For Europe, Only Way Out Is to Break Up: Kyle Bass
With no workable solutions in sight and a sovereign debt crisis only likely to get worse, the European Union is likely to see an ultimate breakup, widely followed hedge fund executive Kyle Bass told CNBC.
Bass, the managing partner at Hayman Capital Management famous for making huge sums from the collapse of the subprime mortgage industry, said last week's EU summitproduced "a blank piece of paper" on which "there are no details," causing him to conclude, "It won't work."
"They're going to have to restructure a lot of their debt. Eventually the (European Monetary Union) is going to have to break up," he said. "The adjustment mechanism that these countries need is a much weaker currency. It's very difficult to go through a hard restructuring and become competitive once again as a nation unless you have a currency adjustment mechanism that's associated with your restructuring."
Under current EMU rules, individual countries cannot devalue their currencies because they are all tied to the euro.
As such, heavily indebted nations such as Greece cannot get out of their sovereigndebt predicament while their currency remains at still-elevated values, though the euro has dropped off significantly against the dollar this week. A currency devaluation, done through central bank money printing, would help cheapen the value of the debt.
The most recent proposal — which Bass called "sophomoric" — would allow banks to borrow at low rates and then buy up the debt, but Bass doubts many large investors will be willing to join and help ease the crisis.
"It's a circular reference that I don't think institutional investors around the world are going to buy," he said. "They might hoodwink some retail investors into buying these things. When you look at the periphery today there are no buyers for peripheral bonds other than the host countries' banking systems that are basically the host countries' sovereign banks. That seems to me like what you would do at the end."
Bass believes central banks will "take the nuclear option" and print money, but not until after debt defaults occur.
"There aren't any buyers of this debt in that kind of size," he said. "I don't see anything yet. Maybe if they come with some concrete data I'll change my mind."