Many observers have become unduly excited about what they depict as efforts to break the dollar hegeomony, such as the joint effort by the so-called BRICS nations to form a development bank. While having a suite of internationals funding entities, particularly ones focused on activities that in theory increase the collective benefits of relying on a reserve currency, are seen to be important, it does not follow that launching useful new funding institutions will break dollar dominance. As much as US abuse of its position as issuer of the reserve currency is correctly resented, there isn’t a competitor waiting in the wings. The Eurozone has blown it with its failure to clean up even sicker banks than the US has, and by compounding a bad situation with its adherence to destructive austerity policies. China clearly has the potential to displace the US longer-term, but it is unwilling to run the requisite trade deficits, since that means exporting demand and hence jobs. And no country had made the transition from being a major exporter to being consumer-driven smoothly; a crisis or protracted malaise would also delay China displacing the US as currency top dog.
But not being able to get rid of the dollar any time soon does not mean that countries that the US is trying to punish by using its influence over international payments system won’t find nearer-term escape routes.
Regulators look to be getting more serious about financial firm misconduct, as witness their new-found willingness to file criminal charges against banks. Not that has happened yet as regards JP Morgan, the US bank with far and away the biggest rap sheet of all US financial firms. But as we’ll discuss, while it is good to see regulators getting tougher with banks, this move still falls in the category of “too little, too late,” particularly since it looks to a last-ditch effort to improve departing attorney general Eric Holder’s file of media clips.
It’s actually somewhere in the middle. While it represents prosecutors starting to use muscles that had atrophied, at least as far as financial firms are concerned, as readers will no doubt suspect, the shift falls well short of the levels of official zeal needed.
But there’s actually an important shift discussed at some length in the article that may have bigger ramifications: that powerful bank consultants and lawyers are no longer being taken at their word.
Yves here. The word “collapse” may seem overwrought when applied to Europe, but cold-blooded, clear eyed colleagues who have good connections and have spent a bit of time there recently say things that are broadly similar to Ilargi’s take. Despite the conventional wisdom that the cost of a Eurozone breakup is catastrophically high
and thus will never take place, that confidence may prove to be the currency union’s undoing. Ideological rigidity about austerity is leading to policies that are crushing large swathes of the population. And Europe, unlike the US, had enough of a tradition of popular revolt that that uprisings, either on the street or in the ballot box, are real possibilities, as the sudden rise of the anti-EU right shows.
My sources, who also read the foreign language press, say that political fracture is underway and the Eurozone leadership is not taking anything remotely resembling adequate measures to halt its progress. That does not mean upheaval is imminent. But the flip side is this sort of unraveling tends to progress not via an clearly discernible decay path, but through sudden state changes.
We’re expecting to have some more thoughtful commentary in the next day or so from some close observers of the Scottish independence vote. On the surface, the results look more decisive than expected earlier. The margin of victory, at 55% against and 45% for, was wider than the forecast 54%/46% split. And the English press looks to be rubbing it in, with most UK media outlets showing celebratory images of the victors.
I don’t know that I’d go so far to say it was Paul Krugman-induced, but the French government has been dissolved, primarily because two senior ministers dared speak the unspeakable and criticize Francois Hollande’s continued commitment to austerity, in the face of evidence of its failure.
Today is technically the drop-dead date for Argentina to work out an agreement to pay off vulture funds that long ago purchased their distressed debt, or else the country will go into default for the second time in thirteen years. 11th-hour negotiations with a mediator have yielded no results thus far. WSJ divines momentum from the length of the mediation session, which is pretty weak tea.
The default would actually be to the exchange bondholders who already hold agreements with Argentina for restructured debt payments going back to the 2001 default. Judge Thomas Griesa prevented the country from making a scheduled interest payment to the exchange bondholders without the vulture funds getting their $1.5 billion first (the vultures paid roughly $48 million for the distressed debt, so it’s a huge payday).
This week marks the 100th anniversary of a nearly forgotten yet critical moment in global finance. As the looming outbreak of World War I appeared more and more imminent when Austria made an ultimatum to Serbia in the last week of July 1914, the resulting fear in global markets set off a massive financial panic. Investors, fearing unpaid debts, pulled out of stocks and bonds in a scramble for cash, which at this point in history meant gold. The London Stock Exchange reacted by closing on July 31 and staying closed for five straight months. The U.S. stock exchange, which witnessed a mass dumping of securities by European investors in exchange for gold to finance the war, would also close on the same day, for about four months. Britain declared war while on a bank holiday. Over 50 countries experienced some form of asset depletion or bank run. Here’s an incredible statistic: “For six weeks during August and early September every stock exchange in the world was closed, with the exception of New Zealand, Tokyo and the Denver Colorado Mining Exchange.”
With Argentina’s payment to the holders of its restructured debt on June 30th in limbo at the Bank of New York Mellon, blocked by Federal Judge Thomas Griesa, and the 30 day grace period to official default ticking away, financial pundits have taken a keen interest in the biggest debt struggle in memory.
Some have been very critical of both the judge’s interpretation of the pari passu clause that created this mess and, more importantly, of his damaging precedent. But no one seems able to resist adding digs at Argentina, even when generally supporting its position in the litigation.
France appears to have taken its public relations strategy for dealing with $8.9 billion fine against BNP Paribas from an old saying among lawyers: “If you have the facts on your side, pound the facts. If you have the law on your side, pound the law. If you have neither on your side, pound the table.” Here’s the guts of the French compliant, which is that the US is abusing the power of dollar dominance:
Yves here. We remarked recently how the readings we’ve been getting from people who have senior contacts in Europe are increasingly of the view that the economic crisis in Europe is morphing into a sufficiently severe political crisis that the unthinkable – a breakup of the eurozone – is looking like a serious possibility.
One indicator is the article featured below. VoxEU has policy reach in Europe, and this post represents an effort to come up with better economic arrangements within Europe while preserving at least some of the benefits of monetary union. And it is hardly the first to recognize that one of the big problems with the Eurozone is that it put together too many disparate economies without enough in the way of fiscal transfers to buffer the differences. If the Eurozone can’t move towards more economic integration, the next-best remedy might be a structure where more homogenous countries each had their own currency.