Monday, 30 January 2012

Crisis and democracy. Downgrades.

Proconsul, no thanks
Over the weekend rumours surfaced that the EU would want to put the Greek government under administration. According to apparently well-informed sources, the EU commission, supported by the German government, should be interested in making further help depending on the Greek government accepting an EU representative, who would have the right to veto its economic decisions.

It is a very dangerous route to take. As long as the EU is built on the principle of conservation of national sovereignty (as opposed to what the UK government often claims for public consumption), such a move would only give a new momentum to those who see EU as a fundamentally anti-democratic construction.

On the other hand, several reports are very clear: There is no willingness or indeed understanding in Greece that fundamental reform is necessary. There are too many votes to be had on simple populist messages. I perfectly well understand the exasperation on the part of the European leaders, who are being asked to shell out billions only to be met with obstruction from broad groupings in Greek political and administrative institutions. I had mixed feelings reading Michael Lewis’ witty description of the mood in Greece and other crisis countries.

There is no other way forward for the euro-zone than having Germany accept a assistance package that may be comparable to the Marshall aid after WW2. The northern countries must accept that helping Greece and possibly Portugal is the price to pay for rescuing the euro-zone in the short/medium term. Putting in a pro-consul will not help. Maybe is the moment to bring in IMF as a neutral arbiter.

Fitch downgraded 5 euro-zone countries. Yawn! It seems already to be forgotten. Maybe it was because it was “better than expected” since rumours had it that 6 countries would be downgraded. Ireland kept its rating, as did France and Italy.

French president Sarkozy is facing a very difficult run-up to the presidential elections on 22 April. His main opponent Francois Hollande of the Social-democrat PS is consistently showing a significant lead in the opinion polls.

To those who have accepted the French claim that the country represents a “cultural exception”, it will be disturbing to observe that electioneering in France is exactly like elsewhere. Hollande promises to solve the economic problems by lowering the pension age (sic!). Sunday night Sarkozy went on all national TV channels to announce a tax on financial transactions that has neither chance of neither being implemented, nor ability to solve any problems if it ever were.

If Hollande is elected, it could at least for a while throw a spanner in the works for the German-French joint initiatives. But it would only a question of time before the new (and completely inexperienced) French government would find out that Berlin is in charge.

The somewhat weaker than expected US GDP data from last week will focus attention on this week’s data for personal income and spending. Several EU countries will release PMI data that for sure will be scrutinised in every detail. For your investments, it is not important what the economists have to say, but how the markets perceive the data.

My colleague Frank proved to be right. My pious hopes of a stronger dollar could do nothing against a market aggressively positioned against the euro. In the past two weeks, the markets have begun to unwind short EUR positions and all talk about a “collapse” just disappeared. Another element in the risk-on trend.

American banks
Yesterday we had another reminder how grateful we really need to be to the banks. Representatives of US banks pointed out that if the stronger capital requirements and the limitations on prop-trading are introduced, it will lead to slower economic growth and lower liquidity for EUR denominated securities. Please!

The very banks that were saved by the taxpayers continue to resist reforms necessary to avoid a repeat performance of 2008.

However, I agree that the higher capital requirements need to be introduced over a longer period. The demand for a 9% Tier 1 capital on 30 june 2012 is already having a negative effect on the credit markets. Banks prefer to bring down their balances rather than raising new capital.

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