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Breakup of the Euro? Germany Wants a Divorce

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After much initial hesitation, the Irish finally agreed on a “rescue package” over the previous weekend. At first glance it looks like the worst is behind them, but it’s not. Ireland’s public debt will now top out at 130%, so in plain English the fundamentals have not improved. Nonetheless, the ECB is trying to sell this latest “rescue package” as the ultimate solution, or “mission accomplished” if you will. The international loan which the ECB brokered grants Ireland an interest rate of 5.8%, but that’s only on the surface, since Ireland couldn’t repay the debt immediately without causing quite a stir of Irish discontent and frustration.
But well, Ireland’s generous lenders are anything but a good Samaritan driven by charitable motives. The international loan is first and foremost a good business deal for the international group of lenders.
The structure of the Irish deal has been cut out in a way that interest and principal payments the bondholders will add up to nearly 10% of the country’s national income.
This way, painful austerity measures across the board will become the ‘new normal’ for Ireland and this will translate at best to an anemic growth rate of near zero, or even worse, a harsh economic decline.
Without robust growth, the share of Ireland’s debt to GDP will keep growing and once the payments kick in, they will cripple the economy even further.
Also, drastic cost-cutting measures won’t be popular with the Irish constituency. The ECB and the German government have created a marketable “solution” driven by short-term populism instead of finding a sustainable and viable path to growth. The ink on the deal might not have yet dried when early next year the new Irish government could opt to reject the deal brokered by its predecessor.

A vicious cycle ahead for Ireland

In a pre-Euro era Ireland would go about devaluing its currency. But this option is no longer available to Ireland as a member of the Euro zone. The fact that the ECB, which is conveniently headquartered in Frankfurt, Germany, and the German government insisted on severe cuts is a clear sign of total ignorance of rather basic economic theory. Whoever is putting the Keynesian “paradox of thrift” to a test in the middle of the biggest recession in almost a century is in for a rude awakening. Austerity, while unavoidable in light of the current sentiment, will put a damper on the aggregate demand and choke off both consumption and economic growth. The more Ireland succeeds in cutting wages and costs the less the Irish will be able to spend (on German imports, too), the more Ireland’s GDP will fall. The more the GDP falls, the higher a share of it will be due bondholders. The higher the payments in relation to the national income, the more Ireland will have to tighten the belt to come up with the money, setting in motion a vicious cycle of ever more austerity.

Estland’s economy has recently shrunk by a whopping 30% following a similar self-imposed recipe for economic disaster. What makes the ECB think this scenario is not going to repeat itself and render the payment schedule all but obsolete?

Germany’s Chancellor Angela Merkel has reportedly announced that Germany was prepared to leave the Eurozone. So long as Germany keeps bankrolling the periphery, the periphery probably won’t mind.

The New Credit Card Rules: Winners and Losers

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On its surface, introducing new credit card regulations to clamp down on abusive practices seemed a clear-cut solution. Once new credit card regulations take effect, so went the thinking, borrowers would no longer be fair game.

Sudden interest rate hikes, exorbitant fees and some other annoying credit card “features” have been tamed by new regulation. But as banks are phasing out outlawed fees, they are putting in place a new type of fee which is still legal.

Use it or lose it!

Using credit cards for emergencies only is no longer an option. “Use it or lose it” is the new credo of credit card issuers. Now that banks can’t charge inactivity fees to improve profitability they now simply close idle accounts.

Whoever piled on huge amounts of debt on their credit cards is being watched carefully. Should the risk profile of a card holder rapidly deteriorate, they will get a fair warning before the lender can hike the rate. Changes to your interest rate must be announced at least 45 days in advance. On the flip side, banks may not be willing to extend credit when in doubt, given that they can’t get paid for any additional risk for as long as one and a half months.

Forget paper statements, go digital now

Don’t wait for printed bank statements in the mail. Of course you still have to check thoroughly all the mail from your bank(s), but in most cases you can stay on top of your bank accounts with your Mac or PC, iPhone, BlackBerry or Android smartphones.

Online banking and budgeting tools are now en vogue. Comparing prices and fees in this changing landscape is a must, too:

index credit cards

But for many distressed Americans, credit card debt might be more than they can afford right now. Many families have been paying down their card debt aggressively. Still many homeowners have now only negative equity but also more revolving debt on their hands than they can possibly handle. If you are in this category start paying down bad debt immediately. Start with the debt which you can pay off the quickest while keeping up minimum payments on everything else, and once you wipe it out, apply the payment to your next debt, and so on. Forget the interest rate. The fewer balls you need to keep in the air, the easier your financial life will be.