Feliz Zulauf was interview by King World News over the weekend and offered some excellent macro insights on the situation in Europe.  The Swiss macro money manager, unfortunately, has been right about the Euro’s developments over the last few years and has a very dire outlook.  He says the periphery is entering a periphery that will eventually lead to several nations leaving the currency union:

“I think the periphery goes into depression.  When you look at a country like Greece, it’s now been in recession for three years.  GDP is probably down 15% from the top.  The stock market is down 90%, which is the equivalent of 1929 to 1932 in the US.  This is depression-like.

…Then I expect next year one country, probably three, will exit the euro.  That will make 2012 very interesting because there are no rules on how to exit the euro.  A country exiting the euro means the next day, when they exit, their banking system is bust.  That means the banking system has to be immediately nationalized in a new currency.

They introduce a new currency, they nationalize the banking system, and then, of course, the government is also bust.  Then the government will default.  That’s what you have to expect next year.  I think Greece will do so and Portugal and Ireland are candidates also.”

Listen to the full interview here.

Source: King World News


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • http://www.conventionalwisdumb.com Conventional Wisdumb


    What happens to the capital that leaves the country and is held as Euros in other countries’ banks? Can there be a forced repatriation?

    Assuming the above comes to pass. Isn’t it entirely rational for any citizen with financial assets to flee their country’s banking system?

    Scary because no matter what you do as a citizen of one of the country’s in question you put yourself or your country’s banking system at risk.

    There are anecdotal reports that there is already a run on Greek banks and if this spreads across Europe the fear could really cause a meltdown that is entirely self-fulfilling.

    If people lose faith in the currency then it really does become a terrifying prospect.

  • chris

    “They introduce a new currency, they nationalize the banking system, and then, of course, the government is also bust. Then the government will default. That’s what you have to expect next year. I think Greece will do so and Portugal and Ireland are candidates also.”

    agree, but i think ireland is going to think it through in advance and get help from the UK.

    after all, ireland’s banks are already nationalized, so that makes things just a little simpler when they return to the punt.

  • Greedsgood

    From a paper I read last year detailing what an exit might look like:

    Scenario 2: Greece Leaves the Euro
    If Athens were able to control its monetary policy, it would ostensibly be able to “solve” the two major problems currently plaguing the Greek economy.
    First, Athens could ease its financing problems substantially. The Greek central bank could print money and purchase government debt, bypassing the
    credit markets. Second, reintroducing its currency would allow Athens to then devalue it, which would stimulate external demand for Greek exports and
    spur economic growth. This would obviate the need to undergo painful “internal devaluation” via austerity measures that the Greeks have been forced
    to impose as a condition for their bailout by the International Monetary Fund (IMF) and the EU.
    If Athens were to reinstitute its national currency with the goal of being able to control monetary policy, however, the government would first have to
    get its national currency circulating (a necessary condition for devaluation).
    The first practical problem is that no one is going to want this new currency, principally because it would be clear that the government would only be
    reintroducing it to devalue it. Unlike during the Eurozone accession process – where participation was motivated by the actual and perceived benefits
    of adopting a strong/stable currency and receiving lower interest rates, new funds and the ability to transact in many more places – “de-euroizing”
    offers no such incentives for market participants:
    The drachma would not be a store of value, given that the objective in reintroducing it is to reduce its value.
    The drachma would likely only be accepted within Greece, and even there it would not be accepted everywhere – a condition likely to persist for
    some time.

    Reinstituting the drachma unilaterally would likely see Greece cast out of the eurozone, and therefore also the European Union as per rules
    explained above.

