Tuesday, 6th December

A Special Report - The Euro Quakes

by Scott

EMERALD EARTHQUAKE

Ireland does not have earthquakes. There's the occasional minor tremblor every decade or three, but the place is geologically stable. So I never thought my earthquake disaster preparedness would come in handy.

The basic rules of earthquake survival are to build wood structures that can sway when the earth ripples. Have on hand two weeks of food and water. A camping stove is a useful implement, a first aid kit a must. I knew this because I looked out my back window at the San Andreas Fault in California. If it can sink San Francisco and Los Angeles, then I figured I'd better take some basic precautions.

It never ceases to amaze me how willfully ignorant some folks insist on remaining. Knowing that the most dangerous earthquake fault in North America sits the other side of their patios causes most folks to deliberately turn away. Que sera sera, whatever will be...

Sorry, that's not me. So, I'm giving you fair warning that I'm going to talk disaster preparedness. Go bury your head in the sand now.

Still with me? Then let's talk Euro, the financial equivalent of the San Andreas Fault.

THE FAULT LINE

Europe is rapidly slowing to a halt. In Ireland over the last week two huge business deals fell through because the overseas backers felt it was too much of a gamble to invest in the Eurozone. One set of investors was North American, the other Chinese. The money guys are closing the taps and whatever happens will come before too long. Many economists say we won't make it past Christmas.

There's an upcoming summit of EU leaders this December 8th and 9th. This will mark the 15th or 16th or some such ridiculous number of times that the lads have met to sort out the Euro problem. The problem is that credit has dried up and several sovereign governments look likely to default on their debts without a huge transfusion of cash.

The only ones with that sort of money to throw around are the Germans. And they don't want to be lumbered with the debts of Berlusconi's Italy, let alone those of Spain and Portugal and Greece and Ireland and now Belgium is looking weak...

Angela Merkel insists Germany will not prop up these peripheral profligates with a Eurobond. What's a Eurobond? It's a financial tool designed to ease money out of the pockets of the Germans and into the hands of the periphery.

If Merkel walks away from some form of German guarantee - call it what you will - then the risks of buying European debt will be reflected in the usurious rates that these nations will have to pay their neighbourhood loan sharks. The shylocks will demand a knee cap or a pound of flesh and pretty soon the price will get too steep for even the most daring borrower. Instead, they'll default.

This is what the economists say will happen. This is what Europe's Commissioner for Economic and Monetary Affairs Olli Rehn meant when he said "We have 10 days to save the Euro." The ten days are just about up because that summit I mentioned a few paragraphs back is coming right up. This week. Now!

In preparation, Angela Merkel and Nicolas Sarkozy have had more assignations than a college couple. They're thrashing out some kind of compromise that will be presented the rest of the Eurozone leaders this week.

Merkel has her own political problems. She has to sell any agreement to bail out the feckless PIIGS to her own people and she won't be able to do that if they haven't signed up to tighter fiscal controls. She wants a new European Union with new treaties ensuring that this mess doesn't happen again.

My bet is that the situation is so clearly desperate that Angie will get what she wants. The summit will probably stretch into Saturday and Sunday. If everyone agrees to kowtow to Germany's plan, the Euro will hold. For now.

If ever there was a time to kick the can down the road, this is it! In two years, Italy could get its act together, Ireland could kick into gear, anything might happen.

THE RUMBLE

But, if Angela doesn't get what she needs to bring her people with her, then she'll walk out that summit door and the Euro will collapse. It might take a week or two, but I'd bet on a fairly instant reaction. Anyone with significant holdings of peripheral debt will try to get their money out because they know they're not going to get paid the full amount. Beyond that, I leave it to the economists to lay out the scenarios.

Common sense says Angela won't walk away. But, it's come down to that. A single person walking out the wrong door could sink the Euro.

THE EARTHQUAKE KIT

People everywhere have the same reaction to a disaster.

1. Pick up the kids from school.
2. Head for the grocery store and buy anything you can lay your hands on.
3. Fill up the gas tank.
4. Go to the bank and/or ATM and get your hands on as much money as you can.

