprise by any standards and with Germany and France refusing to cooperate earlier did not help matters in any way
 
Honestly this might very well be Angela Merkels' fault, that nothern european mentality,"all in debt countries are lazy bums that do not work and deserve to suffer and pay immense taxes". This could probably be avoided if the European Central Bank bought the debt, it would be quite like the US, the richer states pay the poorer states and the system goes on. If this happens, and many countries cease to pay, Germany goes down too, it's a domino effect.

And Sarkozy is an embarassement to France, he looks Merkel's lap dog.


so we should pay for other countries screw ups (and let's be clear, that is what it is)?

pass on that
 
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UK can't even afford to pay for anything right now, let alone other countries balls-ups. If it goes as bad as predicted, companies that really on imports are going to be clobbered
 
UK can't even afford to pay for anything right now, let alone other countries balls-ups. If it goes as bad as predicted, companies that really on imports are going to be clobbered

And then our banks will be even more reluctant to lend to business, our business' will have an even smaller Euro market to export to, everything goes wrong if the Euro goes down. Even though further integration into the Eurozone doesn't benefit us, the Eurozone as a whole does. We should be putting ourselves at the forefront of this crisis to get what we need from the EU, as much stick as some of the public may like to give this government, if they cared to look outside they'd know we're still one of the strongest economies in the EU, and now have lower bond rates than Germany for the first time ever. We're in an incredibly strong political position with the EU.
 
What would be the impact on the British economy?
Britain wisely stayed out of the euro, despite the best efforts of Tony Blair, Lord Mandelson, Ken Clarke and Nick Clegg. But almost half of our trade is with Europe, so a deep recession on the Continent would hit order books of British businesses hard. Estimates of the resulting downturn vary, with studies suggesting a fall in UK GDP of somewhere between 2 and 4 per cent.
Our banks have reduced their exposure to countries such as Greece, but a widespread panic and credit freeze involving Greece, Spain, Italy and even France is bound to reduce the amount available for lending. That will make the already problematic business of recovery even more difficult.

What can the Government do?
Behind the scenes, Whitehall’s first priority is contingency planning. The Government is now operating on the basis of an expectation that the single currency will come apart, but is hoping it doesn’t happen soon: “The eurozone was a mad idea,” says a senior minister. “It will break up. But so terrible would be the impact that we think it’s worth them having a go at keeping it together.” In the meantime, the Foreign Office is focusing on trying to prepare the machinery to help Britons who might be stranded abroad if banking systems and cash machines go down.

There is also the potential for social unrest: embassies and consulates have been told to prepare for a flood of inquiries and requests for help if the euro stops working in some countries and other currencies have to be introduced (there are a million Britons in Spain alone). Fortunately, the government can keep liquidity flowing at home in an emergency, thanks to the UK retaining its own currency.

Is there any good news?
Not a lot in the short term, but there is some further down the road. Even if the euro as we know it comes apart, it is unlikely to splinter into 17 new currencies. Austria, Holland and others are so closely integrated with the German economy that a northern currency bloc would quickly be born. That bloc – let’s call it “Greater Germany” – is extremely prosperous and would want to be open for business as soon as possible.

Economic crises also present opportunities. Britain has a long history of trading well beyond Europe’s borders, and the Government is keen to encourage better links with rising countries such as India. It will take time, but a post-eurozone Britain could end up less fixated on Europe, and more engaged with the increasingly prosperous outside world.
 
Honestly this might very well be Angela Merkels' fault, that nothern european mentality,"all in debt countries are lazy bums that do not work and deserve to suffer and pay immense taxes". This could probably be avoided if the European Central Bank bought the debt, it would be quite like the US, the richer states pay the poorer states and the system goes on. If this happens, and many countries cease to pay, Germany goes down too, it's a domino effect.

And Sarkozy is an embarassement to France, he looks Merkel's lap dog.

Germany, unlike the others, has not racked up as much debt. That's how simple it is.
so we should pay for other countries screw ups (as let's be clear, that is what it is?)

pass on that

Labour's Britain got bailed out by the IMF in the 70's. They paid for you then.

Regardless, I've thought the Euro (not EU) would fail for quite some time. Specifically since the Germans started printing marks "just in case." I'm just waiting for some Keynesian to say "we can solve this through government spending."
 
Labour's Britain got bailed out by the IMF in the 70's. They paid for you then.

Indeed, the whole 'it's their fault, it's their problem' is a rather selfish outlook on it. If the shoe was on the other foot, imagine the outrage if other countries said that to the UK.
 
Germany, unlike the others, has not racked up as much debt. That's how simple it is.


Labour's Britain got bailed out by the IMF in the 70's. They paid for you then.

Regardless, I've thought the Euro (not EU) would fail for quite some time. Specifically since the Germans started printing marks "just in case." I'm just waiting for some Keynesian to say "we can solve this through government spending."

We're not exactly in the best state to be lending money out
 
Poor Germans. They've spent the past few years practically bailing out every European country that has got into a mite of trouble, and it seems in vain.
 
Indeed, the whole 'it's their fault, it's their problem' is a rather selfish outlook on it. If the shoe was on the other foot, imagine the outrage if other countries said that to the UK.

We already contribute large sums to IMF and pay a disproportionate amount to Europe. Bailing out isn't the same as 'buying their debt'. One is aiding them while they actually sort their problems through austerity, the other is removing their problem so they don't have to.
 
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