    The government would essentially be asking investors and its own population to sign a social contract that the government clearly intends to abrogate
    in the future, if not immediately once it is able to. Therefore, the only way to get the currency circulating would be by force.
    The goal would not be to convert every euro-denominated asset into drachmas but rather to get a sufficiently large chunk of the assets so that the
    government could jumpstart the drachma’s circulation. To be done effectively, the government would want to minimize the amount of money that couldescape conversion by either being withdrawn or transferred into asset classes easy to conceal from discovery and appropriation. This would require
    capital controls and shutting down banks and likely also physical force to prevent even more chaos on the streets of Athens than seen at present.
    Once the money was locked down, the government would then forcibly convert banks’ holdings by literally replacing banks’ holdings with a similar amount in the national currency. Greeks could then only withdraw their funds in newly issued drachmas that the government gave the banks to service
    those requests. At the same time, all government spending/payments would be made in the national currency, boosting circulation. The government
    also would have to show willingness to prosecute anyone using euros on the black market, lest the newly instituted drachma become completely

    Since nobody save the government would want to do this, at the first hint that the government would be moving in this direction, the first thing the
    Greeks will want to do is withdraw all funds from any institution where their wealth would be at risk. Similarly, the first thing that investors would do -and remember that Greece is as capital-poor as Germany is capital-rich – is cut all exposure. This would require that the forcible conversion becoordinated and definitive, and most important, it would need to be as unexpected as possible.

    Realistically, the only way to make this transition without completely unhinging the Greek economy and shredding Greece’s social fabric would be to
    coordinate with organizations that could provide assistance and oversight. If the IMF, ECB or eurozone member states were to coordinate the
    transition period and perhaps provide some backing for the national currency’s value during that transition period, the chances of a less-thancompletely-disruptive transition would increase.

    It is difficult to imagine circumstances under which such support would not dwarf the 110 billion euro bailout already on the table. For if Europe’s
    populations are so resistant to the Greek bailout now, what would they think about their governments assuming even more risk by propping up a former
    eurozone country’s entire financial system so that the country could escape its debt responsibilities to the rest of the eurozone?

  • Greedsgood

    Sorry for the poor tabs – did not see it in the comments WYSIWYG

  • Max

    Next year? Nah, it won’t happen that fast. The authorities can hold things together as long as nobody blames the Euro for their suffering (so far, so good).

  • http://skunkmonger.blogspot.com Mark Baker

    That’s the $64 question. Why would anyone or any company leave its money in a Greek bank? Or Portuguese bank?

  • anon

    CW, its a little more than anecdotal reports – deposits in Greek banks have fallen 30% or more in the last year – that’s a staggering amount.

    As you allude to, we’ve got a situation where individuals are fearful of a bad event happening and are thus rationally acting in their own best interests. Sadly, those actions serve to only INCREASE the chances of that bad event actually occurring!

  • Andrew P

    I don’t think any EU State other than Ireland is leaving the Euro. The Euro will be greatly restructured somehow, but no one else has any chance of leaving. There is no upside to leaving for the Greeks or the Portuguese. Ireland’s problems are not structural, but instead were forced onto them by the EU, which required Ireland to bail out its banks. Also, Ireland is an island, and is the second smallest of the EuroZone States. Ireland does so much trade with the US that they could actually do better if they went back to the Punt, especially if they invited the US Military to stay there. [They may have to do the latter to forestall EU revenge against their secession, since the EU might try to put Ireland under military occupation.]

  • Andrew P

    Faith in the currency is not the same thing as faith in the banks of any State, ore even all of them. The currency could be fine even if most of the banks go under.

    The UK banks could go under too since they are leveraged to 600% of UK GDP.

  • Andrew P

    Forced repatriation can happen under an international agreement, or if the EU simply waves a big enough stick to make other countries comply with its orders. If you want to safeguard your assets, you might have to leave the country in question completely. And even that may not be enough. For instance, if you leave the US, the IRS will still tax your worldwide income for 10 more years. The US looks upon people who renounce US Citizenship as the lowest form of scum, and pursues them to the ends of the earth.

  • Colin, S.Toe

    Cullen, or any of the Europe experts: If you get a chance, I’d encourage you to take a look

    http://www.ecb.int/pub/pdf/mobu/mb201110en.pdf (Section on ‘Target2, p. 36ff)

  • Colin, S.Toe

    Sorry, broken post… a look at the sites cited by Anton’s comment in an earlier posting.

