Guest Post: Things That Are More Important Than Facebook

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Submitted by Finance Addict

Things That Are More Important Than Facebook

The story of Facebook’s disappointing IPO is a gripping tale, and it holds some valuable lessons. But it concerns an event that has already happened.

Forget Facebook — there are far more interesting events in play and that will affect you, if only at the margins. They haven’t happened yet, and they may not happen at all. But if they do, you’d sure as hell better have a plan.

This is the first in a series. I will add to it as frequently as I can over the next day or so, so check back often.

1. The euro will have, at the very least, a near-death experience. 

A currency that was well on its way to attaining global reserve status may now fall apart. It’s not like the sudden collapse of Lehman Brothers — we’ve known this might happen for months. But still — who dares to bet? Worse still is the human misery being caused by a “cure” that any idiot can see is not working to restore Greece’s debt sustainability.

This is uncharted territory. Consider this excerpt from the FT, last November:

Only last week, Nicolas Sarkozy, the French president, said in a national broadcast that a Greek exit would be a “catastrophe” for Europe and the world.

 

The mood has now shifted dramatically, with Mr Sarkozy and Angela Merkel, the German chancellor, publicly discussing the prospect in public as they heaped pressure on George Papandreou, the Greek prime minister, to back away from his call for a plebiscite on the €130bn bail-out for Athens.

Things have only worsened since then, as talk of a Greek exit grows louder and louder and has even  Don’t take my word for it. Willem Buiter, Chief Economist of Citi, has been consistently ahead of this issue. Speaking in the Netherlands in 2010 he said [my translation]:

“For the next 20 years it will be no fun, whatsoever, to be a Finance Minister. In fact, you wouldn’t wish it on your worst enemy.”

Here’s what he had to say, as reported by Business Insider:

There are many uncertainties, but in our new forecasts we assume that Greece will leave EMU in early 2013, followed by sharp currency devaluation, with a large drop in economic activity in 2013 and a modest rebound further ahead. We believe that sizeable adverse economic and financial contagion to other euro area countries will be unavoidable and this is already happening to an extent. We expect that “Grexit” will be followed by far-reaching policy responses: we forecast the ECB will cut rates to 0.5% and resume its multi-year LTRO programme, a second package for both Portugal and Ireland, some kind of Troika programme for Spain, plus financial market support for Spain’s and Italy’s government bonds. We do not expect an early move to Eurobonds or full fiscal burden sharing. But, if deposit flight from periphery banks escalates, then EU policymakers may agree to a jointly-funded enhanced deposit guarantee scheme (DGS)—which aims to protect deposits against EMU exit and currency denomination as well as bank insolvency—plus a jointly-funded bank recapitalization scheme.

Will Spain really need a bailout, as Buiter thinks? Their banks are in horrible shape. From the New York Times:

As those losses are acknowledged, though, the question then becomes whether Spain can afford to absorb them. The government’s own bank bailout fund is running out of money. In a telling contradiction, Madrid has proposed that the country’s banks lend the government the money to keep the fund going.

NYT puts the pricetag at $264 billion. Investors doubt Spain can afford this. The eurozone can afford it, but they would have to print euros to do so. The market seems to think they will.