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Italian Financial Future, And The Euro

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May 25, 2010 Finance No Comments

For travelers to Rome, and those expats being paid in Euros, the currency has become way too interesting over the last month or so. This is a quick overview to wipe away some of the main stream media misunderstandings, and try to understand what might happen to your money

Assumption: If Greece collapses, the Euro could collapse.

Answer: Greece is around 1.5% of European GDP. The official figure is 3%, but that is part of the problem. They have borrowed way to much, and can “never” pay it back. Not if, just never. The interest payments alone are way beyond them. What should have happened is Greece should have said to its creditors (bond holders) sorry – take a haircut (ie, we will pay you 30, 40, 50% of what we owe you) and start again. Countries have done that before (not in single currency). Real GDP in Greece is about 2 times the size of Microsoft gross sales. And Microsoft doesn’t have assets like…. The greek islands to pick up the pieces and start again.

Assumption: But you can’t do that because it is part of the Euro.

Answer: Because of all the politics and opportunism, very few are raising their heads and saying, “sure they can”. Most of the other European countries see it as a chance to bring Greece under more “political” control. In reality, the money was loaned directly to Greece by the bond holders (banks, pension schemes, hedge funds from around the world).

Assumption: But what about Italy? I’ve heard Italy have a big problem too.

Answer: Well, Italy, UK, USA, France etc. The talk currently is “the race to the bottom”. That is, which currency or country is even worse than the next. Yes, Italy is not strong at the moment, but no less so than the UK, France etc. 97% of money borrowed by the government in Italy is borrowed from their own citizens, just like Japan. They can bump along for years without debt being a problem as they are not exposed to the margin attacks of the hedge funds (pushing interest rates and payments up and up in order to break the country). If there is a “next” in Europe, try Portugal, then Spain. But this horrible big bail out on behalf of the ECB should kick those cans down the road a bit at least.

Italy is also the 5th largest exporting nation in the world. Just above the UK, and behind the behemoths of Germany, USA, China and Japan. It has suffered the last two years, but in line with all the others.

Assumption: The euro zone is in danger of breaking up.

Answer: Always possible, but mighty improbable. The weaker countries don’t want to leave, as they need the currency for credibility. The rich (mainly Germany, but also France) are using this period to put a lot more controls on the weaker countries. If it breaks, it will be because the best chose to leave rather than the worst, and it is highly likely they will take the currency with them.

Assumption: The euro currency will lose value against the US dollar and others. It is best to wait to convert.

euro dollar exchange 300x178 Italian Financial Future, And The Euro

Euro Dollar Exchange

Answer: It is much more complicated than the Main Stream Media would have you believe in their headlines. They often use the phrase, “flight to safety”. This is essentially just plain rubbish. There is some degree of change when certain news comes out due to contracts Pension funds and the like have in their own constitutions. For example, it might say they have to have 50% of their investments in AAA rated investments. If the rating agencies make a change, they may have to liquidate and move some investments. But the Euro is still much stronger against the USD and GBP than 10 years ago (.80 cents to the dollar in 2002, 1.25 to the dollar now). The USD and GBP have deflated far more.

Don’t expect much more movement in the coming months (or there is a 50/50 chance of getting stronger or weaker). However, some big hedge funds are mobilising behind a fall in the near term – and they can influence things. But they hunt in packs to create problems because they profit from instability (change) and not from stability (no change). They don’t keep focus for long so will move on to attack something else shortly afterward, creating a bounce (assuming they created a fall).

General: The whole of Europe and the US etc are suffering economically. There is no safe haven. Many financial bloggers (to whom you should turn to truely understand the financial situation) have been predicting that there will be a double dip recession, and a long period of weak growth from there. Maybe 5-10 years of very low level economic activity. But Italy and the Euro are a part of all of the countries bouncing along the bottom.

So will it all just be stable and weak? Probably not. It is not the way economics works. It tends to carry on oblivious to problems and then suddenly everyone sees them. Then it thinks there are many problems and suddenly everyone sees stability. Some of the measures the governments must introduce to rebalance their books will cause certain sectors great pain, and they probably won’t take that lying down.

There is a current debate precisely on this subject at the The Economist Magazine.

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