    They seem to indicate that the central banks of EZ countries like Greece can act in a limited fashion as ‘currency issuers’ by running up a ‘tab’ with the ECB which has no limit in size or time for repayment. According to the second paper, this balance as of 9/11 represented about a quarter of Greek public debt (ca 115 billion Euros). Specifically, this amount covers their current account deficit plus any ‘capital flight’, which has recently been accelerating (Italy’s balance also appears to show recent expansion reflecting similar flight).

    if this analysis is correct, all countries like Germany can do is try to bully and bluster countries like Greece into limiting increases in these balances. Essentially their only credible threat is to abrogate the agreed upon rules, which would ostensibly ‘trigger the doomeday device’ and blow up the Euro. Conversely, Greece would have a strong disincentive to voluntarily leave the Euro – and there may be no legal way to force them out involuntarily.

  • Misthos

    I moved to Greece from the US just over a year ago. My observations:

    The Depression, yes, it’s a depression, is accelerating. Stores shutting down, people working for no pay, spending down, defaults up, etc….

    Compared to last year, talk of the drachma is growing. The Euro is increasingly being looked upon as a cause of the crisis. I am surprised at how many people in Greece today, compared to just a year ago, believe that a weak drachma is better than a strong Euro. People are understanding, in their own way, the concept of floating exchange rates and economic competitiveness.

    The worsening economic outlook in Greece is feeding into something else – let’s call it “currency nationalism.” It’s on the rise.

  • Trixie

    Colin, you need a profile pic of sorts. May I suggest Billy Jack?

  • SC

    LOL…”under military occupation”.Begs the question can their solitary soldier be in two places at one time.The EU can wage alot of things ,but war or similar isn’t on the list.We are talking about the nanny state of all time here.

  • http://jamesgoodeonthemoney.blogspot.com/ OntheMoney

    Interesting Misthos. I’m beginning to wonder if the political coup engineered by eurozone chiefs and bankers in Greece and Italy isn’t eventually going to provoke a lethal democratic backlash.

    Will these unelected prime ministers command any loyalty when times get tough in Italy, or even tougher in Greece? Once these eurocrats are seen to have tried austerity and failed, they will have zero legitimacy and the trap door will surely open. It’s not hard to imagine what could happen next.

    How long before some charismatic, tub-thumping nationalist leader emerges who latches on to the growing anti-euro mood? Someone who’s genuinely prepared to open the exit doors at 30,000 feet? Assuming austerity fails, isn’t that historically well-trodden path the path we’re on?

  • Colin, S.Toe

    I may have to mash an ice cream cone in your face, unless you (or somebody else) addresses my question.

    Anton’s comment seemed to throw a significant wrinkle into the Euro dilemma as it has been portrayed from an MMT perspective (with the peripherals, being, rather than just hapless, in a position. along with the core, to hold the system hostage via a threat of ‘Mutally Assured Destruction’).

    Among other things, it makes it possible that Merkel, and perhaps others, do have a real understanding of the currency dilemma, but can see no realistic solution under the current system. Hence, rewriting the rules and moving toward a full fiscal union may be more than just a ploy or a move toward German domination of the eurozone, but the only option she can see to save it.

  • Misthos

    OnTheMoney, good points you bring up.

    I remember an article by Simon Johnson in the Atlantic: “The Quiet Coup” where he describes the financial sector capturing the US Government. Well, in Italy and Greece, we have had effectively a financial junta – open for all to see. These “technocrats” have a brief window to change things. Are they there to address the human cost of the crisis? Or to save the banks regardless of the human cost?

    Europeans, especially southern Europeans, do not fear their government – it’s the other way around – the government fears the people. Just look at how they take to the streets in protest. Furthermore, under a Parliamentary system, a government can collapse overnight if the masses get really pissed off. This is what European policymakers are facing. This is the challenge – incremental federalization verse an ongoing deflationary collapse with all its political and social ramifications.

    Which process is faster? The deflation of the southern periphery or the “federalization of Europe? It’s a race. Time is running out.

  • Colin, S.Toe

    My understanding of Anton’s comment and the articles he cites, is that the NCB’s have a limited power, under the treaties (Target2), to issue currency, but this is enough to cover their country’s current account deficit, plus capital flight (in a way that is consistent with MMT principles).