I watched this happen with the Cuban Missle Crisis in 1961 - before ATM's existed, mind you - and again and again after natural disasters. We all watched it happen when war threatened the Iraqis and most recently after the earthquake and tsunami in Japan.

The collapse of a multinational currency is likely to produce a similar response. My advice is to pray it won't happen but to be prepared, just as for an earthquake. I do NOT advocate cashing out and buying gold or taking similar huge moves. When everyone comes out of that summit all smiles you'll feel pretty foolish.

I am no fortune teller. I bet the Euro will be "saved", at least long enough to limp along a few more months. So, speak to your financial adviser before doing anything drastic.

What I'm talking about is getting your euro-quake kit together. The premise is that, just like in a tremblor, you only have to hold on long enough for help to reach you. After a few fearful days, everything will settle down again. It's just that the world will be different. Think New York one week after 9-11. Nothing is the same - everything's the same.

What I'm recommending is being able to hold on for one week. That's a safe margin for governments to shut down the banks, re-issue some new form of national currency and for some sort of normalcy to return.

So, here are the basics of the kit.

• Lay in a few extra gallons of water.
• Keep the cars full of petrol during this week. When they drop below 2/3rd full, get a top up.
• Stock some extra food - enough to get through a week. Don't do exotic - just normal stuff.
• Top up home heating oil if it's lower than halfway.
• Buy some extra bags of coal.
• Make sure there's extra toilet paper, sanitary pads, and such.
• Fill medicine prescriptions promptly.
• Put some cash in the cookie jar - lower denominations like 10's and 20's.

If commerce comes to a complete halt for a few days and no one is willing to accept money because they have no idea what that money is really worth - then you have to be able to ride out a few days of "bank holiday".

There are going to be lines of worried people if the worst comes to pass. You don't want to be part of that scene. You want to be home. It will sort itself out at the most basic level - I need formula and diapers for my baby, open that store! - and you want to be out of the way if the atmosphere proves insalubrious.

Don't go crazy. Just be prepared.

EARTHQUAKE PROOFING YOUR SAVINGS

Unfortunately, if Angela chooses Door Number One when she needed to pick Door Number Two, it's going to be a LOT harder to preserve your savings.

What happens if the banks collapse and the government's deposit insurance is needed? Here's an instructive lesson from November 2009. A private Dutch bank, DSB, failed after a spooked public withdrew nearly three quarters of a billion Euro in just 12 days. You can read about it at the BBC site - http://news.bbc.co.uk/2/hi/business/8323991.stm Commentators say that this bank's situation was unique.

Most savers were caught short. They got only an initial payment of €3,000 per depositor. The rest was tied up in litigation and red tape. As in the Dutch situation, it could take a while to get your hands on your money. How long can you hold your breath?

If there's a run on the banks and a full scale panic, what they're likely to do around Europe is close all the banks for 3 to 5 days. During that time all cash in the vaults will probably be stamped with a physical, ink stamp designating it as Nua Punt or somesuch. That's what the economists interviewed tell us. Then, the banks will re-open after 3 to 5 days and the public will be able to withdraw funds but now only Nua Punt. All the monies in accounts in Ireland - and this includes Ulster Bank, Rabobank, and Danske Bank - will be denominated in Nua Punt - or whatever they call such a reestablished Irish currency.

If the Irish government is unable to fulfill its guarantee, they'll put brakes on withdrawals just as happened DSB bank in Holland. At that point, it would be good to have money in Ulster Bank or RaboDirect or Danske Bank, which are guaranteed by England, Holland and Denmark. Such funds might be more accessible if the contagion hasn't spread as deeply to these societies. Maybe. But, no matter what, all Euro in any of these banks operating in Ireland will now be denominated as Nua Punt.

The real problem is that the Nua Punt will be guaranteed by a government which is so deep in debt that it will never climb out, and no Eurozone to backstop it. So, the value of the Nua Punt will drop in comparison to the New Deutschmark and the British pound and the dollar and the yen and remimbi. It is from these nations that the bulk of Irish imports comes. If the Nua Punt falls in value by 50pc, then suddenly all goods from these countries will cost the Irish 50% more.

