Back to normality?
It's boring out
there. And it is perhaps the best piece of news in a long time. After reaching
a crescendo in early December, the amount of headlines dealing with the euro
crisis is now in a clear decline. I choose to take it as a sign that the ECB's
three-year money has stabilised both inter-bank market and the demand for
government bonds from Italy and Spain.
More bad news is
certainly still possible. As an example, I expect that a major European bank or
two will go belly up, as no decisive action is yet taken at a European level to
clean up the banking sector. But a collapse or two is probably already built
into the soaring risk premiums in financial sector shares. It is more and more
urgent to get EFSF and ESM up and running.
A weak euro is a
strong euro
I have always
wondered a little about the media fixation on the positives of having a strong
currency. It smells so badly of Neanderthal nationalist policies (or of
man-talk in the locker room), especially when looking at the headlines in
recent months. As if it was negative to have a weaker euro!
Since the
beginning of the crisis, several countries have profited from a weakening of
the currency: USD, GBP, NOK, and especially the SEC. These countries all have
central banks and finance ministries able to act quickly. The Euro-zone's
institutions were too slow and the result was that the euro strengthened,
together with CHF and JPY. This moved growth from the Euro-zone to the
countries with weaker currencies. So I can only see it as good news if the EUR
/ USD were to trade at par. It has been there before, and it was not the end of
the world. (My colleague Frank Jensen says: “It
will be no surprise if EUR strengthens in the short term as a result of
short-covering”. Go figure!)
Back in 1992 we
saw the last major crisis in the European Exchange Rate Mechanism, when GBP
fell out of the ERM and we had a wave of devaluations against the Deutschmark.
Italy devalued by almost 30 percent. That crisis began with a dramatic
weakening of the dollar, and it revealed the tensions in Europe. The current
euro crisis is similar to the situation at the time - but now we do not have
devaluations as a means to remove those tensions. A weakening of the euro will
reduce tensions significantly.
Risk Rally
New Year has
brought the traditional amount of forecasts for this and that. Obscurity will
mercifully descend upon most of them. So let me give my own anti-forecast: If
we are moving towards a normalisation of the conditions in Europe, and if risk
premiums have finally stabilised, there will be room for a significant shift in
the relative prices of the different classes of risk assets. Some will rise
dramatically (shares? Bank shares?), while some will fall with a bang (Bunds,
T-bonds?). It could conceivably happen in 2012. There are just 241 things that
need to be in place first.
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