Will the Euro Survive?

11/09/2011 10:45 am EST

Focus: GLOBAL

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Kathy Lien assess the challenges facing the Euro right now, and outlines what could happen if it does not survive, in this exclusive interview with MoneyShow.com.

Will the euro survive? let’s ask Kathy Lien. Hi Kathy.

Well, that’s a very good question. I mean, the euro has been here for a good number of years—you know, over a decade—and it’s been tested from many different directions.

I think there’s something people will have to remember when it comes to the euro, which is that there are a significant amount of benefits that we tend to forget, and especially in this type of environment where we’re seeing the challenges of having a single currency. At the end of the day though, for trade purposes, many countries have benefited from having the single currency.

If we remove the euro, you’re going to get a lot of these countries start to look more inward in terms of imports and exports and demand. You’re going to put back up those barriers that you took down. I think that that would present more problems than solutions for the euro.

At the same time, a lot of countries that are suffering right now—for example, Greece, and even to some degree Spain and Italy—they did not have the protection of the big brothers, namely Germany and France, and their relative stability in terms of fiscal finances. Their buyer cost would be through the roof, and they would be in even more severe problems than they are right now.

From the perspective of being able to get lower yields from the market, and than also the perspective of trade, there are plenty of reasons why these countries will fight aggressively to keep the euro intact. If the euro was to disappear, or if its viability was seriously challenged—basically we have the speculation for that to happen—that would basically lead to a very sharp sell-off in the euro-dollar, that would probably lead to a very strong inflationary corrections across the regions.

There are so many, I mean that’s just three reasons that I can list, and there are five others in my mind why they’re not going to abandon their euro. They’d sooner kick someone out of the euro than eliminate it completely.

How about if they’re going to kick out, who would we "voluntarily" withdraw? I’ve heard some talk about Italy…what do you think about that?

Well, the first one they want to kick out is Greece, because it’s kind of like the arm of the gangrene, you just need to cut it off and let it go so you can save the rest of the body. I think that problems do stand around Greece.

I don’t necessarily believe that Italy is a country that needs to drop out of the Eurozone. Granted, they do have very sluggish growth, and they also have very weak fiscal finances. They recently went back on some of their plans to bring down government spending, and they also decided to lower the threshold for some of the taxes that they were going to increase, so they’re problematic.

But right now this is a crisis of confidence, and the crisis of confidence is centered around the small countries. I think that if you were to eliminate Greece as an issue, and then just kind of leave the EFSF to protect Spain and Italy, that that would be sufficient.

How about Portugal?

Portugal…I think that’s kind of a budding problem as well, but the market is obsessed over Greece right now.

It has been for, what, two years?

Right. There’s a solution to Greece that could successfully ease a lot of the concerns in the markets, and then as a result bring the stability that will take the focus off of Italy and Portugal.

What is your probability that we’ll be able to fix this problem?

It’s not so much fixing the problem. It’s a matter of absorbing the costs of basically allowing Greece to write down their debt. There will be some initial pain, meaning that banks will have to take a tremendous amount of writedowns, there will be quite a bit of debt forgiveness of Greece’s kind of obligations. Once that initial pain is over, then there will be stability.

I think there is probably like an 85% to 90% chance that this is going to happen. Now it’s going to lead to volatility initially, because none of these banks will want to take these losses, and that would be reflected in earnings and things like that. And it wouldn’t necessarily be good for risk appetite in general. But that’s the only way that it can happen.

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