    If these spiral out of control (as one could argue, has been building for some time with trade imbalances, while capital flight may be currently in the process of exploding), this essentially would put the NCB’s of surplus countries on the hook for unlimited amounts. This would make the German response more than just a ‘fit of petulence’, and far more understandable.

    The bottom line would be that arguing who is more to blame for the current impasse is pointless. Major structural change may be needed to save the Eurozone (and possibly avoid something close to ‘MAD’ – if there is no way to undo it without catastrophic consequences).

  • http://www.pragcap.com Cullen Roche

    Yes, but my understanding is that currency issuance must be done in accordance with ECB approval. And let’s not forget who really runs the ECB….

  • Colin, S.Toe

    That’s really the crux of my question: the references make it appear that this ‘approval’ to issue currency is automatic in specific situations according to the Target2 rules, and not dependent on the discretion of ECB eurocrats. Am I misunderstanding this?

    It looks to me that these rules were designed by people that did have an MMT style theoretical understanding of ‘currency issuance’, to distribute this capacity in a limited and controlled way, between the various EZ countries and their NCB’s. The problem is that in practice, this mechanism has not proved adequate to control the system.

    Because of this design flaw, all the EZ countries can view others as transgressors, and themselves as victims; but all are locked into an unworkable system.

  • Ming the Merciless

    Scenario schnenario!

    You all forget about Argentina!

    That nation of thieves and robbers beggared everyone that invested and loaned money there, stealing thus a trillion or two, then they defaulted and are selling their resources cash on the barrel head, fat as pig in shit, they even have the luxury of nominating a prostitute as President for life!!!Fat, of course, we are talking of Argie Oligarchs, the oi polloi of Argentina is living off dumpsters as we speak!

    Try that anywhere else and you will be nuked…fact Mexico did in the past and was invaded quite a few times…

  • Trixie

    I’m lost, link to Anton’s comments? You know how I am…

  • Colin, S.Toe

    Trixie, I think it was near the end of the ‘EU Council – No Bazooka’ post (It might have been “Europe has been Saved -‘; see under ‘Popular Stories’ on right of home page).

    However, look at the papers, I’ve re-cited above. The section on ‘Target2′ in the EU bulletin, and the other paper are short, and mercifully easy to understand. They make it appear that the peripherals can at least cover their current account deficits plus capital flight, just by following the rules that allow them to run up a ‘tab’ of unlimited size and duration with the ECB.

  • Trixie

    Yes, yes, ok. I remember this now. Unlimited ability to run overdrafts at the ECB…

    And I remember at the time thinking I wanted to get back to this issue, but never did. Thanks for the reminder, will read up more on it.

  • http://roycobden.blogspot.com/ Roy Cobden

    Being “trapped” in a currency in which they have no control (the Euro) is arguably destroying what little chance of recovery nations like Greece have.

    Hanging on by a thread from one bailout to the next – Sorry – one POSTPONEMENT of the inevitable to the next – is a fools game.

    Does ANYONE seriously think that Germany can or will keep throwing what remains of it’s wealth into charitable donations to a bunch of bankrupt spendthrifts for the next decade?!

  • Trixie

    Colin I started a forum post on this to see if we can get a conversation going, I’d really like to understand this better as well. Head over there at (WITH A PIC):


  • Gerald P

    Argentina is a good starting model, but Greece and Ireland Have the advantage of being really small populations in compact countries. Enough people know each other to understand a financial extremity for a popular overwhelming response, i.e. dump the euro and systematically introduce the new currency, to devalue it. Exports and tourism could soar.

  • Gary_UK

    Let’s hear it for the Euro, the only currency in the world that will not bow to the demands of weak government for QE.

    Sorry Europe, life’s gonna get hard, but you’ll be better off in the long run for taking the hit now.

    Just a year or two max before (in no particular order) Japan, the UK and the US see their poor worthless currencies wither away to nothing.

  • GCT

    Demand for gold and silver is also up in Europe. Why not put your Euros’s in gold and keep enough Euro’s in the bank if you have the wealth to do that? I have some reports from friends living there alot of folks were doing that. What does the government do outlaw PM’s? I do not think they will be able to confiscate it.

