This series of questions and answers - which 2nd episode we now publish - was released in December 16, 2008 'GEAB N°30).

5. What are the major risks still weighting on the world financial system? And are all savings equal in front of the crisis?
LEAP/E2020: The risks weighing on the world financial system are now coming from the real economy on the one hand; and from the Dollar monetary system’s collapse on the other hand. So they are extremely serious. As anticipated in GEAB issues more than a year ago, after having been crushed by their own financial mistakes (subprime, derivatives, excessive leverage, …), the banks worldwide are now being directly hit by the consequences of the global recession (initially triggered by banks’ financial mistakes). Households and companies are now increasingly defaulting on their debt, together with a growing number of public authorities and states. So banks which were afraid lending money to one another last year, are now afraid of lending to anybody but the ‘safest’ states. This of course is directly affecting their revenues on the downside. The financial sector is heading for another year of major upheavals with more bankruptcies than in 2008.
Meanwhile, even the states which financial institutions (or individuals) may think ‘safe’ can provide huge surprises. As our readers know, LEAP/E2020 estimates that the US will default on its debt by Summer 2009. Such a situation will act as a ‘nuclear financial bomb’ wiping out some of the most prestigious financial institutions worldwide. As in 2007 and 2008, it is sufficient to identify which ones have the biggest exposure to US Dollar denominated assets (Treasury Bonds, Dollar, US corporate stocks, …) to have a good map of the existing risks. This situation also goes for UK and Switzerland. These two countries, which are two key pillars of the existing global financial system, are directly exposed in 2009.
Meanwhile, as anticipated in GEAB N°23, countries where the retirement system is based on pension funds are facing a major blow in the coming months. Already we are seeing in all these countries (essentially the USA, Canada, Japan, Denmark, and The Netherlands) that an increasing number of pension funds are announcing huge losses along with increasing contributions and reduced benefits. In these countries in 2009, the risk is very high that governments must start nationalizing those funds in order to prevent a total collapse of pensions of dozens of millions of pensioners. Pension funds will be in 2009 what mortgage institutions, hedge funds and investment banks were in 2008.
Those who stay cash for the time being, who are not tied up into stocks and who are away from assets of countries whose government may default are fine. The others should either move out rapidly, or be prepared to very bad news.

6. Is the Eurozone a true protection shield against the worst aspects of the crisis and what should the Eurozone do to improve its protection status?
LEAP/E2020: For several reasons mentioned in previous answers, the Eurozone is acting as the best protection against the current monetary/financial/economic tsunami. To resist the tsunami, some countries are sitting on multi-storey concrete buildings (as in the case of the Eurozone), while others have only ground-floor concrete buildings (Japan, China for instance), and others only ground-floor or multi-storey wooden buildings (USA, UK for instance). The analogy speaks by itself about which countries will suffer the most of the tsunami. The chart below shows that both the USA and the UK are rapidly moving up in the scale of default risks. With a currency disconnected from these two countries, the Eurozone is benefiting from a significant protection against any risk of contagion when both the USA and UK will default. Asia is much more exposed to these risks, as well as EU countries outside the Eurozone or Latin America.
But of course the Eurozone situation is far from perfect. There is an obvious need for regular meetings of the Eurozone summit now that it was gathered once last November. It should take place the day before every EU summit (every 4 months). There is a need for some kind of a Secretariat of the Eurozone which would coordinate economic policies and serve as daily interlocutor with the ECB on the one hand (in charge of monetary matters) and with the EU Commission & Parliament on the other hand (in charge of the whole EU area). These two “instruments” are pre-requisite in order to have a pro-active Eurozone rather than a reactive one. We think that 2009 will rapidly push forward such evolutions, therefore strengthening the Eurozone situation, for the following reasons:
- The new EU presidency will be held by the Czech Prime Minister whose country is not in the Eurozone, who is known to be Euroskeptical, whose presidency’s agenda has nothing to do with Eurozone countries’ priorities, and who is extremely unpopular in his country. These factors will naturally push for an increasing autonomy of the Eurozone which will have to find alternative ways, than the usual EU ones, to deal with its own priorities. As shown by the GlobalEurometer, a huge proportion of Europeans now support such an evolution (94% in December compared to 63% in October) and it will influence leaders’ choices.
- The increasing socio-economic pains carried out by the consequences of the crisis will growingly compel Eurozone leaders to look for innovative solutions which, inside the Eurozone, are all Eurozone common solutions.
- On a more psycho-political level, we can count on French President Sarkozy to keep on running after the idea of an autonomous Eurozone governance (chaired by himself of course). It will be so, not only because this is a very Gallic concept, but also because, deprived from his EU presidency’s aura and faced to the growing disillusion of his fellow citizens regarding his management of the crisis (as Gordon Brown is also about to discover in the coming weeks), he will seek for any significant political success enabling him to take some distance from the tough French socio-economic scene.

