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Sunday, 25 August 2019

On bailouts and getting bludgeoned into submission

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“Ed Fisher’s First Folio”, is a collection of cartoons published in The New Yorker in the late ’50s and early ’60s. There is one in my mind of two knights in armour comparing their shields. One is a simple per cross, the other is covered in highly complicated heraldic designs. The knight holding the complex shield is commenting “…and while they’re trying to work it out, I ride in and clobber them”. I feel as though the defence of the eurozone has gone that way.

Anthony Peters, SwissInvest Strategist

Please don’t get me wrong. In all my scepticism with respect to many of the systems and structures within the eurozone, I think you might find that I never formally suggested that the currency union would collectively fail. What I do feel though is that investors have been bludgeoned into submission.

Who can’t recall the day when St. Mario declared the euro would be defended, by doing “whatever it takes”. Thus, Sr. Draghi took the bears by the short and curlies and we have since then, one way or the other, been in recovery. Since then, Spanish 10 year yields have fallen from over 7½%to below 5% and Italian ones from just over 6½% to just above 4%. That has Italy trading at around 260 bps above Germany and Spain at 345 bps, give or take a few. Does this truly signify that the crisis is over?

Duebel demonstrates how once again losses are shovelled from left to right until people take their eye off them for long enough for them to be vanished onto the public sector balance sheet and eventually from there – my words – eventually into the pocket of the German tax-payer.

A little bit like Ed Fisher’s clever knight, the eurozone authorities have now created so many layers of bail-out that it appears to me that investors have raised their arms, have surrendered and that they have decided that they must follow that well trodden path where it becomes too expensive to stand in the way. I once worked on a trading floor with a poster on the wall which read “How do you ride a bear market? In the same way as you ride a bull market – in the direction in which it is going”. Spain and Greece underweights have been viciously expensive in the past six months and the reported enthusiastic participation by non-residents in the recent Italian bond sales smacks to me more of capitulation than raw enthusiasm. If you can’t beat ‘em, join ‘em.

I follow the work of Achim Duebel at FinPolConsult in Berlin with much interest - more interest than detailed understanding, I should add. Achim is a specialist on bank capital and appears to grasp even the minutiae of the way in which the eurozone banking system has been propped up. His opinion seems to engender ever so slightly the story of the little boy cycling past his mother calling “Look, mummy, no hands…”, only to return some time later crying “Look, mummy, no teeth….” Last Friday, he published a paper titled “After the ‘Whatever-it-takes’ Bail-out of Eurozone Bank Bondholders ” in which he argues that problems of European debt – public and private – have, one way or the other, not been resolved but merely elegantly glossed over, not least of all in the way in which bail-ins have been widely discussed but only scantly implemented.

We should know by now that our socio-economic system works on the base of promises that everyone’s a winner and Duebel demonstrates how once again losses are shovelled from left to right until people take their eye off them for long enough for them to be vanished onto the public sector balance sheet and eventually from there – my words – eventually into the pocket of the German tax-payer.

Bank on it

Alas, ours is not to reason why; ours is but to do and die. Banks are trumps. Bank stocks were the outstanding performers in 2012 as were both senior and subordinated debt. From not being able to give the stuff away, banks have become “must have” assets again which couldn’t come a minute too soon, given the amount of paper which needs to be refinanced this year.

However, from the debt perspective – I can’t speak for the equity markets – there is a need to own but precious little visible enthusiasm. Mind you, there seems to be a lack of it in all areas of credit. Yes, we’re doing deals – primary markets are not far off the run rate of this time last year – but there is no “fizz” in it.

I spoke to a senior credit strategist earlier on this week. We’ve been friends for fifteen years so we don’t mince words when talking about life, the universe, rugby and credit, and he alluded to how heavy the market feels. Yes, things are okay but there is a feel of weariness in the activity. I noted at the end of last year that rates markets and higher grade credit would barely be the asset class of choice for 2013. So far, so good but if my chum has the right finger on the right pulse, this is a better time to be selling than to be buying.

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