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Monday, 23 October 2017

A humble bond salesman could save the Eurozone

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It is now rather old news that the authorities have lost confidence in the markets and also that the markets have lost confidence in the authorities. What is new news is that – based on the mother and father of all bungee jumps which bonds, equities and currencies jointly performed over the Italian scare yesterday – markets have now also lost confidence in themselves.

With an intra-day bottom-to-top move of just over 6 1/2% on the MIB – the index closed the day up 1.18% – the last vestiges of rationality departed without even saying good-bye.

If you took out all the research pieces which have landed in your in-box in the past 24 hours and read a dozen of them, you’d find 20 suggestions as to what is to happen next.

Anthony Peters, SwissInvest Strategist

Anthony Peters, SwissInvest Strategist

I always look forward to John Plender’s columns in the FT, for he has one of the best brains when it comes to cutting through the nonsense and delivering lucid and understandable analyses of whatever he turns his mind to. He does the same again today with his take on the Eurozone mess (registration required) but he too stops at the edge of the cliff, at the bottom of which lies, maybe but hopefully, the solution to the crisis. Perhaps the best and most incisive analysis I’ve seen comes from a humble bond salesman. To call Steve Beck of Citi a humble bond salesman would be a bit like calling Warren Buffet a Midwestern pensioner.

Steve has already enjoyed a full and successful career as a US Treasury trader and had put on and reversed most trades while the current crop were still trying to select which GCSEs they were going to take and were hoping Santa would bring them a Gameboy for Christmas.

In a privately distributed note yesterday under the title of “Tous pour un, un pour tous!!“, Steve wrote:

“Rather like when you hoist up a huge stone in the garden and see multiple forms of insect life scurrying away from the light, this is as much a crisis about sclerotic policy co-ordination within the Eurozone as it is about liquidity. The longer they have dithered, the more the navel gazing has turned to the bigger fish than Portugal, Ireland or Greece. In point of fact - if they do go down the route of common issuance at some point (the sooner the better, even though Europeans don’t do “shock & awe” very well), the longer they take, the more the Eurozone as a brand is sullied - and after the speed at which Murdoch closed down the News of the World, you’d think someone would pay attention…
Someone, somewhere, will have to come up with a catchy acronym name for the issuance that doesn’t leave investors grimacing at the very mention of the word Euro…….”

While Anatole Kaletzky is writing some polemic nonsense in the Times (subscription required) that we’re off to a single United States of Europe before the year is out, Steve gets is right. Set up a single funding agency, take national accounts out of the eye of market scrutiny and let the agency control behind closed doors who gets how much money and at what price. Reverse the trend to dis-intermediation.

Take a look at Eurofima, that treasury operation of the railway industry which is hidden away in a little seventeenth century burgher house in Basel. It is AAA/Aaa rated, it is jointly and severally guaranteed by its shareholders and it borrows at the finest rates in the market. How much it lends to the likes of Hungarian National Railways or Greek National Railways and at what rate is nobody’s business and so far as I can tell nobody has ever asked. It could probably, if it wanted, lend to some members below its own funding cost, so long as the interest earned on the loan book exceeded interest paid (please, I am not insinuating, because I don’t know). Its balance sheet would be, horror of horrors, a bit like a CDO in reverse.

 


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