2012 The European Crisis Conjecture: Euro Zone &Nbsp To The Left; EU To The Right.

If you want to bet on 2012

Despite the difficulties of forecasting, the European debt to the left or to the right is like the furthest distance in the world.

To the left, the euro zone will be disintegrated.

Greece and Italy may have left one after another, and then issue their respective currencies.

But this is bound to bring malignancy.

To the right, the European Union will move towards fiscal reunification.

With more stringent fiscal restrictions, a new Europe that has never been and has been streamlined will be born.

Although the outcome is a mystery, the answer is always open.

Splitting the euro zone's unbearable pain

What will happen if the eurozone breaks up? A very realistic example is that Italians may only need 3 euros for a single bread, but they may have to pay 10 euros for Italy lira after leaving the euro area in Italy.

Similarly, the Greeks can no longer get drunk after work, and they may even lose their jobs.

Only the Germans and some Nordic countries (with a small budget deficit) were laughing at the end, but they could not do so, as exports to important trading partners such as Italy and Spain were reduced.

Hollywood has a rule of making films. Heroes can't die.

Yes, the euro zone also can not fall.

Currency depreciation is the first big problem.

In fact, if the crisis is allowed to develop, the euro zone will collapse.

But before the collapse, there is still a way for Germany to split up the existing euro zone so as to achieve the purpose of self insurance.

This proposal will enable the eurozone member states to return to their independent monetary policy, but the economic cost will be enormous, especially the exchange rate volatility is inevitable.

JensNordvig, senior currency analyst at Nomura in New York, analysed the exchange rate fluctuations in the post Euro era in his report.

If the existing euro zone countries resumed their previous currencies, the currencies of the troubled countries would depreciate in addition to the German Mark's rise of 1.3% on the basis of the existing Euro 1.34.

Among them, Greece Drake horse will depreciate by 57.6%, Italy lira will depreciate 27.3%, Portuguese ESCO will devalue 47.2%, Spain's beta will depreciate 35.5% and Ireland pound will depreciate 28.6%.

The most volatile exchange rate is the least desirable for both the market and the sovereign state, as it will cause inflation or deflation in addition to great harm to the import and export trade.

Boston consulting company (BCG) believes that to withdraw from the euro area, separated countries must follow complex steps.

First, capital control, trade control and border control are adopted to prevent asset outflow.

Second is to prevent banks from being run.

Then the central bank, which is most concerned by investors, announced the new exchange rate system and converted the euro capital to carry out debt restructuring.

Then, the countries that have been separated will recapitalise the banks that lose their solvency.

Finally, the country needs to decide how to deal with domestic commercial contracts.

The Boston consulting firm points out that in the process, compared with corporate debt, government debt is more likely to default because of domestic legal constraints.

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In a report in December, New York Times envisaged one of the problem countries, Greece, how to face such a scenario.

Reported that after the split, Greek currencies rapidly depreciated, and many Greek nationals did not even have the opportunity to go to bank run deposits, and all their savings went to ashes.

The consequent inflation is more unbearable, and soaring prices will make most stores in Greece unable to operate normally.

Finally, the New York Times boldly speculated that civil riots would emerge in the society, and that the army would come back to control the government again.

What is worrying is that the conjecture of Boston consulting company and New York Times is increasingly being proved by the strong evidence provided by scholars.

EricDor is one of the economists at the I e SEG School of management in Lille, France.

EricDor said that once Greece set up a new currency, to prevent residents' deposits from being pferred abroad, the Greek government would immediately freeze all international pfers of assets and force residents to accept currency devaluation.

At the same time, Greece will temporarily close its own financial system until the central bank prints enough new money to replace the original 200 billion euro bank deposits and the total value of market currencies.

Similarly, Nomura believes that there are two exchange rate matters that investors should pay attention to in the process of disintegration.

One is, the way the euro is disintegrated, that is, will the euro represent the current problem countries or the economically strong northern countries? Secondly, is the legal obligation of investor debt borne within the international jurisdiction or by a single country in the euro area? These two will directly affect whether the investment is affected by exchange rate fluctuations.

JamesSmethurst lawyer of FreshfieldsBruckhausDeringer, a London law firm, thinks that the exchange rate change is a complex legal issue.

