On today show we were talking about whether we are about to experience another repeat of the 2010 and 2012 sovereign debt crisis having a ripple effect through global financial markets. There are clues of an impending crisis when you listen to the words of Christine Lagarde head of the European central bank.
This next crisis will also precipitate a change in foreign exchange markets. When countries experience a crisis of confidence, the release valve is the value of the currency in international markets. Some currencies are free floating. Some currencies are pegged to specific assets. Still others are pegged to other currencies. For example, we have 66 countries pegging their currencies to the US dollar. There are 25 countries pegged to the Euro. This is designed to stabilize exchange rates between trading partners.
We have some very powerful lessons in the 2008 financial crisis. But we are doomed to repeat those lessons if we don’t actually pay attention to what those lessons have to teach us and look at the root causes of what precipitated the financial crisis back in 2008. Many people think that you thousand and eight was only about subprime mortgages. But there had to have been much more to 2008 than just subprime mortgages. Why were banks in Ireland failing?
Europe is a funny collection of individual countries each being held together for a common monetary and economic system. But each of these countries are not created equal. It makes sense if you look through out history that bonds issued by one country are not necessarily of the same credit quality as the bonds issued in another country. We often hear about the north south divide in Europe. Italian credit is not of the same quality as German credit. Yet somehow we see that a very large percentage of the collateral being used in the repo market at the European central bank is comprised of Italian sovereign debt. In recent months this has peaked at 45% of all repo transactions.
Christine Lagarde recently went on record stating that she has anti-fragmentation tools at her disposal and she intends to use them. At the same time the head of Germany’s going to spank, the German central bank has publicly stated that he is not on board with the use of the anti-fragmentation tools.
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Host: Victor Menasce
email: podcast@victorjm.com