7. Is the Bretton Woods system (in its 1970s last version) currently collapsing? Should the Euro take the place of the Dollar?
LEAP/E2020: As mentioned already in previous answers, this crisis is indeed the terminal phase of the Bretton Woods system, 1944 version & 1971-76 version. The time of the Dollar as the unique currency for oil transactions, is reaching the end. As anticipated by our team at the beginning of 2006, from Russia to Iran, Venezuela, and soon the Gulf's petromonarchies, all oil producing countries are speeding up the pace of diversification out of the dollar for their transactions. The question is no longer whether the US Dollar will lose its status of single currency for oil transactions, but whether this evolution will happen ‘chaotically’, as it is the case now, or ‘in an organized way’. According to LEAP/E2020, the answer is clear: the evolution must be organized because current chaotic developments are partly responsible for the huge volatility of energy prices contributing to the general instability of our planet. And it is just as obvious for our researchers that everything must be done to avoid the Euro from being substituted to the US Dollar. Two reasons to this statement:
. on the one hand, being energy's sole exchange currency is a curse on the long-run, as proved by the United States today, because it carries a country along the way of facility and inadaptability to changes of reality, thus creating the conditions for severe crises to happen in the future for the country and its partners.
. on the other hand, for oil-producers themselves, this apparent simplicity conveys medium-to-long term problems of over-dependence on one country and one economy alone. Therefore it is in the interest of neither the Europeans nor oil-exporting countries to turn the Euro into the heir of the Dollar. On the contrary, it seems to our team that it is in everyone's most obvious interest to found the price of energy, oil in particular, on a global currency, based upon a basket of existing currencies reflecting at best the reality of the global economy and energy market. This basket of currencies could consist of currencies representing the main economies of the planet (Euro, Dollar, Yen, Yuan, Real...) and of the main energy producers (Ruble, future Gulf States common currency...), with a decennial assessment process allowing a rebalancing of the basket of currencies (and of power share at the global bank in charge of managing the global currency). According to LEAP/E2020, if such an initiative is not planned by mid-2009 at least, interweaving of Dollar and oil-price crises, plus the rapidly increasing massive US debt, will entail a serious aggravation of the global economic crisis and, as mentioned in previous GEABs, the breakdown of the international monetary system by Summer 2009.

8. What can be expected from the next G20 meeting in London?
LEAP/E2020: G20 meetings are showing that global economic and financial governance by the Anglosphere plus EU and Japan is over. Other players are getting into the game and will not get out from now on. But having said that, for the time being the new players still play by the old rules. This transition period should not last more than a year until the G20 starts operating as a new “engine” for global governance. This time will come when the G20 will directly address the core issue of “how to replace the US Dollar as the core of the international monetary system?”. Until then, it will only be a discussion forum.
Therefore we do not expect the next meeting in London to be more than that. Most probably, the 3rd meeting, if organized by Summer 2009, will start becoming something else. For that to happen, it must be organized outside the USA or UK (the two anchors of the collapsing financial system), Geneva or Vienna could be good locations, or Singapore or Tokyo. And it must put upfront the core question of the US Dollar on the table.
If the G20 is unable to anticipate the US government defaulting and the breakdown of the international monetary system by Summer 2009 as anticipated by LEAP/E2020, then the world will enter such a chaos that even the ability of the G20 to keep on existing as such will become a question.