But what is more complicated is that not only the problem countries will encounter exchange rate problems, but also the northern countries' exchange rate against the US dollar will fluctuate.

ING's MarkCliffe says that not only is Greece recovering from the devaluation of Mark, but the new German Mark will also have a certain degree of depreciation against the US dollar.

The strong evidence of this trend is that in 2011, the correlation between Euro rate expectations and foreign exchange movements is no longer sustained.

According to Deutsche Bank's foreign exchange research team, the correlation between foreign exchange rate and interest rate in 2011 changed to a negative correlation of nearly 50%.

This anomaly shows that investors will get wind before splitting up, and the whole eurozone will face a capital vacuum ahead of time because of the risk aversion of foreign capital.

Default risk should not be ignored

The sequela of the euro zone splitting is not just a currency devaluation, it is more likely to further promote debt default.

You may be surprised to say that if a problem country currency devaluation, according to the empirical accounting requirements, the debt will be automatically reduced by the exchange rate of the accounting assessment. Why is there a default risk?

The answer is that the default here will no longer be an orderly default between the sovereign state and another sovereign state, but a storm of disorderly financial default brought by the collapse of a large number of banks and businesses, which will far exceed the imagination of the people.

Some analysts pointed out that in the existing large scale debt of Spain, Italy and France, it is difficult to repay all the gold reserves in Europe.

It would be unthinkable to share the debt value in the banking industry and businesses that were crumbling in the crisis.

According to the latest stress test released by the European Banking authority (EBA), the current European bank's funding gap is as high as 114 billion 700 million euros to meet the requirements of 9% capital rate and 50% reduction rate in Greece.

According to the calculation of IMF, at present, the European banking industry has at least 200 billion euros in capital shortfall. In the same period, Morgan Stanley reckons that the gap is about 275 billion euros.

If we want to complete a higher scale of writedowns, the gap of banks will increase a lot.

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According to the press, the top ten financial institutions holding Greek bonds are France's largest Asset Management Co Amundi, which is jointly owned by France and Paris agricultural credit, which accounts for 0.13% of the total circulation. The SANPAOLOIMI Asset Management Co of Italy's main banks (0.07% of the total), Asset Management Co BNPASSET of the Bank of France (0.05%) and BNPPARIBASASSET (0.04% of the circulation).

It is worrying that the refinancing of parent banks of these institutions is extremely difficult.

Foreign investors run on European banks all the time.

Some investment bankers point out that European banks are simply unable to raise new capital in the market by common means, because investors realize that the money invested in European banks will be used to reduce sovereign debt.

The world's largest

Unable to finance, many large banks are forced to sell assets or nationalize them.

Deutsche Bank is ready to sell its asset management department for 2 billion euros; faba bank and faxing bank plan to sell 150 billion euro risk weighted assets; Santander Bank of Spain plans to sell 3 billion euro real estate assets.

In the first test of the European Banking authority, Dirk, the "healthiest" bank, was nationalized after less than three months after the test, which again showed the horror of change in further runs.

Worse still, if there is a division, I am afraid more depositors in healthy areas will join the run.

Such an event was rehearsed within the European Union.

Due to rumors that Swedbank and Sweden are facing liquidity and legal problems in Estonia and Sweden, more than 10 thousand Latvia people have taken 10 million lat (19 million 200 thousand US) deposits from the bank.

Although MarisMacinskis, the chief executive of the post office, said it was a rumor, the bank's 1/3 deposit had disappeared.

But such a run has not yet fully revealed the consequences of the huge default brought by European banks.

If there is "Lehman", the global financial industry will be shocked.

The cost of splitting the eurozone is obviously high, no matter whether the euro zone or the north and South will fall into recession.

According to ING's MarkCliffe, GDP in Portugal, Italy and Greece will plunge into a severe recession in the five years after the euro zone splits.

GDP in Spain, Austria, Germany, Belgium, France and Holland will also fall sharply.

The unification of Europe's fiscal "flow" has already begun, but the "source" is hard to open.

Because the consequences of splitting up are extremely serious, Europe must join forces to move towards fiscal unification.

This means that Europe needs to "increase revenue and reduce expenditure" and reduce debt from two.

"Throttle" means that the debts of the troubled countries are reduced by their own fiscal tightening.

The "open source" refers to Germany's corresponding easing at the monetary level, reducing the pressure of debt countries.

