Eurozone QE would be catastrophic for outside investors.

[jo0477]

Quote from athlonmank8:

So they should take the kind of hit like Greece bondholders may take? Typically they're labeled as 'risk free'. However, they're becoming anything but that.

They need to stabilize bonds. That's the key. Investors are too scared to take the risk. Thus bond prices continue to make that region unstable.

ECB needs to back them in a similar way the US did.

Yep, agree 100% on this point. Until they back them with "full faith and credit" who is going to take on that kind of risk? Greek 1 yrs are yielding around 400% now...

So what are the options for Greece and all the other dominoes that follow? No reason for large institutional holders to take a voluntary haircut assuming that many of them have hedged them with CDS's=default. If they make the haircut mandatory, this should qualify as a "credit event" by the ISDA, CDS are triggered=catastrophe.

If I'm missing something here, please feel free to fill in the blanks!

 

[morganist]

Quote from jo0477:

Yep, agree 100% on this point. Until they back them with "full faith and credit" who is going to take on that kind of risk? Greek 1 yrs are yielding around 400% now...

So what are the options for Greece and all the other dominoes that follow? No reason for large institutional holders to take a voluntary haircut assuming that many of them have hedged them with CDS's=default. If they make the haircut mandatory, this should qualify as a "credit event" by the ISDA, CDS are triggered=catastrophe.

If I'm missing something here, please feel free to fill in the blanks!

What I am really saying is that the effect of debasement are as catastrophic as dropping the debt. Even on an international level.

 

[jo0477]

Quote from morganist:

What I am really saying is that the effect of debasement are as catastrophic as dropping the debt. Even on an international level.

I would agree with that if the risk of not stabilizing the debt situation first may result in that currency ceasing to exist at all - no euro has to be worse than than a weak euro if you're holding any EU paper (I personally wouldn't want to be made whole in a newly floating drachma). If the ECB won't step up and buy the debt, the member countries refuse to buy each others debt, and yields continue to skyrocket organically - what is the point of maintaining the union when the economic policies of each country differ so vastly and the ECB isn't backing the paper?

 

[Martinghoul]

Quote from morganist:
No the consequences of QE have not kicked in yet. Also you are stating two things. One is QE for the sake of propping up demand, as seen in the UK. The other is QE for the sake off paying of debt. The difference being that when debt is paid off there is a transfer to another country which requires a purchase of the said countries currency. This is the point I am making, if the QE is done to pay off the debt (not support artificial demand) then the currency of another nation has to be purchased. If the number of currency units is increased without an increase in output, which is the case in this scenario, then the number of currency units that can be bought in the creditor nation to pay back debts is diminished by the level of QE. This means that the QE money can buy less of the currency reducing the return to a level relative the amount of debasement.

As the UK is not using the QE to pay off foreign debt this scenario does not occur. There has to be a purchase of foreign currency for this effect to work. It is a exchange rate consequence of QE.

Your answer makes me think you do not understand what I am saying. It is very clear there was an element of foreign exchange in the scenario of the OP. This makes me think you don't understand a lot of things I put, which makes me wonder whether your opinion is valued on these kind of arguments. I think you are good at mathematical black and white scenarios that already exist. But any kind of new thinking or hypothetical situation you find difficult.

So I think I will keep on with these posts. Besides I think I am right on this one but I don't want to be.

Whatever, mate...

I normally try to do my best to discuss stuff, no matter how outlandish, but in this case I just can't muster the energy necessary to wade through your confused ramblings. I am sorry.

 

[morganist]

Quote from Martinghoul:

Whatever, mate...

I normally try to do my best to discuss stuff, no matter how outlandish, but in this case I just can't muster the energy necessary to wade through your confused ramblings. I am sorry.

The answer you gave suggests you completely misunderstood the point I am making.

 

[morganist]

I really don't see why what I said is so radical. I am simply saying that if there is devaluation of a currency on a domestic level to pay off debt it will have a devaluing effect on the exchange rate. As a foreign investor would have to be paid in their currency any repayment of the debt they had would be diminished by the exchange rate change the devaluation would have. So in effect the even if the Euro or its member states devalued their currency to pay off debt it would have almost the same effect as default. People will lose the bulk of there return in either event.

 

[Martinghoul]

Quote from morganist:
I really don't see why what I said is so radical. I am simply saying that if there is devaluation of a currency on a domestic level to pay off debt it will have a devaluing effect on the exchange rate. As a foreign investor would have to be paid in their currency any repayment of the debt they had would be diminished by the exchange rate change the devaluation would have. So in effect the even if the Euro or its member states devalued their currency to pay off debt it would have almost the same effect as default. People will lose the bulk of there return in either event.

