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Two notes.

...The four horseman of the carry trade apocalypse - Deleveraging, Risk Aversion, Growth Differentials and the Dollar's Reserve Currency Status...

...the Currency Reserve argument is one until it isn't...

I'd say it is already crumbling. Yet another indication, which I quoted in the Salon, too:

Bloomberg.com: Currencies

Dec. 17 (Bloomberg) -- Ecuador's default on $3.9 billion of international bonds means it's only a matter of time before the country drops the U.S. dollar as its currency, Goldman Sachs Group Inc. says.

Ecuador's use of the dollar gives President Rafael Correa no outlet for providing credit to the economy as access to foreign financing dries up and revenue from sales of oil, the nation's biggest export, tumbles. Correa, a critic of so-called dollarization, also may use the default as an excuse to abandon the policy, said Alberto Ramos, a Latin America economist with Goldman Sachs in New York.

European sovereign bonds offer an alternative but inferior safe haven because of the European bond market's fragmentation and exposure to emerging Europe.

(My emphasis.) This newsletter article may have been written by Roubini himself -- who may be under the impression of his stay in Hungary just when the financial crisis hit there a month ago. But, I think he is overestimating that (existing) risk.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Dec 18th, 2008 at 12:41:36 PM EST
Didn't people see how quickly and without hesitation the ECB came to the help of Hungary with large facilities? Outsiders (read non-continentals, aka English speaking people) just keep on underestimating the political component of the EU, and the very strong solidarity it means even if there is no short term economic case for it

The EU is not an economic or financial union, but that passes right over the heads of the analysts in London or NY.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Dec 18th, 2008 at 01:10:28 PM EST
[ Parent ]
Exactly. The EU is about solidarity, a concept these people can't really seem to fit into their heads.

Now, it's not just solidarity for its own sake, because deep down somewhere everyone knows that without solidarity in Europe we will eventually lose peace in Europe, and no one wants to go back to that. At all.

That's what the Union is all about.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Dec 18th, 2008 at 01:22:40 PM EST
[ Parent ]
To the contrary, Roubini did see that, but he also saw that the credit risks here were in large part that of West European companies. That's what I mean by him overestimating the risks. I'll see if I can dig up an interview with Roubini made at the time.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Dec 18th, 2008 at 01:29:31 PM EST
[ Parent ]
That's whatwhere I mean by him overestimating the risks.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Dec 18th, 2008 at 03:07:27 PM EST
[ Parent ]
I found it -- turns out it was in English on Forbes rather than the interview with Intex.hu. Here is the part on the ECB's help to Hungary:

A Goulash Meltdown? - Forbes.com

Second, the government has access to 5 billion euros that were made available by the European Central Bank in a swap operation. The willingness of the ECB to "bail out" a country that is not yet a member of the Euro zone is significant, and points to the concerns European Monetary Union members now have about the disruptive effects of a crisis in Hungary.

Also, the ECB liquidity support, unlike the conditional International Monetary Fund loans, comes without any strings attached. The additional issues caused by the ECB action, however, are important: If the financial pressures intensify and 5 billion euros is not enough, would the ECB lend more? Will the ECB do similar swaps with other emerging European economies that are likely candidates, in the next few years, for EMU membership? Should Hungary use this additional international liquidity to prevent a further depreciation of its currency, or should it save this ammunition in case things get worse?

Further, on the foreign ownership connection:

Since the Hungarian operations of foreign banks are profitable, it should not be in their interests to roll off their exposure to Hungary. On the other hand, many European banks have their own domestic stresses, given the financial turmoil in the Euro zone, and their need to deleverage and reduce risk exposure is leading to destabilizing pro-cyclical behavior toward their emerging Europe subsidiaries. This pro-cyclicality of the credit behavior of foreign banks in emerging markets is a well-known phenomenon in the empirical academic literature on this subject.

(I won't comment any of this now, but if you read all of that article, I note that even Roubini strikes me as more a conventional free-marketer.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Dec 18th, 2008 at 02:00:40 PM EST
[ Parent ]

The willingness of the ECB to "bail out" a country that is not yet a member of the Euro zone is significant, and points to the concerns European Monetary Union members now have about the disruptive effects of a crisis in Hungary.

He sees it as a defensive move to protect the eurozone (ie a self-interested decision) rather a move to actually help Hungary. That's what I mean by seeing it through a purely economic lense.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Dec 18th, 2008 at 03:22:54 PM EST
[ Parent ]
Well, you've got that, but you have to give he saw how quickly and without hesitation the ECB came to the help of Hungary with large facilities, and that there was a short term economic case for it...

More to the point, what do you think of his claim that the risk of a domino effect across the new EU members could overwhelm the ECB's resources? (I think he is mistaken about the size of the default risk, but wqonder what's your take.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Dec 18th, 2008 at 03:36:06 PM EST
[ Parent ]
The size of the economies of the periphery is too small to have an impact on the eurozone.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Dec 18th, 2008 at 03:57:58 PM EST
[ Parent ]
Uhm... the domino effect across the periphery Roubini envisions. The Eurozone is not a domino in this, "just" something affected. What do you mean 'not having an impact'? There is always an impact, the question is its size and nature. (Note that trade with the new members is quite significant since 2005, expecially for Germany.) For our purposes, the question is: how much higher an emergency credit liquidity package can the ECB assemble than the €5 billion put together for Hungary only? And how could the need to put together a say €150 billion package affect its other activities?

(My take is that even Hungary is/was not in danger of exhausting this cushion, much less the rest of the new members, but that may not be your take or from where you approach this question.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Dec 18th, 2008 at 06:08:59 PM EST
[ Parent ]
(...English speaking people) just keep on underestimating the political component of the EU, and the very strong solidarity it means...)
Yes!  And the political component of political-economy will remained banned until these clowns have been driven from positions of influence.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Dec 18th, 2008 at 03:15:35 PM EST
[ Parent ]

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