The Guest Blog

Crouch: The Day The Euro Died

Stanley J.G. Crouch|CIO of Aegis Capital
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Photo: Ken Sciciuna | Getty Images

While most have dubbed the products of the European Union Summitas further ‘kicking the can down the road,’ I believe the outcome portends the end of the Euro currencyas we now know it.

My reasoning goes well beyond the questions engendered by the actions and comes full circle to the realization that, far from getting what she wanted, Germany’s leader Angela Merkel agreed to provisions, which she knows full well her countryman will never accept when push comes to shove.

And trust me, push is coming to shove very soon.

At the core of the intolerable elements of the agreement are two intertwined provisions; that private investors are not expected to take losses on unsustainable sovereign debts and the European Central Bank (ECB) effectively channels support for challenged national debt complexes through the IMF and the European Stability Mechanism (ESM), the permanent successor to the temporary European Financial Stability Facility. In de-facto ‘monetizing’ the credit support mechanisms and preventing the ‘market’ to exact any risk-reward measures from investors, to central tenets of Ms. Merkel’s multi-year protestations, I believe the so called agreements seal the fate of the Euro. That Germany will exit is now a virtual certainty, to my mind. When this will occur is sooner than most likely think possible. A matter of a few months is my best guess.

Now for the whys and wherefores.

Let us start with the hubris the Germans have displayed from the beginnings of the Crisis. As some, myself included, have pointed out the effective imbalances in the Euro, which greatly benefited Germany, and its powerful export economy from the inception of the common currency in 1999, the Germans have never believed this has been so. They simply believe all the troubles stem from a severe lack of financial rectitude on the part of the now struggling members of the Eurozone. If only they had controlled themselves from a fiscal perspective and acted with prudence, we would not be in this mess. That is the common refrain overwhelmingly heard throughout the German populous and institutions. Polls support this notion. That there are some severe structural imbalances, which have rendered the so called ‘peripherals’ very uncompetitive, is not just ignored, but patently rejected in Germany.

Since these beliefs are deeply ingrained in the German psyche, the Germans will form a new version of the Euro when the inevitable bill comes due. And the bill will come due. And it will be very large. The resignation of a number of high profile German officials from the ECB over the bank’s intervention in the markets through the bond buying program the ECB engaged in under the previous Director Jean-Claude Trichetis a visible clue of German attitudes toward the support of the debt markets through ECB ‘monetization’ and what I call, ‘collectivization’ of the debts. After all, if the whole of the EZ support the bonds of individual member states, does not allow for market risks to be borne by investors and provides for direct purchases of less creditworthy issuers, it renders the collective actually ‘on the hook’ for each others debts. This condition is patently unacceptable to the Germans, regardless of the agreements at hand.

Speaking of agreements, I believe the agreements that will emerge sometime in March will be crafted in very deliberately to allow for the exit of the parties currently in the common currency known as the Euro. Further, I believe that the joint announcement from the EU Summit is but a staged media event very much meant for public consumption. The break has now been made and the ceremonies and pronouncements are all strictly for show. I knew this once Ms. Merkel gave up her two central tenets. Of course, those tenets being no private participation in losses and the collective EZ mechanisms acting as ‘lender of last resort’.

Additionally, there are a couple of ‘details’ lacking in all this. Chief among them are:

  • How much supposed funding ‘firepower’ is actually being made available for support?
  • Specifically, where is the funding coming from?
  • What are the terms of both funding and repayment?
  • What is the timeframe of the various components of the ‘fix?’
  • Besides Britain, who else will bail on it BEFORE the documents are prepared in March 2012?
  • And the big one: What happens should some participants not receive the needed mandates at home?

From my perspective, Germany just answered these and many other questions. Besides Finland,
Luxembourg, Austria and Holland, the rest of the World will find out soon enough.

Stanley J. G. Crouch is the Chief Investment Officer and Senior Managing Director at Aegis Capital Corp. He also is CEO of EXP Wealth Enhancement, LLC, an affiliate of Aegis. He has co-created a proprietary income-centric investment platform ...More encompassing all facets of income investing and centered on "off-the-run" client solutions. Serving HNW, UHNW, Endowments, Organizations and Family Offices, he helps steward over $2 billion of client assets.

***The opinions expressed by Mr Crouch are strictly his own and do not necessarily reflect those of Aegis Capital Corp, EXP Wealth Enhancement, LLC, or their affiliates. Nothing expressed constitutes an solicitation to buy or an offer to sell any particular investment or investment program. Any investment involves risk and may result in a loss of principal. Investors should carefully consider their own circumstances before making any investment or embarking on any investment program.***