Yes, and the sky is blue. The point you're making is blindingly obvious. Yes, all else being equal, QE is likely to weaken the domestic currency, as well as discourage foreign investors from holding domestic currency-denominated bonds. However, it's also blindingly obvious to pretty much anyone that "all else" is anything but equal. As I have already mentioned, as someone who lives in the UK, you should be aware that ongoing BoE asset purchases have NOT had the effect described above. In fact, what has been going on is pretty much the exact opposite. Likewise, BoJ has been engaging in all sorts of QE for a good long time now. What has been the effect on yen and JGBs? Yes, you guessed it, a strengthening yen and foreign investors (namely, the Chinese) that can't seem to get enough of those tasty short-dated JGBs that yield next to nothing. I could go on, but you get the idea. Point is that QE is but one factor out of many and, in the grand scheme of things, it doesn't really matter. What matters is the need for "safe" assets and duration in the face of a possible Euro-geddon.

So here's my prediction for you. If the ECB does engage in QE, I expect EUR to rally (let's say, on a trade-weighted basis) and the average European bond yield (let's say, a GDP-weighted average) to fall.

 

[morganist]

Quote from Martinghoul:

Yes, and the sky is blue. The point you're making is blindingly obvious. Yes, all else being equal, QE is likely to weaken the domestic currency, as well as discourage foreign investors from holding domestic currency-denominated bonds. However, it's also blindingly obvious to pretty much anyone that "all else" is anything but equal. As I have already mentioned, as someone who lives in the UK, you should be aware that ongoing BoE asset purchases have NOT had the effect described above. In fact, what has been going on is pretty much the exact opposite. Likewise, BoJ has been engaging in all sorts of QE for a good long time now. What has been the effect on yen and JGBs? Yes, you guessed it, a strengthening yen and foreign investors (namely, the Chinese) that can't seem to get enough of those tasty short-dated JGBs that yield next to nothing. I could go on, but you get the idea. Point is that QE is but one factor out of many and, in the grand scheme of things, it doesn't really matter. What matters is the need for "safe" assets and duration in the face of a possible Euro-geddon.

So here's my prediction for you. If the ECB does engage in QE, I expect EUR to rally (let's say, on a trade-weighted basis) and the average European bond yield (let's say, a GDP-weighted average) to fall.

You have pointed out again you have completely missed my point.

The reason for the debasement is the debt that already exists. It is the debt that has to be paid off already not buying future debt as you suggest. This is the problem, what I am saying is that if the Euro prints money or if the member states leave and they print money to pay the debt the consequence is as severe as if they simply default. What I am saying in addition to that is the foreign investors who already own the debt that has to be paid back will lose out on the majority of their investment regardless of whether there is a default or printing money. The level of debt is so high that the cost of this scenario will be global.

In terms of your comments on QE in the UK and Japan. They are completely irrevelant. You are discussing QE which has been used to stimulate growth not to pay off existing debt. This is where the problem arises on an international level and the exchange rate comes into play. If the debts are owed abroad the money has to paid off in that currency so if the currency it is owed is devalued the amount of the foreign currency it can buy is diminished. This is not the case in the UK or Japan the QE is to stimulate the economy and stays in the economy thus the consequence of inflation is purely a national thing and only has an impact on the domestic economy. The situation in the EU whether it is joined or seperated is a global issue and will have a huge impact other countries return as a result of QE. QE is not an option for the Euro or the member states unless you want global collapse. What I am alluding to in the OP is that either another solution to the situation in the Eurozone has to be found or QE will lead to a catastrophic consequence to outside investors. That is what the title says is it not?

 

[Fractals 'R Us]

Quote from morganist:

There has been a lot of talk about the consequences of QE on a domestic economy. However I think there is a devasting consequence to foreign investors too. If the Euro did QE or if the states do it individually if the union fails, the investment made in the countries from outside will be damaged as much as a default.

but the politicians fare better in an inflationary default than if they just admit they have created a mess... they aren't very concerned about the actual economies, they are all wealthy and will not feel the pain even a little bit.

 

[morganist]

Quote from Fractals 'R Us:

but the politicians fare better in an inflationary default than if they just admit they have created a mess... they aren't very concerned about the actual economies, they are all wealthy and will not feel the pain even a little bit.

The default, whether QE or traditional, would be so damaging that the banking system would likely fail. Regardless people would lose savings pensions etc and would revolt. No amount of money the wealth have would prevent them from that.