Black Swans and the hypothetic collapse of the Euro

The shock of last week in the Forex markets was so big that it made me reconsider some things.

If it happened to the Swiss franc, why would it not happen to other currencies?

After all, the franc is one of the major pairs. What condition should be met for that to happen?

Black Swan event Forex

There should be some sort of government intervention in the market, similar to the Swiss franc case or the pound in 1992. What means, any situation in which a country compromise to fix its currency to some other currency or asset, pursuing better economic conditions.

In the Swiss franc case, its central bank thought that the best they could do to stop their rising currency (as if it was a bad thing), was to peg it to the euro and devalue it artificially by buying euros and selling francs constantly.

All World currencies are intervened constantly. That is what the different national monetary policies are about. However, that kind of interventionism is done in a gradual way normally, making that prices trend in a, more or less, predictable way.

The problem arises when that interventionism reaches a higher grade and experiments like the franc and pound cases are tried.

The price of the currency is tried to be maintained in a narrow range. From that moment on, the currency stops being freely traded.

It would be an exchange rate control, similar to price or interest rates controls.

As any student of Austrian economics knows, all interventions are deemed to fail. In other words, those interventions may succeed, but only in order to create a bigger problem.

Black Swan Government

The logic of interventionism, perfectly explained by Von Mises in his book “Critics of interventionism”, lead to a growing set of interventions and regulations which create an even greater number of problems towards the end: a socialist society.

The fact is that this kinds of interventionist policies are never going to work.

The Swiss Central Bank tried to “devalue” its currency every day in a massive way, being the greatest speculator of all. To do that it had to accumulate euros and very dubious assets.

It is evident that when you try to keep the value of your currency by buying another asset in the market of less value, is not a good idea in the long-term.

There came a time when Swiss franc authorities realized that they might be buying assets of similar credit to that of the Zimbabwean dollar.

In view of the above, we should search what assets and currencies are more intervened in the markets. Therefore, at first sight we realize that every market is intervened in some way.

Nevertheless, the dollar and the pound do not have exchange rates controls.

Both currencies fluctuate in a, more or less, free way in the market.

There are other currencies that have that rate control like the Hong Kong Dollar, The Saudi riyal or Dannish krones. The latter is pegged to the euro and the first two are pegged to the dollar.

Do you think it is a good idea to trade those pairs?

It seems that you are facing a similar risk to that of the Swiss franc. However, the case that worries me the most is that of a very well known currency: the euro.

 

market intervention

 

Exchange rate controls, interventionism and the case of the euro.

The problem with the euro is not that it has an exchange rate control like the Swiss franc had. The problem is rather the fact that the euro is a massive exchange rate control itself. Nineteen countries are sharing it.

In theory, it seems that the euro is a very stable currency, and the house of one of the two main (yet, but not for long) economic areas of the World, Europe. But, the truth is that a common currency for such disparity between its members, from Germany to Greece.

How can this end well?

Is that not a massive form of interventionism?

Once you think it over, you realize that the euro area is under a permanent exchange rate control for nineteen societies.

Some years ago, Antal Fekete, wrote one of his best articles: “The year of the euro”. In that splendid paper he said that the European project would not work in the long-run.

He predicted that a chain was as strong as its weakest link, which in the case or the euro could be Greece. If it was not for the euro, the Greek drachma would be trading in a similar way to this:

An "eternal" bear trend for the Lira
An “eternal” bear trend for the Lira

Black Swan Europe

Although, as Fekete pointed out, the euro is a Trojan Horse for the subsequent introduction of communism by the backdoor, and I think that he is quite right. If that is the case, the euro is the prelude to a bigger interventionist experiment.

From that point of view, the euro should not break up since a totalitarian regime needs a single currency (the Mark of The Beast). However, that single currency could very well be something different from the euro, once the final drama plays out and everything goes to hell. But, that is another story.

Here, we are talking about the euro and its possible future stability as an international respected currency, and if something similar of what occurred to the franc could happen to it.

Black Swan credit crisis

Imagine a new credit crisis in Europe, and after the elections in some of the countries from the South of Europe, and with a strong bear market in the US, we find ourselves in a situation with the euro quoting at 0,9 against the dollar, and with the European public opinion strongly divided.

Spain, Italy, Portugal and Greece asking for further devaluations (and subsidies) and Germany, Holland, Finland and Austria asking for further and dramatic reforms.

In a scenery like that, and with worse conditions than in the last crisis, we should not rule out a political change of great dimension. It could be the countries of northern Europe expelling Greece from the euro; or Greece and Spain, or all Southern countries altogether.

Do you imagine what would happen to the euro forex rates if that occurred?

You can bet the gap in the market prices would be devastating for millions of traders and brokers accounts throughout the World. But, what if it is Germany that decides to leave the euro?

In both cases a major collapse of the forex market would occur. In the second case, the euro would spike 1000, 2000 or whoever knows how many pips. In the first case the euro would dramatically collapse further to 0.4 or 0.5.

The truth is that nobody (well, maybe there are some guys who know) knows what is going to happen, and it is still possible that none of it occurs and there is a total political integration of Europe, in what would be a truly prelude of the final totalitarian state.

The problem with the euro is that when the time comes, any scenario is possible: that of Germany leaving, or Greece leaving. It is true that the second scenario (the reckless states being expelled) is more likely, but you never know for sure. In the Swiss black swan it was quite certain that the move could only be for a big spike in the Franc, however nobody expected it so soon.

Black Swan risk European Union

The risk is quite big, so big actually; that I think that the best we could do is not to trade euro pairs. That, however, is not a very rational decision. It is no “rational” because if that black swan occurred (The ECB suddenly announcing that Greece and Spain leave the euro), a big deal of the World brokerage industry would go bankrupt. It is not the Swiss franc that is traded by a tiny % of people.

The EURUSD is traded by almost everybody.

Whatever the black swan is (long or short side), millions of day traders would go bust in a matter of seconds, and brokers would consequently go bankrupt. In that case, even if we do not trade the euro, we could not know if our broker is going to go bust. Would we recover our funds? I just do not know. And, even though, this is nothing more than speculations the chance is there.

There are coming very interesting years. The Swiss black swan will not be the last of this very long Depression.

In fact, it is not unlikely that we would deal with the mother of all black swans: the last contango in the Comex.

It is clear that things are never going the be the same as before

 

Thanks for reading and sharing.