Jeremy Warner argues in the Telegraph that the eurozone authorities have gone past the point of no return through a series of strategic errors, including

forcing banks to mark their sovereign debt to market. This may only have recognised the reality, but it also destroyed the concept of the “risk free asset”, forcing banks for the first time to apply capital to their sovereign debt exposures. Unsurprisingly, they stopped buying sovereign bonds, again making it harder for governments to fund themselves.

But perhaps the biggest sin of the lot was effectively to render all credit default swaps (a form of insurance against default) on sovereign debt essentially worthless, or void, by making the Greek default “voluntary”. This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it’s made investors believe that the euro cannot be trusted, that it’ll repeatedly find ways of reneging on contract. That’s the point of no return. This is no longer a serious currency.

This last point is one we’ve previously not heard of, but it sounds pretty bad. The WaPo says that “investors will be carefully watching scheduled auctions of Italian bonds on Monday and Tuesday and Spanish bonds on Thursday,” and says good demand could bolster prospects for the euro. If Oliver Sarkozy’s calculations are even remotely in the ballpark, a train wreck looks imminent.

This entry was posted on Sunday, November 27th, 2011 at 10:34 am and is filed under business, China, Democrats, EU, General, Republicans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.