Saturday, 21 July 2018

On polls and sink-holes

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Anthony Peters sees plenty of dancing around the abyss in Europe

Anthony Peters

Anthony Peters, SwissInvest strategist

We live in political times. Well, it may be that current times are no more or less political than any other times but there is certainly a clustering of political events ahead of us which will test some of the comfort which markets have afforded us over the summer months.

On the economic front, the US has been apparently growing nicely, China looks to have turned around to and even Japan is showing green shoots at the end of the best part of two lost decades. Meanwhile, in Europe, Germany is motoring, France is behaving as though it has hit a bottom and there seems to be quiet confidence that the Club Med is getting its act together.

Even Greece last week reported a primary budget surplus so not all can be bad.

The proof of the pudding is in the eating and with both Spanish and Italian 10 year bonds trading at or around 250bp above German Bunds and less than 200bp behind France, who could challenge? Even poor little Ireland can now, if it wishes, fund 10 year money below 4.00%.

The problems might not quite be resolved but they are well and truly over…

…or are they?

Twenty odd years ago they built the channel tunnel. The world and his wife got drawn into buying shares Eurotunnel, the corporate vehicle for this amazing project; they were even gifted by well-meaning relatives as wedding and christening presents by way of offering the next generation a stake in a bright and promising future. As we all know, before long, the project was pulled under by its debts. Although it was quite capable of producing an operating profit, there was no way that it could generate enough revenue to service, let alone repay, its debts so the late Alistair Morton sat down with the banks and effected one of the great debt for equity swaps which pretty much wiped out both shareholders and debtors.

Greece, bless it, can generate an operating profit just as Eurotunnel did but it still has no meaningful way of servicing its debts. However, as opposed to the latter it doesn’t have the alternative option of a debt for equity swap. As it appears to be de facto banned from defaulting, the rest of the eurozone will in one form or the other have to keep it afloat until long after we are all ashes to ashes, dust to dust. The third bailout is upon us and although nobody realistically believes that it won’t happen, it doesn’t sit too comfortably with voters either in Greece or elsewhere in the eurozone.

German coalitions and sink-holes

As said, we live in political times. The German elections are upon us which will, in all likelihood, result in the CDU-CSU/SPD Grand Coalition. The week-end results in the Bavarian State elections will have members of the current minority coalition partners, the FDP, reaching for the jobs section of their local papers. In Bavaria, their share of the vote dropped from 8% to 3.3% which left them well shy of the 5% hurdle which would have brought them into the parliamentary reckoning. Forgotten are the glory years of their own big beasts, Hans-Dietrich Genscher, Walter Scheel and Otto, Graf Lambsdorff and all that looks to be left is a relatively featureless and whingeing rabble – not, in some respects, that different from our own Liberals.

Alas, European fiscal politics has been on hold for most of this year as nobody has dared to poke their head above the parapet in the run up to September 22nd – the last thing either Germany’s mainstream politicians or those of any other country within the eurozone have wanted to do has been to rock Mutti Merkel’s electoral boat. Germany’s opposition has been remarkably quiet which is not really surprising as were it to have ousted the good lady from the Chancellery – which it won’t do – it would have been faced with the same political and fiscal conundrum from which there is no escape.

All the while, the political heat in the Netherlands is increasing where Prime Minister Mark Rutte lacks Frau Dr.Merkel’s authority and where Geert Wilders’ far right is leading in the polls. The Netherlands is struggling to come to terms with its own austerity programme – it is frantically trying to and failing to meet the 3% deficit/GDP target – while native Dutchmen (not a politically correct term, I know) are questioning the open and liberal society they have themselves created.

One of Merkel’s repeated lines during the campaign is that nobody can persistently live beyond their means. Quite so, but most of the West, Germany included, has been doing so for at least fifty years. The sovereign credit crisis made it clear to all but the price which would need to be paid to right the fiscal imbalances is both unknown and unpalatable.

Although there is a distinct risk of those key questions resurfacing this autumn, I strongly suspect they won’t. Life is so much fun when we don’t look at the fiscal sink-hole and dance around it, champagne glass in one hand and olives in the other. 

Exiting a recession is one thing but generating more than one is spending is something altogether different. The former is stepping through our front door while the latter hasn’t even left home yet.

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