Nov 30 2011
Canary in a Coal Mine
By Allen G. Yee
Have you ever wondered what the saying “canary in a coal mine” meant or where it originated? In the early 20th century, canaries served as sentinels and were brought into coal mines to serve as early-warning signals for toxic gases such as methane and carbon monoxide. A bit of a crude method of detection before the advent of electronic gas monitors, yet decidedly necessary. As these small birds became ill or died, it prompted miners to escape or put on respirators.
For those of you that follow my posts or frequently read financial publications, you know that businesses love to use analogies. In this analogy, the part of the fragile, yellow bird in the depths of the coal mine will be played by Greece. And the dark and toxic coal mine is referring to the European Union. However, while we are laying out the setting of our analogy, it is important to note that there is other government debt, including the United States that could represent other coal mines. Sovereign European debt concerns surfaced in late 2009 as the term PIGS (Portugal, Italy, Greece, Spain) was coined. Since then, Greece has been leading the way with its continued sick debt issues. On November 3, 2011, Greek two-year bond yields surged over 100% for the first time. This is a clear indicator that investors are signaling the demise of Greek debt, i.e. they will default. And as Greece, the canary, becomes sicker the question is who’s next and what does the European Union do? The who’s next part is fairly easy…everybody except Germany. Which leads to what Germany/EU will do?
Does anyone think that Germany has been sitting idle while everything has been unraveling around them and contagion spreading? Staying consistent with our analogy, Germany may be looking to take a bigger leadership role over the miners, or escape from the coal mine altogether. With so much to at stake, it’s obviously conceivable that Germany would be calculating a means of either increasing their position in the EU or creating a way to leave the union. I recently read an article on Seeking Alpha titled Report: Germans About To Launch Bomb Within Heart Of Europe. In a nut shell the article outlines Germany’s power play move – In order to continue their support, Germany will insist on changing the voting mechanism within the ECB Governing Council. Currently, each member has one vote irrespective to size, GDP, etc. The Germans will push to have that vote changed to be representative of GDP, under which they would have 27 votes out of 100, and France would have 21. This would in essence give Germany and France (along with another ally) control of the ECB (European Central Bank) and dictate policy to the other member states. However, it seems unlikely that the ECB would entertain such move. Yet, perhaps that is what the Germans are hoping for, paving a path for Germany’s exodus of EU.
I think that the current discussion of the EU’s problems create more questions than answers. What if Germany’s tactic doesn’t work? Will this ultimately cause the demise of the EU? What happens to the EU if Germany leaves? What happens to the Euro (currency)? In my opinion, there is no easy or quick resolution to this mess. The fear of contagion will continue to rock the Euro (currency) and could trade at parity to the dollar in the next year. The uncertainty along with the possibility of sovereign government default will cause havoc in the markets.
Sources:
Seeking Alpha – http://seekingalpha.com/article/307732-report-germans-about-to-launch-bomb-within-heart-of-europe?ifp=0&source=email_the_daily_dispatch
Greek Bond Yields – http://www.businessweek.com/news/2011-11-03/greek-yield-rises-over-100-italian-bonds-drop-on-eu-ultimatum.html