    Agree Roy they are trapped and cannot control their destiny right now. I hate to type this but why should they worry right now when they can continue to spend as long as the Northern contries continue to give them money. Greece has not hit a target yet.

  • marx-reloaded

    Good insights, Misthos. And let’s not forget that some countries have a longer history of Left radicalism than others. Whereas a “nationalist” leader in Germany or the U.S. might be assumed to represent a swing to the right, in Greece this could very well portend a dramatic swing to the radical left. Dont a majority of Greeks favor a coalition government that includes the KKE (Communisty Party of Greece)?

    Radicals are dusting off the old Bolshevik theories of the “weakest link”…

  • Roger Erickson

    everyone who can is angling to do what Jim Rogers advises

    Buy Emerging Market Stocks After Their ‘Final Collapses’: Rogers

    “emerging” being an obvious euphemism for the Acropolis, etc

  • chris

    here’s a discussion that gets to the point of target2 asset generation at surplus ncbs and liability creation at deficit ncbs: http://ftalphaville.ft.com/blog/2011/12/13/796341/the-imf-as-the-ecbs-unsecured-borrower-of-last-resort/

    there is also discussion there of the importance of freeing up collateral to grease these skids…hence finding the only unsecured lender in the world, the imf.

    maybe i am thinking a little simplistically about this, but what makes buba think it will ever get paid back? wouldn’t the ecb have to keystroke buba at the end of the day?

  • Colin S.

    My question may boil down to how, under EZ/U rules, currency can be transmitted from an NCB into the national economy.

    For instance, if a Greek or Italian bank, under liquidity pressure from capital flight, can post government bonds as collateral to obtain Euros at par from the NCB (accounted as an ‘overdraft’ at the ECB), then effectively the risk of default will have been transferred to the European Central Banking System (thus providing a roundabout backstop for sovereign debt).

    I’m hoping Cullen or one of the other Euro heavyweights will weigh in on this again, but I’ll post this comment (sans pic) on the forum as well.

  • chris

    thought this was interesting; is there an ecb?: http://ineteconomics.org/blog/money-view/there-ecb

    see especially Perry G. Mehrling’s comment at the bottom

  • Colin S.

    Thanks, Chris.

    As has been the case in the past, Kaminska is writing at the limit of my capacity to follow (“Not only can it act as a CCP for the NCBs, being the IMF, it could do so without requiring collateral in exchange, easing the existing collateral crunch considerably” – what is a ‘CCP’?); but she appears to be addressing the issue at hand.

    Moreover, it links to another of her postings:


    This cites an example almost identical to the hypothetical one I posed in my reply to Trixie, in which a Greek Government Bond serves as collateral for a ‘Target2 Claim’ – resulting from a Greek resident’s transfer of capital to a Frankfurt bank. (I was afraid I’d get laughed out of PragCap when I thought up my example, for not knowing what I was talking about.)

    In addition, according to this and the Lancsster paper, the ETSF and SMP programs are not offering German charity to the periphery, rather they are alternative ways of dealing with what the BundesBank is already liable for under Target2.

  • Trixie

    Great link Chris, thanks. I’m currently working on this paper, which instinctively seems to make more sense to me as I sort through the details:


    From the paper:

    There are good reasons for worrying about the risk exposure of the
    ECB/Eurosystem. There also are solid grounds for being concerned about large and
    persistent current account deficits and government deficits. However, we argue that linking these legitimate concerns to the emergence and persistence of growing net liabilities of euro area periphery central banks to Target2, and to large and growth net credit positions of the Bundesbank is unwarranted – conceptually/analytically and empirically.


    cc: Colin S. Toe

  • chris

    @ colin

    and people think lawyers use too much jargon!

    i always try to summarize and simplify when i read difficult stuff, not to dumb it down, but to gauge how much i retain.

    my take away is that buba is all in, as the penultimate backstop to the eurozone; the ultimate backstop is the german taxpayer.

    now, one might say that because the ecb can print euros, then buba has nothing to fear, it will always be paid back on its target2 credit extensions.

    except that, increasingly, euros are becoming less fungible. while a euro note in german and greece are identical, a german bank deposit of one euro is quite different than a greek euro bank deposit.

    so increasingly, i think what you will see is buba preferring bunds to anything else euro-denominated, including payables from deficit ncbs. this will cause germany to continue to say nein to eurobonds and anything that truly amounts to a fiscal transfer union. they are already in a euro payments union and they don’t like it much.