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"Throttle" needs "open source" urgently

From the second half of 2011, the plan of throttling has been put forward by the problem countries and is being implemented step by step.

According to a data released by the BLS in the third week of December, Italy's per capita working hours are 1778 hours after the European debt crisis in 2010, which is 25% higher than that in Germany, and 23% higher than that in France.

And in the earlier year, Irish workers started to get busy ahead of schedule.

Ireland's per capita working hours increased by 7% over the past.

This shows that Ireland and Italy are trying to change their laziness and jump out of the center of the European debt vortex.

Since July 2011, the yield difference between Irish and German 10 - year bonds has shrunk by 500 basis points.

A more long-term "throttle" plan was also worked out. In December 16th, the house of Commons of Italy passed the euro 33 billion austerity package.

Greece passed the 2012 budget in December 7th to pave the way for deficit reduction.

The Portuguese Parliament passed the government's 2012 budget in November 30th.

However, although "throttling" is an inevitable choice to solve the debt crisis, such contraction often brings about the negative effects of economic recession and political turbulence, and hinders the fundamental solution to the debt crisis.

Statistics show that Portugal will not be able to complete the deficit reduction target in 2011, and in 2012, Portugal, Britain, Ireland and other countries may not be able to achieve the goal of deflation.

Mei Sheng, the world's largest asset management agency, said in an interview with reporters that Europe will introduce a clear plan to stabilize the whole European debt problem.

Maison is optimistic about the overall outlook for Europe as Europe has a greater chance of introducing solutions.

Maison believes that the key is how to provide some short-term liquidity to some troubled countries in the EU system.

Jiang Dong, a researcher at Bohai Futures Research Institute, told reporters that the initial results are relatively good now. The problem countries have done to strengthen fiscal discipline and control daily expenses, but the new financial agreement that the market does not recognize German lead at present.

In addition, metal researcher Liu Yiqing of Jinshi futures told reporters that Spain, Italy, Ireland and other countries in the current euro system did not get cheap on the euro exchange rate. In 2012, Italy was the most debt issuing year in 5 years. Therefore, if there was no market convincing plan, 2~3 would be the month of the outbreak of the European debt crisis in 2012.

He pointed out that the problem countries are only temporarily suppressing the domestic opposition. If the European debt crisis is not yet solved, and the deficit reduction plan is actually implemented, it will lead to a decline in people's living standards in the troubled countries. In 2012, Italy and France will face great changes.

Reporters noted that Goldman once pointed out that a key point that hinder the euro zone from adopting similar multi pronged rescue measures is that the cooperation of policy and politics requires the participation of the 17 member states of the euro zone, and so far, this is difficult to achieve.

Although policymakers have invested a lot of money in helping the troubled countries through the European financial stability mechanism (EFSF) and the European Central Bank's securities market plan (SMP), the ECB is also very happy to provide the banks with unlimited liquidity through full allocation of fixed interest rates, but policymakers have yet to find an effective way to support sovereign bond issuance or to recapitalise European banks.

In addition, Germany has so far adopted an incomprehensible delay and has not clarified how to provide liquidity assistance to troubled countries.

German Chancellor Merkel said in a parliamentary address on December 2nd that the euro zone debt crisis could not be resolved in a hurry, but also needs a marathon long term fiscal integration.

In his speech in December 14th, Merkel said more directly that "there is no such a way."

The market is clearly not buying. After the German Chancellor Merkel refused to raise the ESM ceiling, the euro's exchange rate against the US dollar (1.2949, -0.0011, -0.08%) immediately hit a low level since January.

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According to the report, if Merkel continues to be procrastinate, the probability of successful crisis resolution is only 10%, and in 90%, a comprehensive debt crisis will break out.

The current divergence in Europe has led to no clear role of the European Central Bank.

Most countries strongly recommend that the ECB become "lender of last resort", but under the pressure of Germany, the European Central Bank has set an upper limit for future weekly bond purchases, and President Delagi has publicly denied the role of lender of last resort.

At present, the European Central Bank is gradually turning to the "Hawk" power led by Germany, which undoubtedly increases the possibility of Europe's liquidity crisis and economic recession.

Geng Jialei, new lake futures, told reporters that Europe is moving towards fiscal tightening and controlling fiscal deficits.

