Economist Shayne Heffernan on the Euro Crisis

Debt levels in many European states are now terminal, and collapse of the EU or the Euro is certain.

Greece may yet be forced to abandon the Euro, default on more of its national debts totaling hundreds of billions of euros, and revert to the old drachma as its currency. This may trigger banks in Greece and elsewhere in Europe to collapse, or at least seek massive bailouts from the European Central Bank and the International Monetary Fund that will add pressure to devalue or die.

And as Europe slips deeper into an Austerity fueled recession, European governments play politics as to how best to address these problems. Germany, the richest member of the European Union, has a Conservative government that is adamant that the fiscal problems faced by Greece, Italy and Spain were caused by excessive government spending and borrowing and they are correct, It is also true that contagion is catching up on Germany and they can not afford to bail out their neighbors.

To the Germans the solution is to avoid the bill and cry austerity. They say that Countries with major debt problems must cut back their spending, reduce the size of their public sectors, and curb social entitlements like public pension plans and health, education and welfare policies. The victim here of course is GDP, the cuts reduce spending a minimal amount but hurt GDP to the point where the GDP to Debt Ratio gets worse, not better.

Such austerity has already been the price of Greece receiving fiscal support amounting to hundreds of billions of euros. This has of course also crippled the economy, placing the country and its people into an economic depression the likes of which have not been seen since the 1930s. The Greek economy has declined by over 10 per cent since 2009.

European leaders are poised to use two rescue funds to buy Spanish and Italian debts in a £600bn bail-out, as a Bank of England policy maker tells traders to prepare for a devastating market seizure like that seen as the collapse of Lehman Brothers.

Cheap and ready access to the liquid assets that oil the financial markets are under threat from both state-imposed capital controls and flagging confidence in the euro, said Robert Jenkins, a member of the Bank's Financial Policy Committee.

Without easy access to liquidity, markets could seize in a re-run of the credit crunch after the collapse of Lehman Brothers, he warned.

The warning comes after it emerged last night that European leaders are poised to announce a £600bn deal to bail out Spain and Italy.

The Markit iTraxx Financial Index of credit-default swaps tied to the senior debt of 25 European banks and insurers snapped two days of declines and climbed 10 basis points to 283, the highest since June 28.

The Markit iTraxx Europe indices trade 3, 5, 7 and 10-year maturities and a new series is determined on the basis of liquidity every 6 months.
Product summary:

The benchmark Markit iTraxx Europe index comprises 125 equally-weighted European names. A HiVol index consisting of the 30 widest spread non-financial names and three sector indices are also published. The Markit iTraxx Crossover index comprises the 40 most liquid sub-investment grade entities.

The Markit iTraxx indices trade 3, 5, 7 and 10-year maturities and a new series is determined on the basis of liquidity every 6 months. Total Return indices are calculated and published hourly for Markit iTraxx Europe, HiVol and Crossover. These indices measure the performance of holding the respective on-the-run Markit iTraxx CDS contracts.

They only real solution is to devalue the Euro to around 80c USD.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service