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Thursday, 14 December 2017

Another Greek rescue summit; Happy anniversary money markets

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Europe opens with all eyes on the impending “Rescue Greece at any Price” summit and in the knowledge that France and Germany have agreed on a joint policy stance, whatever that might prove to be. Today might be the day when markets finally stop underestimating the political will to keep the Eurozone intact but it could also be the day on which politicians cease underestimating the markets’ ability to find them out.

While so many will be sitting like the rabbit in the head-lights awaiting news from Brussels they might easily have missed that yesterday, July 20th, saw the 4th anniversary of the day the money markets closed (although some might argue that it was July 19th).

Anthony Peters, SwissInvest Strategist

Anthony Peters, SwissInvest Strategist

The collective memory is of September 15th 2008, the day Lehman Brothers swapped 7th and West 49th for the history books. But it was the seizure of the money markets in July 2007 where it all began to go wrong or perhaps more accurately (and much more painfully for most), when everything which had gone wrong began the long and arduous process which persists to this day of being put right again.

The trigger in 2007 was a structured product fund run by BNP which closed to withdrawals as it declared that it could no longer accurately value the products it owned. Within 48 hours the money markets had effectively ceased operating and governments were obliged to pump billions into the markets in order to prevent the banking system from collapsing. On September 20th, Northern Rock threw in the towel by approaching the Bank of England for support and from then it only went downhill. Some might argue, and not at all without reason, that we are still in the throes of a post 2007/2008 dead-cat bounce and that if that is true, then it is the mother and father of all dead-cat bounces.


Man versus machine

Markets notoriously have the attention span of a gnat and spend their lives running around looking for something new and exciting to concentrate on rather than ever carrying one thought to a full conclusion. However, the risk of a double-dip recession can also be re-calibrated as the inevitable continuation of the last recession which was suspended as governments put the economy on a life support system fuelled by free money and the printing press.

What must be of concern to all economists is that, based on the amount of quantitative easing and other monetary freebies which were tossed in our general direction, we should be facing terrifying inflationary pressure – but we are not. I fear that neither markets nor authorities have learnt all that much from the past four years. The rhetoric is smarter but the actions aren’t.

The Iraq wars, both of them, taught us that in the age of ever more amazing and sophisticated technology, the most efficient and reliable tools in military intelligence remain a pair of human eyes. In markets, with all our pricing models, e-mail, Bloomberg IB overload and electronic trading platforms, the only way to find out where the market is to pick up a phone and to actually talk to somebody.

Part of the 2007 crisis was fed by people’s belief that the market was where the screens told them it was. I often cite the Citicorp raid on Euro-MTS as an example of how it was proved that liquidity and transparency are not the same thing – transparency says nothing of the depth of the market and it is depth that provides liquidity. The rest is just a fata morgana. Citi took a severe caning for exposing the truth. I receive thousands and thousands of prices every day and the vast majority of them don’t work. That’s transparency without liquidity…..but I digress.

We remain in waiting in the knowledge that Greece has defaulted. We might spray the pile of you know what green or we might spray it pink but it has, for all intents and purposes, defaulted.

Irrespective of what the Euro-summit agrees as a solution (and agree it will), likely the EFSF option, Greece is gone. A bond repurchasing facility provided by the EFSF which enables the Greek government to purchase its own debt in the market at a huge discount looks the niftiest variation but it takes us nowhere.

Nevertheless, a relief rally would naturally follow and this began overnight with the euro trading up to US$1.43.

There is huge confidence that we’ll get something out of Brussels which for a change might actually walk like a duck and talk like a duck. Whether the ratings agencies and ISDA agree that it is in fact a duck is a different matter altogether. So, just as the Bank of England’s instant support for the Northern Rock did not spell the end of the banking crisis, an agreement on a package for Greece will not bring the European sovereign debt crisis to a close either. 

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