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Wednesday, 18 October 2017

Soviets showed how to break up a union

I always look forward to Wednesday’s pink’un with the Martin Wolf and the John Kay columns. As the crisis has deepened, the former has, in my personal view, lost much of his authority while the latter continues to gain in stature and the comparison of the two today is a case in point.

Anthony Peters, SwissInvest Strategist

Martin Wolf is on the Eurobond trail. In principle, I am not in disagreement with him for I wrote a piece on the subject a long time ago where I held up the example of Eurofima, the supranational railway rolling-stock financing group, as a prime example of what a collective sovereign treasury function could be modelled on.

Those who read the piece more or less all agreed. Sadly, not too many folks appear to have read it and thus its impact was limited. However, Martin Wolf today digs into history and raises the example of how Alexander Hamilton, first US Secretary of the Treasury, centralised treasury, assumed the debts which individual states had run up during the War of Independence and issued US Treasury debt in its place. A noble example but, truth be told, no comparison whatsoever.

We have now had more than two years of jaw-boning about what should have been done or what had not been accounted for, but as yet the only person of authority to pick up the sharp sword and approach the Gordian knot is Chancellor Merkel.

In her meetings with President Francois Hollande she must feel a little like the generous person who has invited a financially embarrassed and probably hungry friend for a quick lunch, only to watch them sit there and grandly order all of the most expensive items on the menu. If correctly executed, the introduction of “Eurobonds” could be a great thing but I fear that too many out there see it as another way to get funding at a spread similar to Germany.

Think again, Martin Wolf

The greatest of all mistakes made during the hey-day of European integration – both by borrowers and by lenders – was to assume a one-size-fits-all approach to the eurozone. There had been something of an assumption that the single currency had reversed Gresham’s Law and that good money was now chasing bad money out of the system. Wolf comes up with all the same old chestnuts about greater solidarity and stronger central intervention being needed. I recall similar rhetoric emanating from the Kremlin Wall at the May 1st celebrations during the Soviet era. There are some natural unions which are destined to succeed and others which are destined to fail. That is the course of history.

I was lunching with a chum not so long ago who works for a major global asset management firm and he told me of a study his employers had commissioned from one of the major consultancies. What they had asked for was an assessment of the biggest risks to investment strategy for the next half a generation. Top of the list was, brace yourself, the outbreak of armed conflict. I don’t think they were talking of what we now know as “armed struggle” which covers all those minorities fighting for independence within a sovereign context but the real thing, the full Monty of national armies, rolling tanks and all.

There is a fissure running through the grand European project and those who know what happens when a crack appears in a dam wall will appreciate that it can’t be fixed with a bit of polyfilla or by means of a little boy’s thumb. There is a need to admit and to accept that something very fundamental is not working out in Europe the way the founding fathers had intended it to and that persistent denial and obfuscation is not making things better.

The previously unthinkable break-up of the Soviet Union took place in a relatively civilised manner – not entirely of course, thinking of the likes of Chechnya – which, nevertheless, led to a period of extreme economic dislocation. However, I’m sure that that Union had no explicit clauses as to how a member was to affect an exit sooner or later and yet order began to re-emerge.

The great currency union under the rouble fell to pieces and enormous economic hardship followed in many areas. Yet, the sun continued to rise every day, the sequence of seasons was not altered and bit by bit the people of the former Soviet Empire have begun to get on with their lives again. Perhaps Martin Wolf would do better to study something immediate like the Soviet Union rather than by trying to draw comparisons with and suggest learning lessons based on events more than two and a quarter centuries ago. The Soviet Union moved forward by way of the CIS. Ought there perhaps be a similar line of thinking in this, the struggling but still ever closer Union?

New paradigms

Yesterday, Germany also did the previously unthinkable and issued a two-year note, a Bundesschatzanweisung, with a coupon of 0%. This is not a zero coupon bond, it is a coupon bond with a coupon of zero. I hear a comment where someone was wondering whether his systems could deal with such an unthinkable event. Yes, it’s all about new paradigms.

Meanwhile, on the same comment page in the FT, Kay once again knocks the cover off the ball in his analysis of how not all euros are equal. I commend.

Facebook and the equity geeks

Oh dear, the equity geeks had another great day selling Facebook which closed down another US$3.03 at US$31.00. That is 20% off the IPO price of US$38.00 and a third off the highest traded price of US$45.00. I saw a little cartoon with two chaps, one in a hoodie and the other with a reversed baseball cap in a Facebook office. One says to the other: “On the bright side, at least we’re not overvalued any more.” Thanks Banx.                                  

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