Last night I had the pleasure of playing bridge with a private investor and reader of this column who wondered how come I, a political scientist and historian by background, had so far largely desisted from commenting on developments in Turkey. Firstly, I currently have larger fish to fry and secondly, I did not want to be the first one to seek to draw parallels between the coup attempt of last weekend and the burning down of the Reichstag in Berlin in February 1933. This morning, however, after the imposition of the three-month state of emergency, things are different.
The subsequent promulgation of the Reichsermächtigungsgesetz, commonly referred to in English as the Enabling Act, set in motion the institution of absolute National Socialist power and many observers have pointed, in the Erdogan context, in that direction. That is where the parallels, at this point in time at least, end.
The real risk is that President Erdogan, with the constitution pretty much suspended, thinks that he can leverage the position that Turkey holds on the geopolitical chessboard between Russia and the US to his or his country’s advantage. Fact is that the Islamists in his own back yard regard Russians and Americans with equal suspicion, which has blurred some of the borders of mutual suspicion. It is hard to be a significant player in a game where the binary definitions of what constitutes a friend and an enemy are so uncertain.
It would be wrong to overestimate the importance of Turkey but even more wrong to underestimate it. 333 years ago the Turks were besieging Vienna until they were defeated by Polish King Jan Sobieski. In celebration so the legend goes, bakers of Vienna baked crescent-shaped puff-pastry treats, known to us today as croissants, proving that pan-European cooperation was possible before and without the Treaty of Rome with a Polish victor motivating Austrian bakers to create one of the national symbols of France.
I shall desist from trying to jump to conclusions with respect to the Turkish situation although I shall remind you of the words of French philosopher and politician Joseph de Maistre who coined the phrase that a nation gets the government it deserves.
That neatly brings me to our new prime minister, Theresa “Kitten Heel” May, and the pictures of her alongside Mutti Merkel in Berlin. They seem agreed that there is little sense in shooting from the hip by way of an early triggering of Article 50 simply for the sake of it. Both sides of the Brexit negotiations need to be fairly clear what their positions are and the unwind needs to be effected in as grown up a manner as is possible. Heavens knows what President Hollande will have to say to “Grey May” on the follow but unless it is more or less the same as the position taken by Chancellor Merkel, it will most probably be dismissed as irrelevant and meaningless drivel.
I noted yesterday that the ECB is beginning to run out of assets to buy. I now hear that there is talk around Frankfurt that the rules of its asset purchases may be changed to permit it to acquire bonds that trade below its own refinancing rate. By redefining the minimum rate at which bonds can be bought as the ECB’s deposit rate, which is -40bp, the range of eligible sovereign assets would grow significantly.
Markets
On the other side of the fence, in corporate bond land, we yesterday saw an issue for the Israeli drug giant Teva. At €4bn and spread over three maturities – fours, eights and 12s with coupons of 0.375%, 1.125% and 1.625%, respectively – the deal was to corporate bond buyers what water is to a man in the desert. Whether a 0.375% coupon on a four-year bond for a Baa2 should or should not be exciting investors is a moot point but it is clear that Teva, a name that has only been sparingly present in the euro-denominated bond market, has seen the gap and has come streaming through it. I’m sure there will be more to come and institutional investors across Europe may need to quite seriously beef up their knowledge base on non-European issuers.
Meanwhile, Europe’s Voldemort, a banking crisis which isn’t allowed to be called a banking crisis, rumbles on. I tripped over a footnote the other day which suggested that Greek banks are about to give up on their attempts to sell their distressed assets as there seems to simply be no interested buyers. After having spent 30 years arguing that there is no such thing as a bad asset, simply a wrong price for it, there appears to be a pool of assets for which there is seemingly no price in which case, by dint of deduction, the price has to be zero.
The Italian banking system in general and Monte dei Paschi in particular seem to be suffering a similar fate. I have repeatedly argued against willy-nilly bailing in of bondholders but in conversation with Achim Dǘbel of Finpolconsult in Berlin, a man who has probably forgotten more about banking in the past 48 hours than I have known in a lifetime, I have begun to get my head around his avowed conviction. He maintains that unless balance sheets can be cleansed quickly and effectively, the zombie economy will persist in perpetuity. Not a jolly prospect; one understands the jealousy of those who see the UK steaming ahead with a weaker and more competitive currency.
So there we are; the Dow continued its winning streak with its 10th consecutive day of gains – its last down day was July 7 – although in all the excitement it should be noted that it is still only up by 6.71%, year-to-date and by 3.77% over the past 12 months. The earnings season is bringing slightly mixed results but so far nothing that should upset the apple cart, least of all the nice figures we got from Microsoft earlier this week. The yen is weaker and the Nikkei slightly firmer on hopes for more stimulus. Does the Tokyo branch of the Last Chance Saloon only sell one kind of liquor? It would appear so. Brrrr!