Simon Johnson, is the former Chief Economist of the International Monetary Fund (IMF) and is now at MIT. Last month he wrote “The End of the Euro: A Survivor’s Guide.” Today on Bloomberg.com he writes that U.S. Banks Aren’t Nearly Ready for the Coming Euro Crisis.
Some of his thoughts on the matter:
Very few people seem to have gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exits, what you will receive is unclear.
They also need to worry a great deal about what the re-pricing risk will do to the world’s thinly capitalized and highly leveraged megabanks.
Simon’s article walks through a number of contract scenarios and resulting confusion that would likely play out. More ominously, he takes a look at the “Living Will” of J.P. Morgan and ponders what might happen in a euro break up which he describes as “an event that would easily be the financial crisis in world history.”
From an investment standpoint, the message is that U.S. investors can not just dismiss Euro concerns as an overseas event that will not drastically effect U.S. markets and the economy.
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