How Long is a Piece of String?

I was chatting to some of my Dutch and German friends on IRC last night (well it was that or watch that bloody singing competition) and the subject of the Euro came up. "You're in finance Dragon," someone said, "How long do you think the Euro will last"

Well just to be clear I may work for a financial organization (thanks for all that taxpayer's money guys!) but I'm not a trader, I just work with the shouty braces types and the bespectacled chaps with Aspergers and maths PhD's* to come up with clever trading and risk management applications. I'm quite good at it too, my systems have won industry awards.

What I'm not good at is divination. To be honest I have no idea if the Euro will survive or if not how long it will live and what will be the manner of its demise. But I'm not alone, nobody does. My own belief is that the markets (well equity** markets at least) will just in the end get fed up with looking at bond rates and endless politicos preening themselves at crisis conference after crisis conference and Nick Clegg throwing his rattle out of the pram and having a tantrum and will go back to doing what they do, looking at company fundamentals, share price relative to earnings, that kind of thing.

Personally I hope the Euro goes and the EU with it. I am no wrap myself in the Union Flag and parade with a bulldog little Englander, far from it, I am very pro-European. I've worked all around Europe, speak four European languages (two of them well enough to do business in) and am all for co-operation that brings us peace and mutual prosperity. However the EU has become none of these things and is seems obvious to me that it is becoming more and more of a tyranny of oligarchs and apparatchiks, unelected, remote and hostile to the liberal ethics which made Europe's nations great in the first place. It needs to go.

And my Dutch and German friends agreed. And they said they would still be able to sell me Stollen and Grolsch perfectly well without the EU and could I bring some PG Tips and Tiptree's marmalade when I come over at New Year. 



* Come on, when did you ever meet a quant who was in any way or shape normal!
** Shares to you and me

The Devil is in the details.

So our lovely leaders are all patting themselves on the back having "saved" the Euro and if you believe the hyperbole from the German Chancellor, saved Europe from hearing the ring of marching jackboots again.

What they have done of course is merely kick the can a bit further down the road. There's still no way even a trillion Euros can prop up the failing economies of Europe who bought into the idea you could buy prosperity with other people's money.

A couple of details behind the headlines that your average layman would most likely miss, if they could find them at all, point to what a fudge this is and which will, in all likelihood, make the problem worse. Firstly not only do the banks take a 50% hit on any Greek debt they own they are being asked to "Recapitalise" to the tune of 160 billion Euro in the next 8 months. Essentially this means the banks have to hold cash or other highly liquid asset classes on their books and they can't lend it. Get that bit, they can't lend this money. Now cast your mind back to last year and the credit crunch which was caused by, right, banks not being in a position to lend money.

The other little weasel word I spotted is the real person-of-colour in the woodpile, that word is "leverage"...

The firepower of the main euro bailout fund - known as the European Financial Stability Facility (EFSF) - is to be boosted from the 440bn euros set up earlier this year to 1tn euros. There is about 250bn euros left available in the EFSF, which the summit statement said could be leveraged 4-5 times.

Put simply this means that this much trumpeted 1 trillion Euro is not actually there, what they are going to do is put up the 250 billion they do have (from your and my taxes) and basically borrow 4 or 5 times that amount, that's essentially what leverage means. And of course if you borrow money, you have to pay interest on it.

So they have commited us to, yet more and more borrowing. An endless cycle of debt backed up only by the promise it can be paid back through future tax revenues, that's money out of our pockets.

All Merkel and Sarkosy have done is put us and our children in hock to the Chinese for years and years.

How long will this madness go on because as sure as I have wings and a tail it's gone on too far and too deep for it all to end in sweetness and light and I fear all Merkel and friends have done is make those jackboots even more of a racing certainty.