Monday, 24 September 2018

Think outside the box? What box?

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Policymakers need to tear up the rulebook, argues SwissInvest strategist Anthony Peters

Anthony Peters, SwissInvest Strategist

WHEN THE SHIP is holed below the waterline, repainting the funnels isn’t going to help. What the eurozone needs now is something more drastic.

Let’s face it, all conventional approaches to dealing with a more or less bankrupt eurozone have led to nought (as one chum wrote to me in the past week, we will soon be needing a new can as the last one must have been kicked to bits by now) so please let me propose my solution to the problem.

The eurozone is weighed down by debts that the individual borrowers will never be able to pay back. That we know. We also know that, as their flexibility decreases, their borrowing cost rise. So how to get out of that vicious circle?

I have railed from time to time about the way in which the eurozone authorities have ridden roughshod over the markets but, to be honest, the longer this eurozone crisis goes on, the more I believe that they may well be right.

Therefore I shall cheekily put forward my “egg of Columbus” – my possible solution to this intractable problem. It is neither moral nor legal and it is so far out of the box that you can’t even see the box.

LET’S ASSUME THAT one Friday after the markets close each and every eurozone member including Germany, France, the Netherlands, Finland – the lot – simply declare that as of Monday morning all their outstanding bills, bonds and other explicitly guaranteed securities will be re-priced at a discount of 15% to par. In other words every single European government bond takes a 15% haircut. Basta!

I would suggest that the authorities need to tear up the rule book and turn to “Raison d’État”

The governments in question should not care about whether this action creates a credit event or not, for it is up to the banks and the hedge funds whether they want to trade contingency derivatives with each other.

I learnt at the time when TDC, the Danish telecom group which was taken private, restructured itself and voided all CDS that the holders of such contracts do so at their own peril. There was much wailing and gnashing of teeth but it became clear to me that holders of CDS are quite simply not stakeholders.

They have invested nothing in the company; they have no equity stake and they have lent nothing. Buying CDS protection gives the holder no more say over the actions of the company’s management than a bet on a horse in the 2:30 at Newmarket gives the punter a say as to how the trainer should be running his nag.

So, at once and irrevocably, all outstanding Bunds, OATs, Olos, BTPs, Bonos and the like are only going to be redeemed at 85 or 90 cents in the euro – pick a number. See you in court, guys.

CERTAINLY, A CONVENTIONAL approach to the debt situation has yielded nothing so far and hence I would suggest that the authorities need to tear up the rule book and turn to “Raison d’État”. So instead of trying to nurse the sick economies against the flow of markets, take the bold step of declaring that an attack on one is an attack on all – an approach like that ascribed (falsely, I believe) to King Christian X of Denmark and his people who are reputed to have worn yellow Stars of David armbands in solidarity with persecuted Jews during the Nazi occupation.

An across the board haircut on all eurozone government debt – with an assertion than all new bonds would remain at par – would offer the stronger members a lot more balance sheet flexibility and enable them to offer more discreet bilateral help to either the struggling members or the bailout agencies.

The upheaval in markets would be incredible but it might give us what the Germans refer to as a painful ending rather than endless pain. By doing this collectively and simultaneously, there would be no flight away from the troubled borrowers to the Triple A markets; it would be the supreme act of solidarity that would restore the supremacy of governments over markets.

Yes, I know; the implications for markets would be huge. But, let’s face it, we’re currently going nowhere in a hurry and wherever that nowhere may be, we are not going to like what we find when we eventually get there.

It might necessitate a temporary suspension of the rule of law but when I hear some of the bickering that goes on between lawyers, I marvel that we ever get anything done.

Cleanly wiping off, irrevocably, a portion of the current public sector debt mountain would maybe help to pull the wagon out of the swamp. And if the lawyers want to argue whether a credit event is to be called or not – well, leave it up to them and sod the rest.

If extraordinary circumstances demand extraordinary measures, what’s wrong with thinking the unthinkable?

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