Tag Archives: eurozone

Eurozone crisis 22/11/11

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Another day and still no closer to any kind of solution. Key events of the day:

  • Spains borrowing costs rose yet again to just shy of 7%. New prime minister refused to detail spending plans until full cabinet formed. Me thinks his hand will be forced well before then.
  • IMF revealed new credit line available for countries in distress. A small step in the right direction but way too limited to have any real effect on the crisis.
  • Stability bonds were officially floated and almost as quickly received the Germany verdict – “NEIN”  - while reiterating its call for treaty changes to stem the crisis – details of which we are now expecting on the 9th December.

Treaty changes probably are part of the solution but Germany is making a serious mistake in thinking it has the time for a new treaty to be finalised with all 17 countries. Recession would have long taken hold before it was agreed, killing growth and any chance for material improvement in the debt to GDP ratios in every western economy. As I’ve said before it needs someone to sit down with Merkel, Schauble et all and example calmly what their actions are doing. With the “super” committees debacle yesterday though the one person who maybe could have forced Germanys hand, Obama, frankly lost his hand in the game as if I was Merkel I’d simply ignore him and tell him to get his own house in order before lecturing anyone else on the state of their countries finances.

Frankly still a shambles.

On a related but other note read first few chapters of “Endgame – the  end of the debt supercycle and how it changes everything“. A very interesting read. It makes the case for two likely scenarios in every western country – one option is years of deflation and depression – the alternative high (or hyper) inflation the choice of which we end up in depends largely on if governments decide to print their debts away. Cameron may take particular note as the author reserves a special place for the UK as “the most indebted country in the world” and being the one most likely to suffer from hyperinflation as the government prints. The hedge against this? Well the usual candidates of precious metals, commodities, energy, corporate bonds, and TIPS. Well worth a read in general though if a little sobering at points.

Eurozone crisis (18/11/11)

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So another day another step towards the cliff. Developments of the day:

  • Mario Draghi scolded EU leaders for the lack of implementation of the decisions taken at last months summit. This is important only in that it shows Draghi is acutely aware that the ECB is already acting as lender of last resort. He also understands, as per my post yesterday, that the devil is in the details to solve this crisis.
  • Merkel and Cameron clashed over financial transaction tax, use of the ECB and EU treaty changes. Merkel is right to say the UK should either be fully in or fully out. We don’t really deserve to have any say if we are not willing to join up fully to the euro club. On the financial transaction tax I have a suspicion that at best it could be seen as an altruistic tax that is instantly transferred onto the banks customers while at worst it could seal the fate of London as a financial centre. I certainly think it is right Cameron defends the city on this front (but I would say that I work there!)
  • Finally we have reports of an interesting development that German bunds are no longer falling in line with rising Italian and Spanish debt yields. This implies that sellers of these bonds (almost certainly to the ECB) are instead of reinvesting in “safe” bunds are repatriating their money into US Treasuries, UK Gilts or just keeping the cash under the mattress. In some ways this could be the stick that the market needs to persuade Germany to begin to act with a bit more haste in solving this crisis. If they genuinely began to see the knock on effect of the crisis on Germany (which up to now has been the sole beneficiary of the crisis!) I would expect them to move very schnell.

On an unrelated eurozone note I was disappointed to see continued negative comment about Chevron in the states – one of my oil stocks. It seems to me as though they are getting into an argument with Brazil about a spill in one of its test drill sites and oil spills are never good news. They lead to environment damage, litigation and being bared from the country. Far better for the company to cooperate, fix the issue and move on rather than rate it a small issue then get fried by the government that clearly doesn’t believe it. Brazil will be an energy hub in years to come and it would serve the company well to have strong ties with the country.

I’m looking forward to this weekend if only to have the markets closed meaning I can’t lose any more money. I’d like to think next week will be better but at the minute I see no positives on the horizon so I expect next week will be more of the same. At least monday week I can sell if I have to!

Eurozone crisis

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A month ago I convinced myself the worst was behind the eurozone and finally invested some money into the stock market. I bought into three sectors; banking, oil and mining. The reasoning was fairly simple – if worst was behind us banks really are cheap at the minute, with oil it looks more and more like we at at or past Peak Oil meaning supply will continue to drop while demand increases and on the prospoect of growth miners should do well as their product becomes more in demand.

I think it is fair to say 3 weeks later I made a monumental mistake in buying when I did. Just sell then I here you say! Well working for a bank I can’t as my employer has strict rules saying you have to hold a position for a minimum of 30 days. Doh! I have another week of pain ahead of me and if I get out with an average loss of 15% across all the names I bought i will consider myself lucky.

What this has made me though is very interested in whats going on in the eurozone. A few things seem abundantly clear:

  • Top of the list is the fact we have no born leader who is stepping up to the plate and providing the leadership the situation desperately needs. The two most obvious people who could change things are Obama and Merkel. Obama however seems more and more like a one term president, incapable of balancing the books of the USA and thereby having any political clout to wield effectively against Germany, while Merkel is behaving more and more like the ostrich who sticks her head in the sand hoping the problem will just go away. No that isn’t quite fair – she is doing just enough, just before (she thinks) it is about to get out of control. Unfortunately this tactic means she is always behind the market which is relentlessly picking off country after country. I suspect her grand plan here is that she is trying to use the crisis to speed up the formation of a much bigger and cohesive eurozone through treaty changes and only when she has done that will she release the monster that is the ECB to calm things down. She will argue at this point as, effectively, all countries are in it together then on the basis they either all stand or all fall printing is better than not. The other problem with this plan is it needs the one thing she really doesn’t have – time.
  • Time is the real enemy here. Time not only makes the debt grow bigger every day that passes it also gives the market more and more opportunities to pick off the weak and escalate the crisis further.
  • Finally any policy that doesn’t restore growth to countries has no chance of succeeding in the medium or long term. Greece I think is the ultimate proof that crippling austerity is not the way forward.

How do we get out of this then? Well I agree with what most people are now saying that we are close to a crossroads here. On the left hand side we have eurozone collapse with Germany, and possibly the other stronger euro countries such as Holland and France creating a top tier eurozone, the rest forming a second block and probably the UK, as always, out on its own. To the right we have the ECB becoming a true lender of last resort and proving the funding Italy, Spain and others need on an unlimited basis. Now which do I think we should choose to do? Well the latter for two reasons.

Firstly breakup would be horrendous. We are talking financial collapse of nations and governments, bank runs, unemployment soaring, and deep long lasting depression. The states should be particularly concerned about a breakup as if I was the market and I’d watched my safe haven of German bunds go up in smoke I wonder if there was anywhere else that could go the same way and I would probably think of a particularly indebted country over a particular ocean who’s books are in _far_ worse shape with equally poor political leadership.

Secondly because allowing the ECB to become lender of last resort may actually buy you the one thing you really need – time to sort out the structural problems at hand in a stable fashion without rioters on your streets every day. Oh but it will cause inflation I hear Germany say. Well maybe. It may – but equally it may not. To be so afraid of something that hasn’t happened is no way to live a life or to make sensible decisions from. Far better to give it a try, use the time to change treaties and generally get the monkey that is the market off your back.

Most of all I wish eurozone leaders would stop thinking that kicking the can down the road is a strategy in itself and provide a clear message to everybody about what is actually going on about how we fix this. Give the market hope, give them a plan and whatever you do – GIVE CREDIBLE DETAILS.