And since Ireland imports most of what is consumed here, there will be a HUGE spike in the cost of living. People will stop buying pretty much everything that isn't essential. The internal economy will probably take a nose-dive.

However, companies making exports will enjoy bumper business since our products will be cheaper. Whether that will result in more jobs is an open question since we've seen the world's wealth be hijacked by an increasingly small percentage of earthlings.

Those Irish people who have had the foresight to pile up their funds in cash will probably get hit as well. These folks will want to travel to Germany to hand in their 10,000 euro in 50 euro notes in exchange for German New Deutschmarks. But, I've seen in the Netherlands how access to the banks is tightly controlled and I have to assume such controls would be put in place everywhere.

For example, there could be a rule that anything more than 1,000 euro can only be cashed out in a bank in your home country. Present ID please. Or, you may cash old notes only where you have an account. So, if you already have a German account, then you're okay but someone off the street is not. In the Netherlands I know that the only way you can open and maintain a bank account is to prove that you are a resident of the Netherlands. If Germany has such rules or institutes them, then the game is up. There will be short term loopholes, but I wouldn't count on cash Euro notes being a safe haven.

The crash of the Euro would be such a tremendous event that I think no place could count itself safe from contagion. Antarctica maybe. I'll bet on the Irish to keep their feet on the ground in the midst of this catastrophe, but the same will be happening all over Europe. Within days that will feed through to the bubble Chinese economy which is decelerating rapidly as is. The US might like to think it won't be affected, but US banks, overextended hedge funds, sovereign debt gamblers will all take enormous hits.

APOCALYPTO?

How realistic is this little game? Like I said, it's come down to a single person making a decision yea or nay. Right now! This week! I do believe the answer will be yea - but I'm willing to buy an extra bag of coal this week and get my prescriptions filled a few days early.

There's no harm in being prepared. Especially when the rumbling is so very loud.

Scott

Banking & Transferring Money

Warning: Ireland's banks are in the ha'penny place.

This is a traditional way of stating that they're not exactly flush with cash. That's because their top execs kept their eyes on the quarterly returns and share price and bet that the property bubble would go on long enough for them to retire with generous bonuses.

Almost, guys.

The biggest messer of the lot did end up retiring with a 26 million euro pension, but it turns out that the taxpayers are giving him that money, not his bank. That's because his bank is now nationalised.

No hard feelings, though. We'll just close a few more schools and cut back on hospital beds to pay this well earned retirement fund.

Bank Fees

Irish banks are among the most scrooge-like on the planet. Fees charged are, shall we say, "generous"?

A few years ago AIB, the biggest of them all, flushed $671 million dollars down the toilet in a rogue trader scandal. Yet, they still managed to celebrate their most rewarding financial year ever - and the directors awarded themselves big bonuses for their excellent oversight. You'll understand how they managed this trick when you get your bank statement.

In 2009, AIB went deep into the red and most of the top layer have retired to their south-of-France villas. The government, that is, the taxpayer, is shoveling thousands of millions of euro down the bank toilet, but fees remain as high as ever. Gotta keep these banks afloat no matter what!

DJ, a subscriber, learned quickly: "The only real problem I've found are with the banks! OMG!! I walked into the bank, and while its looks are modern and high-tech, I found that I had actually walked through a time hole and smack dab into 1985. So, no ATMs can take deposits. I have to go into the bank every time I want to put money in the bank, and if it's a check, then it could take up to a week to 'clear'. And .28 cents for EVERY transaction?!?! When I heard this I stopped the man and asked, "Define transaction." He simply responded, "Well, anything you do. Deposit, transfer, use Laser card, use the ATM. But look at all this free stuff we give you..."

Opening a Bank Account, Transferring Money, Tax Free Non-Resident's Accounts, Bank Credit Ratings, Deposit Insurance, Playing it Safe and lots more...

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