Tuesday, 18 September 2018

On taking the PIIGs... without the G

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Anthony Peters opines on default, despair and Russian nukes.

There could have been nothing more telling than the photograph which has been doing the rounds of Greece’s Minister of Finance, Yanis Varoufakis, sitting yesterday, deeply dejected, on the floor of the Greek parliament. As Maggie Thatcher said in 1979 in her first address outside Number 10 Downing Street following her election victory and paraphrasing Francis of Assisi “Where there is despair, may there be hope….”

What we are to hope for in the case of Greece, on the other hand, is deeply unclear. According to most recent polls out of Germany, 58% of those questioned now favour expulsion. The ECB is still making sure that it will not be tarred with the brush of being responsible for Greece’s failure, should it occur, by continuing to provide ELA funding to the Hellenic banking system which is unrelentingly haemorrhaging cash.

Whatever happens next and should exchange controls be imposed, it will in most cases be too late and it will be Stavros and Helena Six-Pack who will be carrying the can (assuming it hasn’t already been kicked it down the road) while those who raped and pillaged the country for the decade leading up to the financial collapse will already be holding perfectly legal bank accounts in Germany, France or Italy.

The Yanks are also still on the scene as Treasury Secretary Lew called Varoufakis yesterday urging him to make a “serious move”. The latter is slated to be in Paris today to meet OECD Secretary General Angel Gurria. I would like to call this all “shuttle diplomacy” but from where I’m sitting, it seems to be all about shuttling with precious little diplomacy taking place.

Tsipras and Varoufakis have together painted themselves into a corner from which there might now be no escape. Mutti Merkel, meanwhile, is playing head sphinx. Who could blame her? As far back as the first round of Greek insolvency, it was clear that she did not want to be remembered by history as the one who caused the dream of one happy, prosperous single currency block to crack and everything she doesn’t do and doesn’t say is surely aimed in that very same direction.

Recent long-dated financings by Spain and Portugal have never looked better. The latter’s €8½-odd bn of 10-years and €2½bn of 30-years which were issued in mid-January were visionary and explain Portugese Prime Minister Coelho’s confident statement yesterday that the Treasury has sufficient reserves, were access to markets to be limited if “something more serious happens in Greece”.

The matter of contagion is one for the markets to deal with. There is no reason to lock the remaining “PIIGS” out of capital markets even though it would surely be much politically incorrect fun to be had using a revised acronym along the lines of “PIIS”.

No control

Day-to-day volatility in bond markets remains high with both mindless sell-offs and equally mindless rallies back. It all feels as though traders and end-users alike are treating global capital markets like one big playground and are playing “Game of Thrones” in the futures markets.

Enough has been said about current events and game theory – Yanis Varoufakis is known to be a student of the art – but we are now playing 3D, 4D or even 5D games and, as is evidenced by the rapid movements and sharp reversals, nobody seems to be in control. Spanish 10s yesterday traded in a range between 2.31% and 2.52% which is acceptable in extraordinary circumstances but there was nothing extraordinary about yesterday’s markets.

On the back of this, it was good to hear Christian Noyer, President of the Banque de France and member of the Governing Council of the ECB, finally call a spade a spade. Speaking in Paris at Sciences Po, one of the incubators of France’s administrative and business elite, he, himself an ENARC, warned that ever increasing regulation could “create uncertainties and obstacles to financing the economy.” He went on to spell it out more clearly by adding “Let’s stop as fast as we can working on regulations”. If that doesn’t say it, who can and what will?

Russia might have been a tricky market to be playing in but it has been one which has rewarded the bold and the courageous so far this year as the rouble has rallied from Rbs70/US$ in January back to Rbs50/US$ by mid-May. It might have lost a bit in the past few weeks and is, as at this morning, at Rbs53¾/US$. Now we have President Vladimir “Put-me-in” Putin popping up and announcing that he intends to restock the Russian nuclear (American alert: it’s nuclear, not nucular”) capacity. That’s neither funny nor is it conducive to lowering the temperature in Ukraine. The more he hardens, the less the West will be prepared to back off and before you know it, we have a new Cold War escalating.

The West got it horribly wrong in the Ukraine – it was playing in Russia’s back yard when it shouldn’t have been – and now has at least one foot nailed to the floor. My advice would be to take a few of the chips off the Russia table, to lock in some of the profits in order to be on the safe side and to keep a very keen eye on the political pages. The USA is going into pre-election mode. Jeb Bush has finally declared himself. Hot and loose rhetoric, 20/20 navel gazing and obsession with “hard-working American families” will soon be the order of the day, offering Russia a great opportunity to slip into the shadows and to sneak a few extra figures onto the chess board.

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