UBS report: what if Euro cracks up?

[Evildead666]

I am confused. Do you believe that companies should be sole owners in order to have made a profit?

Maybe this example clarifies. Assume a new firm investing 1bln in capital stock (land, machinery etc). They borrow 900 mln, 100 mln is "equity". The stock will last for 10 years only and then be worth nothing. No other investments. Each year it:
- Buys 100 mln in raw materials, wages etc.
- Sells 210 mln in product
After 10 years, they have 1,100 mln in cash. They repay debt, 900 mln, repay equity, 100 mln and pay a dividend of 100 mln.

Yeah, they needed 1 bln in funds just to make 0.1 bln profit in 10 years.

That is just about what I understood, yes
I'm not an economist, very far from it.

what is equity and dividend ? a sort of loan that costs 100% over 10 years ?

edit : I am not a businessman either, If I had to invest a billion in hardware/etc to get the firm going, the first thing would be to repay that back asap, so that I could be not thinking about owing. In your case, after 10 years i could fully repay debt, and be much higher on profit from then on.

[Dr Mordrid]

Equity: the value of an ownership interest.

Dividend: shares of a profit paid to shareholders. A profit can also be reinvested in the business or sometimes put into other investments.

[Umfriend]

Well, in the example your machinery is completely worn out so you'd have to do the whole trick again. Do it 10 times in a row and you'd finally have the cash to DIY. There are many reasons why it does not work like that in IRL (the most important one that few people privately own a billion of course).

[Dr Mordrid]

Dow Jones is -320 ATM due to fears of a Greek default this weekend, Germany possibly cutting them loose etc. -

Bloomberg.....

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.

Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament.
>

[Evildead666]

I can see Europe splitting monetarily if this happens.

What if everyone, every country, went back to previous currencies ?
Is it possible ? Would it be more costly than trying to ride this out ?

It would also bring back border control for all those countries, and probably fold the EU completely.

[dZeus]

I can see Europe splitting monetarily if this happens.

What if everyone, every country, went back to previous currencies ?
Is it possible ? Would it be more costly than trying to ride this out ?

It would also bring back border control for all those countries, and probably fold the EU completely.

What does being in the Euro have to do with being in the EU? What does being in the Euro have to do with the Schengen zone? I don't see the direct connection...

[Dr Mordrid]

If one looks at the EU as a proto-nation, the major glue that holds a culturally diverse nation together is a shared currency. This crisis reveals two economic strata in Europe; the strong economies and the weak. Sharing a currency reduces the flexibility the weak ones need to reset their economics and recover long term - in short, do an Argentina.

Without that flexibility the lower strata is forced to go the bailout route after a bubble bursts, and popular & political patience for that is wearing thin in the stronger zone. This means both strata have incentives to separate, and I don't see how the current EU holds together if that economic glue is shredded - it'll divide along the economic lines. The Euro & EU may survive as German/French etc. entities, but that's it.

[UtwigMU]

There is more to EU than Euro, there are many countries in EU who are not in Euro such as UK, Poland, Danmark, Czech Republick, Hungary, Romania, Bolgaria.

There is common legislation, free flow of goods and free flow of people.

It is great that now I can order hardware from Germany, meet interesting student exchange girls in local bars, open a company in Cyprus or Slovakia where taxes are lower.

Traveling - even before EU passports weren't stamped and we weren't checked at borders much (just waved to drive on) but it's still more convenient.

The companies now have to compete with rest of EU, which is overall better, consumers can buy from elsewhere - better for consumers, the countries cannot quite introduce silly legislation limiting rights or entrepreneurship (though EU brings their own silly legislation).


Still I think Euro might crack up: Greek economy is contracting at about 5-7% a year and even with saving plan, they're not meeting budget deficit. The catch is that with EU, if government introduces higher taxes, Greeks can now register companies in Cyprus or even Liechtenstein (not EU but popular tax haven), the competent hard working people can go work in another country, so this will cause their economy to contract and overall tax revenue to decrease (see Laffer curve.)

The reason for high debt and banks lending money to Greece was that interest rate on Greek bonds was good and they had very good rating. So since German economy grew, German banks issued more currency which they then lent to Greece (it was profitable and safe - good credit rating). Greek bank then lent it to locals who spent it on imported German goods. (a simplified scheme).

The cost of bailing out Greece is still lower than cracking up of Euro or bailing out banks but if Italy and Spain or France start to crack up and default, it will break the Euro.

Inflation is quite high. For example Lavazza Rosa 250g (~8.8 ounces) coffe pack used to be 3.30 2 years ago, now it's 3.95. Cini Minis used to be about 6-7 per kg, now at 10 per kg. Gas used to be 1 EUR/l now at 1.30. Gold used to be 30 EUR/g a year ago now it's above 40/g.

[Dr Mordrid]

I didn't say the border treaties etc. would necessarily fall, just that a surviving EU entity/bureaucracy would be reduced to those nations still using the Euro. Without the Euro as their currency there is little influence or advantage to the have-nots participating beyond the open borders, and even those may not survive if smuggling becomes a big issue.

[Evildead666]

Countries will either leave the Euro, or be kicked out for devaluing it/dragging it down too much.
Those countries would then become a bit sh*tty for the population, which could increase the number of people going to work in neighbouring countries. They couldn't let this happen, so they would have to close/restrict borders for a while.

England keeping the pound was probably one of the best things it did.
Not sure whether it would be better for countries like Germany to stay in the Euro, or to go back to their original currency.

[Brian Ellis]

There is no mechanism for either strong or weak economy countries to leave the euro. In fact, it would be unconstitutional to try. The only possibility would be for an amendment to the Eurozone constitution which would obligatorily require all 27 EU countries to hold a referendum with power of individual veto. This would take at least 2-3 years. If all 27 states' referenda, by a miracle, were approved, the economic conditions which started the process will have changed and the need for secession will have passed.

You can forget either Germany or Greece reverting to their own currency; it ain't going to happen! All the current noises are just manoeuvring to obtain the least unfavourable conditions.

[Evildead666]

Does this mean that if the sh*t hits the fan (Airplane!), there is no real way out for any of the Euro currency countries?

What are the viable options left for the Euro currency countries ?

I don't believe for a minute that Greece will magically change its entire populations mentality on paying taxes, which would mean that any austerity measures taken would most likely fail. Any promises made now to the ECB, or others, are just p*ssing in the wind (facing it).

[Dr Mordrid]

Anyone ever hear of abrogating a treaty?

"Oopsie....never mind...."

[Umfriend]

Anyone ever hear of abrogating a treaty?

"Oopsie....never mind...."

Indeed, I don't see the point. If "we" would at some stage feel it best to kick Greece out of the Euro we'd simply have to do so. What's Greece gonna do? Wage war?

Of course, there is no way we could stop Greece from using the Euro as a domestic currency. Also, Greece might still print it! We'd then get a EU-Euro vs Greece-Euro exchange rate (I think the US had different dollars up to somewhere 2nd half 19th century).

I don't see why we should bail out Greece, it's unlikely to work anyway. I'd rather simply have parts of Greece being sold to countries that are succesfull wrt fiscal discipline and transfer soverereignity (much as I would have proposed with Iceland).

[dZeus]

cutI don't see why we should bail out Greece, it's unlikely to work anyway. I'd rather simply have parts of Greece being sold to countries that are succesfull wrt fiscal discipline and transfer soverereignity (much as I would have proposed with Iceland).

I'd like to repeat that I find your interpretation of sovereignty very, very disturbing.