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« Understanding Chinese Policymaking | Main | Market Musings and Lessons »

September 14, 2011


Angel Martin

Setbang, i'm late back to this but thanks for reminding me about possible euro appreciation scenarios. I don't want to be like Peter Schiff and others who predicted the subprime crisis, but lost money because they thought the dollar would collapse ...

I think in this case, since I assume Spain and Italy exit/default as well, and that there will be significant ECB debt monetization, i think euro appreciation is a pretty remote possibility.


Angel/Others - there are euro scenarios that include default but will boost Euro/FXE.

Let's say the 3 worst off, greece, ireland, and portugal default. With the euro leaders messy way of lurching from one plan to another, there will be mass capital flight with an impending default looming as the local banks in these countries will be casualties of any default. With the banking system already in disarray, a euro exit becomes more tempting.

How do these economies credibly promise growth? One option is to freeze captial, default, exit the euro, and devalue by 50% or so. What are the implications to FXE in this scenario? Probably positive, you have removed the weakest links so the remaining countries have lower, more sustainable debts on average.


I remember that episode!

Angel Martin

Jeff, thankyou.

I don't currently have time to do a blog, maybe in the future...

On the choice of Angel, I am pretty much the opposite of Angel in terms of appearance, dress, behavior and motivations... but that's part of the fun of being anonymous on the internet and getting to choose an avatar. It may say something about my sense of humour, but I'm amused by the concept of Angel Martin commenting on financial markets.

One thing I do agree with Angel on, I could definitely go for a 65 deville convertible.


Many of us would enjoy reading an "Angel" blog. Always thoughtful with good supporting evidence and links.

Hard to reconcile with your chosen pseudonym, however, even if he is one of my favorite characters.


Angel Martin

Mike, sorry I don't have a blog or website.

On the future of the euro vs subprime. One difference is that subprime was incorrectly seen as being too small to be macro economically significant. On the euro, ironically, it is the opposite: a collapse is assumed to be so catastrophic that it won't be allowed to happen...

The future of the euro depends on the power of governments being able to overcome the power of markets. My take is, when governments are doing something that is unsustainable, markets are more powerful than governments and markets will eventually win.

On shorting the euro, your strategy of OTM LEAP puts is what the pro's would recommend, but it is an expensive strategy.

What i'm doing is holding OTM FXE puts only in the Spring and the Fall because, historically, that is when the big financial panics/crises happen.

That cuts the cost of the strategy by more than half. (but I will miss out if the euro crashes in february next year...)

Mike C

In either case, default or monetization, I think the euro will plummet. So any investment strategy which assumes the euro crisis will be "worked out" in some way is taking a big risk on currency losses due to the euro crashing.


I've been enjoying reading your well thought out comments. Just curious, do you write a blog?

Regarding the Euro, I with you 110%, and have been seriously contemplating starting to build a speculative position in OTM LEAP puts on FXE. That said, for 4 months now I've except very recently I've watched the Euro trade between 1.40 and 1.45 and scratch my head and think how but then again maybe the market is just whistling past the graveyard. The endgame seems clear enough although who knows how the story exactly unfolds but I think you are right about the arithmetic. I wonder if shorting the Euro right now is basically the same opportunity as in 2007 when "subprime was contained" and all the junk housing related paper was still holding up.


Angel -- Thanks for the name and the link. This is an interesting "inside" look. It was clear to me that it was not a product of their regular research team (I've read a lot of that).

BTW, the reports and the European bankers call these countries the GIIPS:) I'm not sure that is much better, actually...


Angel Martin

Jeff, the GS deck was originally linked to by FT Alphaville. FT lists the author as Alan Brazil of GS.

I don't know enough about banking to comment on the cost of achieving Basel III standards.

When I look at the europe situation I look at what would be a sustainable sovereign debt situation for the PIIGS and what it would cost Germany.

For the PIIGS to get to current deficits of 6% of GDP and 90% debt to GDP ratio, it would cost approx 1.4 trillion euros, which Germany would have to borrow. That order of debt and deficit improvement would get the PIIGS (barely) to the financial condition of Belgium, which is currently borderline for joining the PIIGS.

If Germany had the political will to do that, it would increase their debt to gdp to 125% and likely drive their deficit to gdp up to 6% (depending on how much their borrowing costs increase).

I don't think it is financially plausible that Germany could carry that additional debt and, while i don't claim any detailed knowledge of german politics, I seriously doubt that such a strategy would be politically viable.

In summary, I don't think political will really matters when it comes to the future of the euro. The arithmetic says to me that this is not going to work. If the whole 3+ trillion in PIIGS debt ends up on the ECB balance sheet, Germany doesn't have to pay directly, but the euro will plummet.

In either case, default or monetization, I think the euro will plummet. So any investment strategy which assumes the euro crisis will be "worked out" in some way is taking a big risk on currency losses due to the euro crashing.


jd and Angel - What Geithner was trying to convey was his sense of the commitment of European leaders. Angel's link is interesting, but the rationale is pretty thin. I wonder who wrote this.

There has been significant progress on determining the amount needed in additional bank capital. Whatever method is chosen will include a variety of sources and asset sales. Some significant portion will come from private investment.

I invite Angel to take the other side of his argument for a moment. Suppose you were a bank executive and wanted to raise capital to meet Basel III standards. What would you do?

The political will is important to maintain stability while the multi-part solutions are developed. Clearly there are many who are betting against Europe and will profit greatly from a disaster. On the other side, a Greek default would probably be more expensive for Germany than taking leadership in stabilizing things.

To summarize, what jd is hearing, and what I think is correct, is that there are many resources available, not just government bailouts.


Angel Martin

jd, I think you need to look carefully at this assumption:

"There is money within the system to deal with losses that are necessary (even from default)and recaps of banks and they will figure out some structure to get it done."

Forget the arguments about the political will to bail out the PIIGs and the banks. I don't think it will matter because I don't think the German economy is big enough to do it. Neither does this analyst at Goldman Sachs (see slide 11).


Thanks Jeff,

"Get ready for months of this, as the 17 different legislatures consider the EFSF, the ECB deliberates, the IMF ponders, the G7 and G20 consider..... well, you get the idea."

This is good. It sets the mind for what is ahead. This European thing is confusing and scary regarding the comments coming from media about systemic risk and a repeat of 2008. But, there's so many moving parts and relationsips between whole countries and banks, that there's article after article about interrelating structures and how the contagion will spread and take the whole system down.

But, here's a statement that I have read which I think may be the truth and would like your read on it. It's this:

There is money within the system to deal with losses that are necessary (even from default)and recaps of banks and they will figure out some structure to get it done.

If that is true, then we can just set back and watch it all unfold, and buy on dips or crashes.

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