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Thursday, 19 October 2017

Snarky Sarko and the breach of the European confederacy

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Anthony Peters, SwissInvest Strategist

Frankly, I’m not quite sure whether it is good or bad that the European Summit has not been headline news all week-end. Sure, the terrifying earthquake in Turkey has taken top billing along with the Tunisian elections and the staggering 1:6 dismantling of Manchester United by their City rivals at Old Trafford (I am a native Mancunian and grew up in the sky-blue and white half of the town, so I have no particular problem with that) but I was, nevertheless, struck by the paucity of news emanating from Brussels other, of course, that the carpeting of David “Call me Dave” Cameron by President “Papa” Sarkozy.

It is easy for us all to sit out here and criticise the European leadership but, as I have said before, the problem is larger than the sum of the available solutions. Although nothing has as yet been said, risk asset pricing reflects the markets’ belief that something halfway acceptable will be cobbled together before the Wednesday deadline. The banks have been sent away in order to find a way of accepting that the haircut on their Greek debt will be closer to 60% than to 40% but that they will receive capital injections to help them to weather the storm.

It is rude to remind anyone of any weaknesses that the system might have built into it; hence the interest which the Wolfson Prize seems to be generating.

France and Germany will try to establish a fiscal management framework which gives them the moral authority to poke other members into doing as they are told. At the same time, France will bravely commit Germany taxpayers’ money while the German government makes sure that said taxpayers don’t get asked what they think of it.

To market, to market…

Not surprisingly, the eurozone has agreed the sixth disbursement of funds to Greece. According to the great Troika report, Greece’s Debt/GDP ratio will peak at 186% but will then decline to 130% by the late 2030s. The country will supposedly not return to the public markets until 2021 – as though it could – but it could need as much as €252bn of additional funding between now and 2020. How anyone can even halfway reliably forecast what the finances of the Athens government will look like in 20 years time escapes me as it appears that in May last year when the first bailout was on the table they couldn’t even predict that the three year funding package would be chewed up within no more than twelve months. I understand that since VAT was raised to 23%, a larger part of the economy than ever has reverted to being transacted for cash. Hands up anyone who didn’t see that coming. C’mon all of you, hands up! Oh dear, no hands to be seen…..

However, all is not well in the garden. The forecast capital requirement for the banking sector which is to be met in public markets is supposed to be €110 bn. That number also looks to be like a piece of string. Various sources have tried to pin the tail on capital requirement donkey and figures of anywhere between the official €110bn and over €1trn come up. However, what if the public markets can’t see the economics of sinking further capital into the sector and simply don’t show up? If the large capital raisings by the likes of Lloyds Bank are anything to go by, investors would be better off going on holiday. In September 2008, the bank raised £284mm at 270p. In January 2009 they were back for £2.58bn at 173p. By June they asked for £1.37bn at 60p and in December were back for more at 55.5p. The stock closed on Friday at 32.87p. Deutsche Bank took €2.13bn from the market in October last year at €33 – it closed at €27.82. Unless I’m mistaken, neither BNP nor Société Générale have been to the markets for capital in a long time.

A cracked confederacy

All in all, an agreement between Germany and France and the acceptance by the other eurozone members of whatever the big two have decided to agree on is only phase one. From agreeing and announcing to actually implementing those agreement is a long way. EU nations, especially those of the more Greco-Roman persuasion, do not have a great track record of abiding by what they have signed up to. I suspect that Sarko’s rounding on Cameron might have something to do with the latter making a menace of himself by pointing this out to the French leader and breaking the unwritten rule of European confederacy, namely that it is rude to remind anyone of any weaknesses that the system might have built into it; hence the interest which the Wolfson Prize seems to be generating.

Finally, my heartiest congratulations to New Zealand on finally winning the Webb Ellis Trophy and becoming world champions at rugby despite all their efforts to throw the game away. I also congratulate the French on a gallant and disciplined performance; if they felt that the referee didn’t help their cause, I’m afraid I’d have to agree.

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