Two collapses

Nouriel Roubini finally latches onto the fact of the collapsing European currency:

So given these three options are unlikely, there is really only one other way to restore competitiveness and growth on the periphery: leave the euro, go back to national currencies and achieve a massive nominal and real depreciation. After all, in all those emerging market financial crises that restored growth a move to flexible exchange rates was necessary and unavoidable on top of official liquidity, austerity and reform and, in some cases, debt restructuring and reduction.

Of course today the idea of leaving the euro is treated as inconceivable, even in Athens and Lisbon. Exit would impose big trade losses on the rest of the eurozone, via major real depreciation and capital losses on the creditor core, in much the same way as Argentina’s “pesification” of its dollar debt did during its last crisis.

Yet scenarios that are treated as inconceivable today may not be so far-fetched five years from now, especially if some of the periphery economies stagnate. The eurozone was glued together by the convergence of low real interest rates sustaining growth, the hope that reforms could maintain convergence; and the prospect of eventual fiscal and political union. But now convergence is gone, reform is stalled, while fiscal and political union is a distant dream.

Greece’s credit rating was recently reduced to CCC. Ireland and Portugal aren’t much better off. Spain is also in serious trouble. But just as Roubini has been late on the developing eurodisaster, he’s probably too generous in thinking that it’s going to take five years for nations to begin leaving the Euro.

Complicating matters is the fact that it looks like the U.S. mortgage scandal is on the verge of entering the next stage, which threatens both the banking industry and the housing market. As usual, Karl Denninger has the details at the Market Ticker:

The principal issue ripe for determination by this Court, and which was left unaddressed by the majority in Matter of MERSCORP (id.), is whether MERS, as nominee and mortgagee for purposes of recording, can assign the right to foreclose upon a mortgage to a plaintiff in a foreclosure action absent MERS’s right to, or possession of, the actual underlying promissory note. However, as “nominee,”MERS’s authority was limited to only those powers which were specifically conferred to it and authorized by the lender (see Black’s Law Dictionary 1076 [8th ed 2004] [defining a nominee as “(a) person designated to act in place of another, (usually) in a very limited way”]). Hence, although the consolidation agreement gave MERS the right to assign the mortgages themselves, it did not specifically give MERS the right to assign the underlying notes, and the assignment of the notes was thus beyond MERS’s authority as nominee or agent of the lender.

It’s only a small matter of something like 60% of all US mortgages. But the court has noted that it’s unlikely to be impressed by the “too big to fail” defense. “This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not yield to expediency and the convenience of lending institutions.” It’s about time. But the fact that the various crashes and cleanups are absolutely necessary doesn’t mean they are going to be a lot of fun for everyone.

To put in perspective the seriousness of the present situation, consider the current interest rates on various two-year government bonds, (the price of government borrowing), as of June 15, 2011. Higher interest rates indicate an anticipated increased degree of risk.

0.445 USA
0.767 USA 2010

25.628 Greece
8.637 Greece 2010

11.621 Portugal
3.090 Portugal 2010

3.402 Spain
2.946 Spain 2010

1.586 Germany
0.511 Germany 2010