'Ratings agencies like rats up a drainpipe on French banks'
Rarely has a truer word been spoken in jest; Harold Macmillan, British Prime Minister from 1957 to 1963, when asked what constituted the greatest challenge to a political leader, poignantly replied: “Events, my dear boy, events”. Well, there is no doubt that there are plenty of those around at the moment.
It feels as though they are trying, as we say here in England, to fit a quart into a pint pot. Mutti Merkel and Sarko are off to have a word with George Papandreou and to discuss how to proceed with the bail-out efforts but it is hard to believe that the “Voldemort Option”, the one which should never be named, will by necessity form part of the discussion.
Meanwhile, Mario Blejer, who became president of the Banco Central de Argentina in the aftermath of its record default in 1999 said of Greece and its predicament in an interview: “This debt is unpayable… Greece should default, and default big. A small default is worse than a big default and also worse than no default.” Although he is probably right, the ongoing fear remains of what happens if or when Greece opens Pandora’s box.
The nonsense yesterday with BNP Paribas and the rhetorical battle as to whether it could or could not finance itself in the dollar market is a case in point.
“Greece should default, and default big. A small default is worse than a big default and also worse than no default” Mario Blejer
I received a rather irate message from a French chum in New York whose father spent 42 years working for BNP Paribas and who I met – the son that is – while working there for eight years myself. His remarks reminded me of what I had written when BofA, another troubled former employer of mine, was making headlines, namely that the retail deposit base of the bank is so large and so sticky that it would take a lot more to ultimately bring it to its knees as it does not lack in funding options. Who can argue with that? However, the spinning spotlight has stopped on the French banks now and the ratings agencies are in there like rats up a drainpipe with Moody’s downgrading both Societe Generale and Credit Agricole but, significantly, leaving BNP Paribas at Aa2 albeit with a warning of a possible future downgrade attached.
Canon of events
There is no question that in the canon of “events” the resignation last week of Juergen Stark as chief economist from the ECB ranks pretty high up the list. A less hawkish replacement would shift the balance of power and open up the path to a more interventionist policy. Foreign exchange markets were not slow to appreciate that formal quantitative easing on the part of the ECB is now a distinct possibility.
“There are too few answers people want to hear or, perhaps more worryingly, with outcomes anyone really want to contemplate and deal with”
The euro has, given all the headwinds it has been facing, held up remarkably well against the forces of gravity but has now begun to slide. Technical wizards suggest that at its current level of $1.3650 it has broken out of its long-term corridor and there is now lots of room open to the downside. Forex traders would love something to focus on and testing the euro looks like a cheap trade. The SNB looks to have won, at least temporarily, its fight to keep the franc/euro under 1.2000. With no carry and no chance of currency appreciation, the speculative longs are departing the Swissy and, believe it or not, heading back into the dollar as a safe haven. However, if the Fed were to embark on another round of QE they’d be off again.
There’s something silly about Germany
The silly thing is that the weaker the euro gets, the better Germany does. Not only has it benefitted for the past decade from being able to access the entire European single market without having the monkey of an appreciating currency on its shoulder, but the more the periphery has dragged the single currency down, the more competitive Germany has been on a global basis too.
Mutti Merkel surely knows that without the failing neighbours her country would be in a lamentable and uncompetitive economic condition. The rhetoric surrounding the impending local elections in Berlin on September 18 niftily does not take account of that. “Events, my dear boy, events”.
A portfolio manager friend of mine I spoke to yesterday bemoaned that there are too many questions and not enough answers. I disagree. There are not too few answers, just too few answers people want to hear or, perhaps more worryingly, with outcomes anyone really want to contemplate and deal with.