QUESTION:
Hi Marty,
I hope you’re keeping well? More news from the “EU beacon of light” for you. I’ve enclosed an article regarding Irish pension money in Italian bonds. This is very very scary if true and we really are heading for a disaster from which a little country like ours won’t recover if we ever did anyway! In the article Mercer says that “after the financial crisis the ECB put in place a system to limit a contagion”.
Is this just more whistling in the dark? I believe it is.
Kind regards,
E
ANSWER: The very design of the euro promotes contagions. Because there was no national debt, the “reserve” status for banks is the debt of all member states. In the United States, ONLY the national debt federally is acceptable. Therefore, if California or Illinois goes bust they do not create a contagion that brings down the whole. Even the government has come out and warned there may be a contagion will emerge if Italy fails and/or breaks with the EU.
The euro crashed BECAUSE there is no such prevention of a contagion. That is totally FALSE and a made up excuse. Fears of the new Italian government of the five-star movement and the right-wing populist Lega came into the markets and sent the euro crashing. A risk of contagion sparked by Italy infecting the entire Eurozone was “not yet completely off the table,” said ECB Vice President Vitor Constancio. This applies in particular if the sharp rise in Italian government bond yields. At the same time, Constancio came out and said that US Treasuries have the greatest risk because the Fed keeps raising interest rates. There is no such mechanism to prevent contagions – PERIOD! It is all smoke & mirrors.
