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Could the CDS market make the Euro stronger?


In the closing days of 2010, the credit default market for European sovereign names hit a speed bump when the debt for Italy started to be infected by the PIGS problems.  Whereas Portugal, Ireland and Greece are small, Italy is large (10% of Europe’s GDP).  It is possible that with Italy’s credit swap market imploding (or at least showing some signs of contagion) that Europe’s governments have finally realized that some form of fiscal centralized action is required.

Obviously, there are still many hands to play, since elections and “domestic” politics will intrude on the proposed pan-European fiscal model. So far, it is more hope that action will bond holders do their share of the heavy lifting? Germany’s government has been its worse enemy during this crisis.  It now seems to have learned its lesson and appears to only speak sparingly with a clear message.  .

Europe’s first step was to realize that liquidity was not the problem, rather solvency was the issue; and it seems apparent that certain tools are being discussed that would enforce a more conservative fiscal track.  These (so far) theoretical discussions seems to meet with the approval of participants and commentators alike, but more interesting will be when implementation is contemplated.  How will the Greeks react to fiscal policy being set in Brussels (or Berlin)?  The first test is Ireland February general elections.

Personally, I am doubtful that southern Europe will bow to Berlin’s will; Europe’s history makes such outcome uncertain.  The negotiations on the faith of Ireland’s bond “hair cut” will be the most telling for the behaviors of Greece, Portugal and to a lesser extent Spain.


Europe’s fiscal imbalance (except for Germany) poses real challenges especially since Europe income tax levels are relatively high.  Europeans have shown a propensity for mass demonstration against the removal of workers rights acquired over the past 40 years.  Yet the reality of Europe’s fiscal imbalance will have to be addressed sooner rather than later.

Over the next 24 months Europe (and the Euro) have many challenges, Ireland will act as the canary in the mine, its election process will give a good sense of what to expect elsewhere in Europe.  Today, I believe firmly that there exists a road that will allow the survival of the European currency (and union).  However, this road is tortuous and requires a great deal of fortitude not only from its leaders but also its citizen.  I retain my reservations

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