Update on Euro Crisis

What is the latest status of the Europe Crisis?  Is the market going to crash?  These are the questions on a lot of traders and investors' minds.

We have read a lot of stuff on the situation there from a lot of people.  Most people are confused, including Soros, but Soros seems to have written quite a bit on the topic and I'm trying to summarise his thoughts here.

Firstly, the Crisis, as we know, came about because Europe (and of course, US as well) has spent beyond their means, resulting in a lot of debts.  Some countries in the EU are weaker and some are stronger.  Some owe more debt and some less.  Of late, a few of those weaker countries are in for reckoning for the amounts they owed, Greece for example.  The fact that there is the EU means that they sink or swim together, giving rise to the fear that if Greece (or any of the PIIGS countries) go down, they may bring down the rest of the guys.

The Crisis came to a boil as all eyes are on Greece to see what would happen if they really default of their sovereign debts.  Almost everyone came to the conclusion (eventually) that the results would be catastrophic.  The next question is, how do they save Greece?  Soros' solution would be to set up a central credit body to bail out Greece.  This would mean all the EU countries would have to cooperate to set up this body to bail out Greece.  The confusion started when Angela Merkel, the PM of Germany, which everyone would agree is the strongest country in the EU, finally agreeing to the fact that Greece needs to be bailed out.  However, the rich in Germany (as well as many other richer countries) don't like the fact that their money would be used to bail someone out.  They would rather that someone sink for all they care.

If such an event is allowed to happen, Soros said that the result would be disastrous.  Almost everyone agrees with him.  That was why we saw the Dow and the European markets falling quite sharply over the past 3 months on these fears.

However, over the past week or so, the market suddenly became very optimistic as all the European leaders said that they are aware how critical the situation has become and they have vowed to solve the big problem together.

Now, if they can really sit down and work together as Soros mentioned right from the beginning, then the Crisis in Europe may finally be solved, at least for the next couple of years or so.

The next move right now would determine whether EU would be headed in the right direction in solving the problem.  If they are headed in the wrong direction (regardless of the fact that they are all now rowing the boat together), then the boat would still sink, and quite quickly as the default date nears.

Soros is saying that the next correct move would be for European governments to guarantee their banks (I think he's referring to deposits, loans and bonds) so that the banks in all of Europe will not have the possibility of collapsing.  He says that governments have the power to do that because they have the ultimate power to print.  However, Soros is saying that the EU countries right now are on the verge of making the wrong move of recapitalising the banks first.  The process of recapitalising the banks is crucial because the banks are not financially sound due to under-capitalisation.  However, the process of recapitalising banks is not an overnight one.  It takes time, and time is right now not on their side.  Soros says that countries should immediately issue a guarantee first, then recapitalise later.  These two steps will solve the whole EU Crisis, at least temporarily.  So, in the coming days or weeks, we will need to see this step taken to save the EU.

On a personal side, some of us, including myself, have taken short positions on EU and the US, believing that this Crisis and the accumulated debt problems are too big to be solved. If EU survives this round, it would mean serious damage to our trading account.  Having placed the bet (with or without stop loss), we would now have to just fold our arms and wait for the interesting outcome.

I still believe Europe would not be able to solve its problems, because some guys there may not believe Soros' analyses.  Even if they do, they may still be selfish enough not to help bail out their neighbours.  Our chances of doubling or tripling our money are still there, unless those guys really sit up and do exactly what Uncle Soros prescribed.