But looking back on the Latin American debt crisis resolution system in the 80s of last century, fiscal tightening will lead to a decrease in investment and a sustained recession in the economy, so fiscal tightening alone will not solve the problem of debt.

So, finally, the crisis needs to be completed through writedowns.

However, he pointed out that only one Greek country is currently in debt reduction, and that Greece has not yet completed its write down negotiations.

In 2012, Europe will not get much improvement. The European debt crisis will be completely exploded.

Risk events or spawning solutions

What is interesting is that in the 12 years that the euro zone was established, Germany enjoyed the dividends from the euro area, and the Germans obviously liked the euro zone.

Data show that by the end of 2006, the marginal countries in the euro area were more affected by the cost of financing than in Germany.

But over the past 5 years, the situation has reversed, and Germany has benefited more from the euro area.

Therefore, perhaps Merkel's procrastination is waiting for the opportunity. Maybe she needs an incident to make the German people feel the pain. If the German people can feel the crisis, the crisis may be solved.

So, what are the expected risk events in 2012?

The first thing to bear in mind is the sovereign rating.

The rating agencies have been doing a lot of action recently. In November 2011, there were only 6 attempts to downgrade the "five pigs in Europe".

What is even more striking is that rating agencies first set eyes on Germany and France with "AAA" rating in the second half of the year.

In December 5th, S & P placed France and Germany on the negative watch list. S & P suggested that the outcome of the European debt crisis would be measured in the next few weeks.

Fitch pointed out in December 13th that if a comprehensive crisis solution is introduced, the euro area's growth in the next two years will be much higher than the 0.4% and 1.2% anticipated GDP.

Without such a method, the pressure of euro zone sovereign credit rating will be considered in the short term.

In December 17th, Fitch downgraded the French rating outlook to negative. It also reflected the hope that the rating agencies would become the German lenient in the future. Fitch's report in December 17th clearly stated that Europe lacks reliable financial support, which requires the European Central Bank to make a more active and clear commitment to the liquidity of the troubled countries.

The report is intriguing to reveal that if Germany does not make a substantial concession on "open source", the rating agency will truly reduce its "AAA" national rating.

In addition to the pressure given by the rating agencies, the bankruptcy of large banks (especially the German banking industry), the bond auction and the blockage of the Greek bond swap may also be a potential driver.

If the Greek bond swap agreement failed to reach the end, the Lehman phantom highlighted or the yield of treasury bonds hit a new high, and Germany could easily ease the bailouts of sovereign states or banks ahead of schedule.

Statistics show that March 2012 is the peak of debt maturity, and the probability of orderly default and debt restructuring is enormous. In March 1st, Italy will have 27 billion 500 million euro debt maturity.

In March 20th, Greece had a 15 billion 100 million euro debt maturity. Greece could only rely on asset auctions, external 10 billion euros aid and debt restructuring to prevent default.

At the end of March, Greece will also sell 7 billion euro assets, and at the end of June, European banks will have to meet the requirement of core capital adequacy ratio of 9%, otherwise they will not be able to accept the assistance from the European financial stability fund (EFSF).

Even so, even if Germany is to come forward, it will be more likely to allow the European Central Bank to expand the scale of its purchases, or to grant the aid fund bank licences, rather than by means of pfer payments.

According to the Research Report of Shen Wan, if Germany pfers assistance to the "five pigs in Europe", it will need 114 billion 300 million euros in 2012, which accounts for 4.3% of Germany's GDP. In the pessimistic estimate, it needs 194 billion 200 million euros, which accounts for 7.3% of Germany's GDP.

As a result of the EFSF contribution, the amount of guarantee provided by Germany has reached 211 billion euros (29.07%), which means that in extreme circumstances, Germany needs another EFSF.

This is certainly not Merkel's wish unless the euro zone has taken the last step.

Therefore, KyleBass, a well-known hedge fund manager, said that the ECB should start the "nuclear button" printing money, provided that there was a default in the country.

Some analysts have pointed out that the real solution mechanism may be launched after the debt crisis has been fully detonated.

The solution may take various forms of quantitative easing, including the involvement of the ECB and non European funds, and the negotiation of debt restructuring and fiscal tightening.

But more importantly, before that, the impact of the debt crisis has begun to spread, or will eventually lead to a unified short-term and long-term solution mechanism.