Sunday, 22 July 2018

The lonely consensus of eurozone finance ministers

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Anthony Peters, SwissInvest Strategist

It was supposedly John Paul Getty Jr. who coined the phrase that a billion dollars isn’t what it used to be. Nor is a billion euros for that matter although this morning, on the foreign exchange markets, it is worth a bit more than it was last night.

However, what are 130bn euros worth? What can one buy for that sort of money today? It took the eurozone finance ministers 14 hours to agree on what they expected to get for it but, truth be told, I think they are pretty much on their own in that consensus. €130bn is a lot to spend on creating a fiction which might or might not buy a French election, an American election and finally a German election too.

I was staggered when I heard Christine Lagarde, managing director of the IMF, make her statement to the press this morning along the lines of: “Last night we had a debt/GDP ratio of 129%, this morning we have a debt/GDP ratio of 120.5%.”

It might as well have been Clarice Starling declaring that Hannibal Lecter had promised never to eat liver again, especially not with fava beans and a nice Chianti. So Greece gets to fight another day, the euro is saved and eurozone taxpayers have been committed yet again to paying up for the enthusiasm of their political leaders.

It might as well have been Clarice Starling declaring that Hannibal Lecter had promised never to eat liver again, especially not with fava beans and a nice Chianti

This morning, Jim Rogers – the one who co-founded the Quantum Fund with George Soros – was to be heard dismissing the entire exercise as a costly farce and echoing my long-held opinion that there is no reason why a failure of Greece would have had to spell the failure of the euro any more than a bankruptcy of California or Illinois will spell an end to the dollar.

The Eurocrats seriously boxed themselves in back then when they declared the inextricable link between Greece’s financial survival and the continuing existence of the single currency and now, a further 130bn of taxpayers’ euros later they are still not out of the woods. Does anybody out there even have a desk-top calculator that can do 12 digits? We can’t even talk of these being telephone numbers because I can’t think of anyone who’s got 12 digit ones of those either.

Sooner or later we will again be confronted with the lack of viability of Greece’s economy in the context of the standard of living which it would like to provide for its citizens, but we have as yet no clue as to how much “sooner or later” we get for €130bn. Those meeting in Brussels must be certain that it is something beyond October 27 2013, the last possible date for the German Bundestag elections which Mutti Merkel will have to face. However, no matter how tired and malleable the attending politicians may have become, I can’t imagine that any one of them will have been dancing in the aisles on the grounds that the eurozone sovereign debt crisis has been put to rest.

The vanity of GDP

To me, the biggest problem remains the use of GDP as a unit of measurement. In a piece called “New Bottles for New Wines” which appeared in Credit magazine early last year, I argued that GDP is too loose a measure, citing the ability of a government to borrow a sum of money, to hire a public servant with that cash to count raindrops but then to add their earnings to GDP thus suggesting that we need to measure value added rather than quantity.

The invisible Scotsman who abolished the boom and bust cycle and who saved the world was a master of that art but even he could have learnt a trick or two from the Athenians who ended up with nearly 40% of the working population on the government payroll. There was an old salesman’s bon-mot which went “Turn-over is vanity, profit is sanity”. GDP is vanity.

With Greece’s bloated public sector, the correlation between public sector spending and GDP is extremely high and the aim of bringing debt/GDP down to 120.5% by 2020 must be making some pretty ritzy assumptions on both the government’s ability to manage spending and as well as absolute GDP. Lies, darned lies and statistics?

Alas, that aside, the Greece issue is off the table for the while and investors can get down to the business of seeking yield. Bunds remain below 2% and in the spirit of fiscal detente cash will be pouring into Italy, Spain and, to a lesser extent, France. As Chris Charlton of Centa Asset Management in Frankfurt said to me yesterday, Italian and Spanish yields are back down to “sustainable levels”; with money at this price the governments have enough breathing space to bring greater balance into their fiscal edifice on the basis of which he is shifting away from his core dollar long to being long the euro again.

With the PBOC easing reserve requirements yesterday and thus sending all the right signals that it doesn’t want to cool the Chinese economy any further, all looks well in the garden and risk assets will be all the rage again.

I shall be out of commission for the next few days as I go to study the economics of beach life on a sunny island and will be returning at the beginning of March. Take care, good luck and stay long – not because it’s right, but because it is what everyone else will be doing which, then again, in market terms, makes it right.                    

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