November 25, 2007

In the immortal words of Joey Lawrence, "Whoa!"

The dollar too low, or the Euro way, waaaaay overvalued? Listen to American academics worried about the cost of their Provence rentals, it's the former: listen to the head of the Eurozone's most high profile manufacturer, it's the latter:

As Airbus chief Thomas Enders warned in a speech to the Hamburg workers last night, Europe's champion plane-maker - the symbol of European unification, in the words or ex-French president Jacques Chirac -- is now facing a "life-threatening" crisis.

Mr Enders said the company's business model is "no longer viable", and "massive losses" are on the horizon. So much for all those currency hedges that analysts like to cite. Have they ever tried to buy a currency hedge? They would discover how expensive these instruments are. Hedges cannot protect a company with $220bn in delivery contracts priced in dollars, when the euro/sterling cost-base is leaping into the stratosphere.

The sudden rocketing in sovereign bond spreads this week between core German Bunds and Club Med debt - Italian, French, Spanish, Portuguese, Greek, as well as Irish, Belgian and Slovenian - is a clear sign that markets are starting to price in a break-up risk for the single currency, however remote. Italian spreads have risen beyond the danger point of 40 basis points. This is less than the 100bp or so seen in Quebec (viz Ontario debt) when it looked as if the separatists might prevail. But it is dangerous nevertheless.

I'll confess to not really understanding the third paragraph: Keith, Lou, any ideas?

Posted by Steve-O at November 25, 2007 08:34 AM | TrackBack

The third para indicates that bonds issued by Germany enjoy better pricing than those of other, less fiscally prudent EU members. So when some member states have to pay substantially higher rates than other EU members it implies that the "union" really isn't one. I wouldn't make too much of it.

Posted by: flashman at November 25, 2007 02:43 PM

Another point of view is that the sh** is about to hit the fan, in terms of monetary policies. Dangerous when tribal rivalries of Euro-peein's are pitted against one another. It is possible that a big fall of the Yoo-row is a'comin, along with a reset of debt. We don't have a Treaty of Versaille to worry about but there are other similarities to the early 20th century.

Hold on to your hats, boys.

Dan Patterson
Arrogant Infidel

Posted by: Dan Patterson at November 26, 2007 09:44 AM