Monday, 23 July 2018

Rallying behind the Europeans... and a 10% mulligan

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This week-end one proud Spanish leader will stand up and call upon his European friends to support his efforts. Response will come from Italy, Belgium, Germany, Ireland and even England and Scotland but not from France or Luxembourg.

Anthony Peters, SwissInvest Strategist

Yes, Jose-Maria Olazabal leads Europe into the Ryder Cup against America’s best at Medinah, Illinois. The hostility which the European players can expect to face will make Wall Street and Washington’s sniping at the ailing eurozone look like chickenfeed. Nevertheless, I’d sooner put my money on Olazabal succeeding in his quest than on Mariano Rajoy.

I do feel deeply sorry for Rajoy. He is trying to pilot a hot air balloon with too many overweight passengers on board against the prevailing wind while running out of gas and nowhere safe to land. However, he stands out for not entirely blaming the makers of the balloon, the suppliers of the gas or the mapmakers either. However, not blaming them does not make the task easier or the outcome more certain. In truth, he is now just a passenger too and the fate of the country is not in his hands.

The Scots are having a referendum on independence; the Catalans are on the streets. Is anyone out there demonstrating and demanding a European super-state?  I rest my case.

A couple of years back when the term PIIGS was first introduced and before it was deemed to be politically incorrect, we all sat around declaring that Europe could afford Greece, it could afford Ireland and it could possibly afford Portugal too but that Spain and/or Italy were too big to fail and, more to the point, too big to rescue. I recall comparing Italy and Spain and concluding that Italy had the necessary industrial base and that, if just for once it was correctly managed, it would do fine but that Spain lacked the underlying manufacturing capacity from which it could draw the strength to recover. None of this has changed.

We might have put all the mechanisms in place, including St. Mario’s OMT, and we might be able to keep Spain afloat but it remains too large and fundamentally too weak to properly rescue. We can provide more gas but we can’t change the weather or create a safe landing strip.

I heard Kenneth Rogoff being interviewed on the BBC World Service at some point in the night – Sleepless in Chipping Norton – where he reiterated what we all know, namely that, irrespective of what measures are being taken, the countries in question will never be able to repay their debts. Of course he wasn’t referring to it core debts but the rescue packages. Sooner or later we’re going to have to write off lots of it. At the same time he also rolled out that old chestnut about the need to a faster move towards political union. The Scots are having a referendum on independence; the Catalans are on the streets. Is anyone out there demonstrating and demanding a European super-state?  I rest my case.

One suggestion

I still see a possible solution in the entire Eurozone, France, Germany and Finland included, closing the bond market one Friday and declaring on the Sunday that henceforth all bonds with more than a 365 day maturity will only be repaid at 90% of par….or something along those lines. That would, with one stroke of a pen, wipe hundreds of billions off the collective debt burden. By sharing the write-down between all debtors, the burden on investors would also be much more evenly distributed and if the Germans did it along with the rest, markets wouldn’t know who to attack. All the while, it would offer the Northern Europeans more balance sheet space for multilateral lending to the Southern Europeans. Just a thought.

The initial turmoil would enormous and Lehman’s failure would look like a walk in the park in comparison. The ratings agencies would be lost, the CDS market wouldn’t know which way to turn, hedge funds would be blowing up left, right and centre. It would be the supreme act of creative destruction but it might prove to be a solution of medium and long term value and those are time horizons which the current actions are not really properly addressing. …a bit of blue sky thinking….never hurt anyone….


Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. If you happen to love watching golf, your week-end is done; if not, have fun cutting back in the garden and lighting that first autumn bonfire…unless of course you live in one of those European democracies where it’s verboten.

In that case, why not have a crack at reading Faust II.                                  

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