Thursday, 19 July 2018

Spain and the long camino to redemption

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If you’re involved in a game and the rules don’t work, you’ve either got to end the game or change the rules. The Eurogroup finance ministers did just that last night as the agreed the €30bn direct support package for the Spanish banks, due to be made available imminently, and to the postponement by one year of the obligation placed upon Spain to rein in its deficit to 3% of GDP from 2013 to 2014.

Anthony Peters, SwissInvest Strategist

Germany, the Netherlands and Finland of course disapproved but after nine hours of negotiations, everyone shook hands and the announcement was made.

Is this good or is this bad? Whether €30bn is too little, just enough or two much depends on your point of view and strongly depends on how long you think a piece of string is. That it resolves nothing on the size of the debt mountain and is just another shuffling of right pocket/left pocket is also hard to deny.

We must give credit where credit is due (no pun intended) and treat this event as the first step on a long journey.

But, on the positive side, it is a decision with deadlines and, more to the point, proves that there is some flexibility to be found in the eurozone edifice. I understand and support the GeNeFi (Germany/Netherlands/Finland) group objections and their persistent demand that no aid should be given unconditionally or at least not without proper strings attached but from time to time one must accept that rules which cannot be broken in times of extreme stress are likely to be more destructive than they are constructive.

That the Spanish economy and its banking system are in one unholy mess is not to be denied – not even by the greatest of hispanophiles – but markets were not happy when nothing was being done and they must be grown up enough to work out that the problems on hand cannot be resolved overnight.

Therefore, we must give credit where credit is due (no pun intended) and treat this event as the first step on a long journey. Despite all it problems, Ireland has gained credibility in markets by its persistence in keeping its foot on the gas. I see no reason why Spain, which is dealing with problems very similar to those faced by Ireland, should not be given the same benefit of the same doubt. Spanish 10yr debt was trading above 7% yesterday and although it rallied sharply pre-opening in Europe, the fun is already over and it is now, give or take, unchanged.

For once I think the markets are wrong.

Metals not accessories

Asian markets were lower in early trading as Chinese imports reported significantly weaker than expected – think Australian commodities, not Louis Vuitton handbags – at +6.3% as opposed to the consensus forecast of +11.0%. However, they did recover some of their composure.

This all puts a bit of a dampener on Alcoa’s results yesterday which got the US Q2 earnings season off to a cracking start with 6 cents per share as opposed to the 5 cent estimate. The CEO, Klaus Kleinfeld, sounded bullish when he foresaw global demand for alumina rising 7% this year, not least of all from an automotive industry which doesn’t seem to be able to put a foot wrong at the moment.

So much for the import of raw materials by China but what about its exports? The US, the EU and Japan have jointly lodged a complaint with the WTO about China’s continued shenanigans surrounding the export of rare earth metals. As a producer of 97% of the world’s supply of rare earth, China can push and pull as it likes and the rest of the world is unimpressed. However, the Chinese argue that extracting and refining these is a toxic process which challenges the environment and that plenty of other countries would be perfectly capable of producing their own, were they prepared to pay the price. They’re happy for the Chinese to poison their people and then to cry “Foul!” when exports are restricted. I don’t know enough about the subject but there is clearly a juxtaposition here of which we hear nothing.

If anyone can clarify the situation for me, please feel free. In the meanwhile, China will be able to maintain a stranglehold on manufacturing many of our daily techno-toys such as smart phones and iPads for which the rare earth metals of essential.

My Lords

Finally, tonight sees in the British House of Commons the first round of the battle over reform of the House of Lords. Reforming the Lords and replacing it with an elected second chamber has been a cornerstone of Liberal policy for nearly 100 years. In the event, they have been out of power for about that long and only by way of the coalition have found themselves in government.

There are plenty of appointed Liberal peers but what would happen to the party if it had to be elected to that second chamber is anyone’s guess. In all likelihood, Liberals would join black rhino and giant pandas on the endangered list.

I’ve heard of turkeys voting for Christmas but spending 100 years campaigning for that vote first is a different matter altogether.

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