Tuesday, 24 April 2018

On Big Bazookas, ultimate deterrents and tough Tories

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Enter stage, left – the Big Bazooka. Today brings the inception of the European Stability Mechanism, the ESM, the Eurozone’s permanent bail-out fund. Yep, five hundred billion crispy new euros aimed at knocking all sceptics off their respective plinths.

Anthony Peters, SwissInvest Strategist

Alas, the idea at the time of conception was that there would be so much contingent rescue money that the markets would cease attacking weaker eurozone members due to the presence of excess cash to sort out any potential problem. The hope, I suppose, was that the fund would make shorting sovereign credits too risky a trade.

Well, when the ESM was originally announced to either back up or replace EFSF, depending on how you saw it at the time, the world was a different place. Spain and Italy were distant problems which many thought would never emerge and France was a proxy for Germany.

I do have to take my hat off to the authorities for, two and a half years into the eurozone debt crisis, the edifice is not only still standing but it also continued to defy its detractors

Wags have already re-dubbed the ESM as the European Non-Economic Market Assistance package – or ENEMA for short. There is (I can already see the acerbic comments from enthusiasts) a level of scepticism as to whether this is the correct or ultimate solution. The Big Bazooka was supposed to be here as the quintessential deterrent, not as a weapon to be fired. Now the talk is about the ability of the ESM to deal with Spain – or at least by those harbouring the firm belief that the Spanish bail-out is a matter of when rather than if - and questions being raised with respect to the financial stability of Italy and now, quite openly, of France too.

I often find myself being accused of being anti-euro. That I am not. However, I never felt comfortable with the widely held view that any country which was a member of the Eurozone had became more or less credit-equal with Germany. The rampant growth of public sector indebtedness across all member states and the price at which such money was being made available by the banks and by investors to the borrowers is now clearly over.

So, after a period of “everyone into the pool, everyone out of the pool”, the ESM was aimed at keeping the bathers in the water by convincing them that the large fish was not a shark and that if it were, it would be well fed and have no teeth.

I do have to take my hat off to the authorities for, two and a half years into the eurozone debt crisis, the edifice is not only still standing but it also continued to defy its detractors by not looking as though it is about to fall over. At around $1.3000, it is within a few percentage points of its lifetime average exchange rate to the dollar, albeit that this is probably as much a function of dollar weakness as it is of euro strength.

Tory punishment

Over here, in the UK, we have the pleasure of the annual Conservative Party conference. It is dubbed the “Nasty Party” because it has a chancellor who voices such outrageous suggestions as only spending what it takes in. The press rhetoric is hard for me to fathom. The word which recurs is “punish” – are the poor to be punished for failing by having their benefits cut or are the rich to be punished for succeeding by being taxed more harshly? The Conservatives stand accused of one while Labour is accused of the other.

In broad brush strokes – very broad ones, I hasten to add – the Conservatives represent those who pay and the Labour Party those who receive. Please, representing is not to be confused with voting one way or the other. The Conservatives might be seen as representing only the rich minority but if that were the case, it would never garner a majority. Funny that, eh?

Chancellor of the Exchequer George Osborne, hate-figure-in-chief, has made it clear that a further £10bn has to be cut out of the welfare budget. This is not popular but he is patently aware that he does not have an ESM to bail him out if it all goes wrong. So far the austerity policies have not really bitten as debt is still rising at an unsustainable rate. The country continues to live above its means – a champagne lifestyle on a lemonade budget – and he is giving his damnedest to address that matter. Shooting the doctor who makes the diagnosis does not make the disease go away.

So we gradually move into mid-October with an increasing awareness that the global recovery, were it ever really there, is hanging by a thread. The FT reports this morning that “Tiger” (Tracking Index of Global Economic Recovery) which is compiled by the Brookings Institution sees little light other than in the USA and that this is also “on the ropes”.

The dead cat, it appears, is not made of rubber after all.                                 

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