This week's column is euro-denominated, as there are sizable credit problems for a quintet of countries that count it as their currency.
In just a few words, my oft-cited friend the "Lord of the Dark Matter" captured the situation: "Mechanically, it is absolutely no different than what happened to Bear Stearns and Lehman Brothers."
Except, of course, that we're talking about sovereign/quasi-sovereign entities, not corporations like those two failed brokerages -- a situation that he characterized as a "silent sovereign run." The problem is so pernicious because none of the individual European countries in trouble has a printing press for the euro. They can't use the Federal Reserve's money-printing approach to solving problems.
As a currency, the euro is a classic conundrum. Those of us who've been sympathetic toward it versus the dollar have always understood the following: that in tough times, it would be nearly impossible for the EU's disparate countries to get along, and that the less-responsible members would have trouble pursuing strategies advocated by the more-responsible members. One would like to cheer the discipline displayed by the EU's quasi-independent European Central Bank for having created rules.
They actually bear sovereign risk for euro-denominated debt, given the aforementioned absence of a printing press. (Furthermore, the credit angst over these entities is putting pressure on derivative holdings everywhere.)
For lack of a printing press
As an aside, I think Greece itself is probably less of a problem than California and some other U.S. states might be -- though for the moment, the fact that we as a country have a printing press and no rules governing its use is carrying the day.Perversely, when you've got a printing press running full throttle (as do the U.S., the United Kingdom and Japan), you can be as irresponsible as you want to be and your credit will be fine. But try to enforce a little bit of discipline, as the European Central Bank is attempting to do, and things go kablooey. As such, the PIIGS' predicament continues to push people toward the dollar.
Exactly how the situation sorts out is not knowable at this juncture, due to the myriad permutations involved. However, though it might be difficult to imagine that Europe's disparate nationalities will be able to row in the same direction, it seems unlikely that they won't. Consider how hard everyone worked to put the system together in the first place. In any case, whatever comes out of Europe on this score is sure to be a market mover one way or the other, or maybe both. A bailout plan for Greece was announced Friday, but the details were sparse.