  • chris


    saw colin’s post before yours. my reply to colin’s post sums up my reaction to your post as well.

    not mmt orthodoxy (not that i care one whit), but then the ecb is not an orthodox central bank.

  • Trixie

    Yep, yep, understood. But far be it for me to NOT jump into the conversation after 6 minutes of research. ;)

    I’ll be back.

  • Colin S.

    Check out the second Kaminska piece (cited in my reply to Chris), before you concur that the ‘Target2′ imbalances are much ado about nothing.

    Cullen? Lance? somebody – help!!!

  • chris


    here is a reply piece to the argument contained in the second ftalphaville blogpost you cite: http://www.voxeu.org/index.php?q=node/7416

    i find this reply unconvincing. to me, just as it was troubling that the eurozone current account imbalances developed between the north and south to such a degree, i think it is troubling that the eurozone is being funded by this target2 payments system that has gone into such imbalance.

    the author of this reply seems to think that since the system accounting is in balance, not to worry. guess you could have said the same thing about the current account imbalances, but you would have been wrong.

  • Trixie

    Got it, Colin. I have a pretty good idea when I’ve just been dismissed. Ain’t no thang. Ironically enough, I was simply trying to help further the discussion, even if I didn’t immediately draw your same conclusions. Or any conclusion for that matter, as I was sorting through the details myself. Your response is telling coming from someone who consistently encourages the free exchange of ideas.

    Coincidentally, after reading the different perspectives, I really DO concur that Target2 imbalances are much ado about nothing. Good luck with it though.

  • Colin S.

    Oh dear, Trixie. “dismissed”? Not at all. I was hoping that you were joining the effort to figure what this ‘Target2′ business was all about.

    But I was assuming you’d need more than “6 minutes of research” to get up to speed (or else you should be looking for the ‘Higgs boson’ rather than wasting your time on this stuff. At this point, chasing after that sounds appealing compared to trying to understand this Euro-mess.)

    Chris’es citations did clear up one piece of confusion on my part: the Target2 transactions do not appear to entail a net creation of Euros.

    Thus, the Euros obtained by a Greek bank from its NCB are ‘transferred’ from a surplus NCB, which ‘sterilizes’ the drain on its reserves by selling an asset or taking in a deposit, and thus removing the same amount of Euros from circulation. Moreover, in the hypothetical example, a Greek resident is withdrawing the Euros in order to deposit them in a German bank, so they are back in the country of origin.

    Other than the ‘Target2 Claim’ being added to the Greek NCB’s liabilities and the German NCB’s assets, the main net effect is that, assuming a Greek government bond was used as collateral, that sovereign debt is now held by the European Central Banking system (likely in exchange for a more solid asset to the private sector).

    If capital flight from the periphery is in fact occurring, it sounds like this could quickly lead to a breakdown of the Target2 payment system, on top of everything else.

    (PS: Just because the end of the world may be at hand, there is no need to get all emotional about it.)

  • Colin S.

    The Whelan and Buiter pieces you and Trixie cite do not appear to contradict that the risk on peripheral sovereign debt can be transferred to the European Central Banking System via ‘Target2′ transactions – which is what I originally thought the Germans would have valid reason to be concerned about. (It appears that such debt, used as collateral, may take a ‘haircut’ – with some confusion about who retains ‘ownership’ in the example: the ‘Greek resident’, or the Greek commercial bank? – certainly not the BundesBank.)

    There is stark disagreement with the Kaminska pieces about whether the BundesBank has been selling assets in relation to ‘Target2 Claims’ and on the wider issue of whether a shortage of collateral due to the increased imbalances is posing a threat to this payment system.

    However, there also seems to be agreement that, one way or another, capital flight could add significantly to the problems of the EZ.

  • Ben Wolf

    Then I guess I’d better prepare for the worst.