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Thursday, October 27, 2011

The Eurozone Agreement

After much pantomime and farce, there has been agreement of sorts on a way forward to try to save the Eurozone from collapse.

The key points are:

- Banks will take a 50% "haircut" on Greek debt

- The bailout fund will be leveraged to Euro1Trillion

- Banks have 6 months to raise Euro106BN

So, will this work?

It has bought some time. However, the Eurozone (in its current) form will eventually implode because of its inherent internal contradictions (eg you cannot have one monetary policy when there is such a disparity of growth between the member states).

That being said, there are some "issues" that may well unravel this sooner than the "leaders" of the Eurozone would like:

1 The "haircut" is, despite the spin (seemingly, according to the Euro spin machine the "haircut" is voluntary, therefore it is not a default!), a default.

Does this matter?

Yes, it does matter.

By defining it as not a default, the Eurozone has null and voided sovereign hedging via CDS (this has not gone down well with those who hedged against default).

2 According to George Osborne, the IMF cannot contribute to the bailout fund.

Therefore where will the money come from?

Seemingly Sarkozy is on the phone to China (as I write this) trying to persuade them to put money in.

Good luck with that then!

3 Many commentators are of the view that the fund (even if money is found to beef it up) is not large enough to appease the markets.

4 A large part of the Greek debt being "haircut" is tied up with Greek pension funds, ie the value of Greek pensions has been halved. Quite what the views of the Greek people will be, when they realise that their financial future has been cut in half is anyone's guess!

Real people are being affected by the decisions made by the clowns "leading" the Eurozone, the clowns would do well to remember that they only remain in office under the sufferance of the people.

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