IFR IMF/World Bank Report 2014
Playground rules - The collaborative effort of European governments and regulators is akin to children rushing around the school playground with a football. Enthusiasm and no lack of skill are undermined by issues of translation and the fierce desire of all to score the winning goal.
The result is certainly diverting but not entirely confidence inducing.
Take the struggles of Europe’s financial minds to build credible and workable regulation to enable the stress tests that were seen as crucial to stabilising the eurozone banking sector. If this was a lesson in policymaking, it fell well short of textbook, moving from the hapless Committee of European Banking Supervisors through the European Banking Authority to the European Central Bank.
Central banks and regulators have also struggled to talk the same language in the debate about how to help non-financials, with the ECB keen to support SME funding via securitisation and repeatedly calling for changes to rules on ABS.
On rates the strategies of the ECB and Fed could not be more different, for the first time since 1997–98. Europe looks set to enable the games to continue with further loosening through 2015, just as the Fed picks up its ball and heads home for tea.
It stretches the school analogy to breaking point to suggest the events in Russia, Ukraine and the Middle East are mere fisticuffs in the playground, yet behaviour in the emerging and frontier markets is broadly on the up.
Latin America’s capital markets are back in the good books, Sub-Saharan African sovereigns are outperforming while the new man, India’s prime minister Narendra Modi, is definitely the teacher’s pet – for now. EMs are also becoming more attractive to each other, thanks to global reach of a credit ratings industry that has not only weathered the fallout from the financial crisis, in which it played a lead role, but has arguably grown in relevance as a result.
Yet the European chaos may yet produce the correct result. While the formula for stress testing was initially ridiculed for being as strict as a substitute teacher, the process has ultimately yielded a more nuanced approach to bank crises, risk and thorny questions such as the bailout. The contrast with the US’s decisive Federal Deposit Insurance Corporation may be striking, but the European approach is premised on a fairly realistic assessment of behaviour in a climate in which liquidity, anyway, is in short supply. Banks are inherently unpredictable – and you can’t push them too quickly.
It is this nuanced and – dare one say – relaxed approach to punishing capital (what might in fact be called “capital punishment”) that helps to put into context the eurozone periphery’s surprising good humour when it comes to sovereign debt. A year ago Ireland, Portugal, Greece and Spain were looking decidedly queasy – today they seem to be full of beans as they prepare to feast on the market. So far even bad news on growth has failed to spoil appetites as it brings closer the real prospect of quantitative easing.
Children, it seems, will be children – with few limits to their imagination when it comes to ensuring that the adults don’t ruin their fun. Take Europe’s playful enthusiasm for CoCos – bespoke – and, to some, over-complex – they may be, but never underestimate the propensity of youngsters to embark suddenly in radically different directions at exactly the same time. They are, in short, a force of nature.