Kruggy joins the Euro doomers. If this plays out as below I'll be kicking myself in 6-12 months for not hedging more aggressively against it (but not like JPM ;-) ...
NYTimes: Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out.
6 comments:
He must be a minority. This isn't a possibility as far the market is concerned.
And how would you hedge against this? Even more difficult ... how would you hedge against this if you lived inside the Eurozone? If you've never played with financial products (like most of us) then now isn't the time to start:
http://kiddynamitesworld.com/trading-rule-1-know-what-you-dont-know/
http://kiddynamitesworld.com/trading-rule-2-know-why-youre-in-a-trade/
http://kiddynamitesworld.com/trading-rule-3-understand-the-product-you-are-trading/
Most of us already fail at rule 1 ... and I couldn't imagine how I would answer rule 2 in these chaotic times (like in chaos-theory including sensitivity to tiny perturbations).
This is crazy and it won't happen. Months, not years, to remind Krugman how wrong her was.
If Krugman says it, then we can relax. It almost certainly is false.
How would you run a hedge? Short European banks?
Here's a possibility I don't see anyone considering: As part of the bailout package, Germany (and the other solvent Euro countries) impose punitive taxes on deposits in their banks made by residents/citizens of the bailed-out countries, justifying it as "returning flight capital" or some such.
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