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Experiencing €uro trouble in real time


The lack of a scenario planning that takes into account this or that variable in forecasting, what is the strategy or a master plan to keep the Euro intact, and is the main reason why most of the progress euro-area policy makers have made toward ending the euro crisis is reversed.



Porbunderwalla Kersi
Porbunderwalla Kersi
In 2007, Fed chairman Ben Bernanke said that he thought the impact of subprime mortgages losses were contained. Six months later the first phase of the global financial crisis surfaces, when the asset-backed commercial paper market seized up. The rest is history.

Last year, Mario Draghi, the European Central Bank president, support the Euro with strong words and quelled fears over the future of the Eurozone, won valuable time and stopped the hedge funds to make a bundle by shorting on southern European bonds. Cyprus on the other hand was in default due to the massive problems with the neighboring Greece and their investments in Greek bonds.

The Cyprus result reveals that a Cypriot euro is no longer a core €. The Euro that you can use only in Cyprus and the Euro you can use elsewhere in the EU monetary union. A de facto two tier € is probably the first step prior to a € breakup.

Compliance cliff
Copenhagen Compliance has for a long time pleaded that: Compliance and the variety of complex capital controls without any obvious cure of the underlying problems simply complicate compliance issues. Introducing complex Compliance and controls beyond the therapeutic dose is self-defeating.

Seizing a large chunk of the investor’s money in Cyprus was the only viable option. ECB and IMF could not provide tax payers subsidies to save the money laundering of black money by Russian gangsters. Confiscating bank deposits is now on the table in any future € crisis. That is toothpaste that is not going back in the tube and probably will be the formula used to resolve future € crisis.

What saved Iceland, Sweden and Finland in the early 1990s – was a currency devaluation that brought their industries back from the dead. (Iceland is even growing tomatoes in greenhouses near the Arctic Circle).

More defaults are on the horizon
There is merit in red flagging the design flaws and construction issues in the Euro but at its wise to get a sense of proportion on the EU meltdown. The Cypriot economy represents about one tenth of one percent of EU GDP while Greece is below 2 percent. Probably Slovenia will emerge as the next Epicenter of the Euro Crisis.

The € construction is made up of cracks and imbalances
Latvia, Ireland and Greece will struggle with their growth and economic problems for quite a while. Sooner or later Italy, Spain, France and Portugal that are currently moving into a potential € crisis at their own pace. They will probably join forces in a different kind of € bailout. However the raid on the deposits that force depositors to participate in future bailouts is on the table, it probably will be sooner than later.

As the euro crisis unfolds, nobody knows what is going to happen to the € except that if the EU economy goes into a free fall there will be no bail out money as the growth outlook is downgraded and a sizeable chunk of wealth disappears, together with much of the financial services sector that needs to be recapitalized. That will only make a terrible situation more worse.

Banking Union undermined
The bailout negotiations in Cyprus have revealed cracks and imbalances within the region and individual systemic risks have returned. Was the ECB sleeping while most of the European banks piled up the debts? Does that mean that the 'Banking Union' that should address the lack of proper Union in the EU is undermined, and thereby widening the divergences within the global banking sector? We continue to add new dimensions to the € and global crisis. This time due to the unexpected and unreflecting problems as a result of the dangerous signals that each bailout sends to the investors.

The tail risk of a possible € meltdown may be significantly deferred. It is just a few months ago that the ECB’s promised to do whatever it takes to keep the euro intact. That promise still remains to be tested.

When the current actual costs of holding the euro together (unsustainable public debt, lack of economic growth and confidence, depopulation) are made available, people and politicians will judge the € construction from a different perspective that they admit today. The above and other financial issues will be discussed at the forthcoming Copenhagen Compliance conference on the 15-16 may 2013. At the conference we will discuss the contingency plans for the corporate world during such an eventuality.

Kersi Porbunderwalla is the founder and CEO of Riskability®, Copenhagen Compliance® and Copenhagen Charter®.
 
After his early retirement from ExxonMobil, Kersi has been involved in several Global Good Governance, Risk Management and Compliance (GRC) Projects for multinationals like IBM, Shell, BP, Volvo and others.
He continues to implement GRC journeys for a variety of clients to develop custom tailored GRC folder that includes methodologies, roadmaps, and specific solutions to assignments, training and certification.
Kersi conducts workshops, seminars and conferences that focus on developing and implementing GRC applications & frameworks into operational environments.
He is a consultant, instructor, researcher, commentator and practitioner on 4 continents.
 

Mercredi 17 Avril 2013
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