It almost seems a certainty that a run on the bank is taking place.  This particular run is the wholesale repudiation of the sovereign debts of the PIGS, Portugal, Ireland, Greece, and Spain.  Where this ultimately ends seems to have a great significance.  Does it come back home to roost and result in interest rates rising dramatically in the U.S.?  That’s the big question, isn’t it?  There are only a few ways that this author can imagine.  Which scenario is most likely?

  1. Eurodollar continues to weaken as one after another country’s debt comes under attack.  If the EUCB continues to supply loans and credit to each sovereign nation, they in effect are printing money debasing the currency.  The Euro goes down in value.
  2. The populace of Germany revolt in principle as the stronger nations, ie; Germany, France guarantee the fiscal irresponsibility of their neighbors.  This is likely to happen.  Each time a bailout is considered, the outcome comes less and less certain.  This weakens the currency further.
  3. Finally these bailouts become untenable and the EUCB is forced to insist that future loans and bailouts consider a large measure of principal write-down.  The question then who is going to absorb the pain?  If the write-down is contained to the bond holders of the big banks that hold these bad loans, then the Euro could rise in value.  If the write-down pain is going to be shared, banks and sovereigns, then the picture is more clouded.  I would guess that Euro declines if perception is that certain countries debts will not be paid in full.    You would be less likely to hold debt at a low interest rate if there is some possibility you won’t get all your money back.

Why is this all important?  The path of the Eurodollar is extremely important to the profits of US multinationals as Europe is still the largest market for these companies and having a weak dollar vs. the Euro provides a good tailwind for US manufacturers.  If the Euro declines dramatically in value against the Dollar, then Cat tractors look cheaper and US food exports look cheaper than their Euro based counterparts.