Thursday, February 26, 2009

Euro Nation Default A Matter Of Time Claims Ex-Bundesbank President

Karl Otto Poehl is pouring some major cold water on all the optimistic talking heads saying eurozone defaults can be avoided. According to the former Bundesbank president, a default of smaller member of the euro region is only a matter of time.

"The first will certainly be a small country, so that can be managed by the bigger countries or the IMF,” he said in an interview with Sky News. “I think there are countries in Europe which are considering the possibility to leave the eurozone. But this is practically not possible. It would be very expensive."
Poehl suggests that Germany or the IMF will be forced to deal with the default... However he does not account for just how much cash it would take to pick up the pieces after the intertwined European dominoes start faltering left and right. Last time we checked, Germany couldn't issue bonds to save itself, let alone the entire Eastern European region which is on the precipice every single day.

Curious is the comment about countries leaving the eurozone "In the case that a country would leave the eurozone, the foreign exchange rate would go down significantly -- 50 or 60percent,” he said. “Interest rates would go sky high as the markets would lose confidence in the system” and “in the countries that can’t maintain their membership."

And while practically speaking Germany bailing anyone out is a pipe dream, even the theoretical proposition is not assured. Former ECB Chief Economist Otmar Issing told Frankfurt Allgemeine Zeitunglast week that saving a profligate member would be“catastrophic” and undermine the monetary union framework. Current ECB Executive Board member Juergen Stark calls the no-bailout rule an “important pillar on which the European Union was founded.”

And some more bad news:
Former International Monetary Fund Chief Economist Kenneth Rogoff today predicted the default risk may rise once central banks start to raise borrowing costs from record lows. “Interest rates will rise in two to three years and countries like Italy may face rates of 11 percent again -- will they be able to pay?” he said in a speech near Reykjavik today.“I can well imagine that if we don’t have a large sovereign default, we will see some large sovereigns on the brink of it."
All of this should provide more ammunition for the contrarian "all is priced in" bulls as they take the market to new highs today. Sphere: Related Content
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