All Things in Moderation

Fool’s Errand?

5 Responses

1. 

   lmsinca, on June 12, 2012 at 7:39 am said:

   Wow Mark, it appears they’ll never really take the bold steps, or agree on the bold steps, they need to take. And as the piece points out, that might not be enough anyway. Regardless of the FDIC discussions we’ve had here I think this shows how important it is to both the banks and their customers as far as confidence goes. I remember when they added money market accounts and we breathed a sigh of relief before moving our money. I sold all my stock at the end of 2007 and the money was just sitting there waiting for me to re-invest. **Edit: it was sitting there in a Schwab money market, as was my husbands.

   Oddly enough, such a deposit guarantee would probably be pretty cheap. The psychological effect of such a guarantee would most likely ensure the solvency of more banks than the guarantee would ever have to pay out. That was the experience in the United States.

   Of course, there’s a catch. A euro zone deposit guarantee would require agreement from all the countries that use the euro, which is something that the leaders there seem incapable of reaching because ultimately it would mean tighter integration and, yes, a loss of sovereignty.

   And here’s another problem with a euro zone deposit guarantee: Unless you believe the euro is going to remain the standard — that countries like Greece or Spain won’t be forced out or secede from the currency — even the guarantee might not be enough, unless the guarantee holds for all currencies. For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he may well move his money.

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2. 

   markinaustin, on June 12, 2012 at 7:48 am said:

   LMS, Scott has suggested that without a political union a currency union makes no sense, and I think Europe is chasing a shadow. But to devolve the currency it would take something like a guarantee that translated into drachma and lira and peseta, to soften the landing, and assure continuation of the Common Market.

   Right, Scott?

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   • 

     ScottC, on June 12, 2012 at 9:30 am said:

     Mark:

     Right, Scott?

     I’ve been trying to imagine how the re-introduction of local currencies might work. I’m not sure how to do it while providing incentives to depositors to keep their money in deposits that will automatically be converted.

     As a practical matter it was relatively easy to to introduce a single currency as a replacement for several currencies, because the value of the individual currencies relative to each other had already been established by a market. All that needed to be done was to pick a time certain, look at the exchange rates at that time, and lock the relative values. From that point on, holding one local currency vs another carried no FX risk. But in doing the reverse, one is actually introducing, not eliminating, FX risk. In fact, FX risk is effectively introduced the moment it becomes clear that the old currency is going to be re-introduced at some point in the future, and since the currency is not yet tradeable, the only way to manage that risk is to move your money out of any place where automatic conversion is going to occur.

     And remember that one of the primary benefits of re-introducing the old currency is so that it can be devalued relative to the Euro, and debt can be paid off with with cheaper money. If you know that the re-introduced currency is going to be devalued after it gets re-introduced, why would you ever willingly hold the currency?

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3. 

   Brent Nyitray, on June 12, 2012 at 8:24 am said:

   “As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to its shareholders, not to move its money out of Spanish banks. ”

   “could be argued?” I think it is a black-and-white situation. People who had money in hedge funds that primed at Lehman had their money tied up for years.

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     markinaustin, on June 12, 2012 at 8:48 am said:

     I don’t think I mentioned it here, but I represent an Austin subsidiary of an Italian GPU manufacturer. They are moving the European HQ from Milan to Switzerland in anticipation of a crisis. The Treasurer told me on a LD call that the UK should not have done austerity, b/c it would have been the major beneficiary of moves of HQs from Spain, especially, had it seemed inviting. She added that it may still be. I have read of one Spanish co. moving HQ from Barcelona to Mexico City, btw.

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