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Emac's Bottom Line

Breakup of the United States of Europe

Emac's Bottom LineFOXBusiness

We are now witnessing the beginning stages of the break up of the United States of Europe, as Greeces recent attempt to raise more money via a bond auction came up short.

That means the U.S. Federal Reserve may see more action with its euro-dollar swap lines. In fact, the Fed has kept open its dollar swap lines, renewing them in June until August 2012. The way it works is, a foreign bank in Europe sells a slug of its euros to the Federal Reserve in exchange for dollars -- the foreign bank then agrees to repurchase its currency on a specified future date. This is literally dollar printing.

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The United States of Europe was always a rickety construct, with no single Treasury Dept. and no single tax collector to back it, just the Triple-A ratings of countries like Germany and France. Europe cant get its act together. Germany doesnt want Eurobonds, which is effectively issuing more debt to fix a debt crisis, because those bonds would push up Germanys borrowing costs, plus ruin its Triple-A rating.

Surveys show Germans are fed up with the Eurozone, they ask, Why should we pay when others break the rules? Why hasnt Greece been booted out already for cheating?

After all, Great Britain was (thankfully) booted out of the European exchange rate mechanism in 1992 after it couldnt keep the sterling above its agreed limit -- thats when financier George Soros made an estimated $1 billion shorting the sterling.

Meanwhile, German businessmen now want to break the euro into a northern and southern currency. The northern quadrant would have all of Europes Triple-A countries. (S&P still has a triple-A rating on Austria, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden, Switzerland, Liechtenstein, and Luxembourg.)

Have faith, though, weve seen sovereign debt crises before, in Mexico, Russia, Asia and Argentina. This is a slow motion crisis that the market is pricing in. Expect more bank turmoil through next year.

And expect to see more Federal Reserve euro-dollar swaps in coming days if Greece potentially defaults. Europes bailout mechanism is small, at just $620 billion, $400 billion of which is already committed to problem countries like Greece. Meanwhile, European bank funding needs are a whopping $2.5 trillion over the next three years. Italy has 1.9 trillion in euro debt, making it too big to fail.

French bank Societe General just announced it plans to rely more heavily for short-term liquidity needs on euro-dollar swap lines, as U.S. money market funds pull out of lending to European banks with high exposure to Greece and other teetering European countries.

Even the Bank of International Settlements already noted last year that dollar swap lines between the U.S. and four other central banks -- literally dollar printing by the Federal Reserve -- were very effective in relieving stresses in foreign exchange markets during the financial crisis of 2008.

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