Wednesday, 1 February 2012

25/27 EU. Portugal. RBS.

25/27 EU
So 25 of 27 EU member states decided to sign up to the new fiscal policy agreement, and the Czech Republic may sign up later due to democratic procedure. The UK decided to remain on the sidelines – again.

I have nothing new to add. The agreement is asymmetrical and will always have a deflationary bias. Unless, that is, it is completed by a solidarity agreement whereby the surplus countries agree to stimulate growth when other countries are forced into budget cuts. It is not on the agenda and the German understanding is that they have no such responsibility.

President Carter’s security advisor Zbigniew Brzezinski gave this description of the UK: “Its ambivalence regarding European unification and its attachment to a waning special relationship with America have made Great Britain increasingly irrelevant insofar the major choices confronting Europe’s future are concerned. London has largely dealt itself out of the game”. It cannot be said any clearer.

There was some flowery talk about creating more jobs for the young unemployed and for making some initiatives to help small and medium-sized companies. It will not improve the economic growth.

I continue my focus on European bond auctions. European nations including Italy, Belgium and Spain plan to sell more than 33 bn euros this week. Italy sold 5.5 bn euros out of a target of 6 bn euros of five- and 10-year bonds on Monday, and issued 1.9 bn euros out of a maximum goal of 2 bn euros of 4-year and 9-year bonds. Belgium sold 2.58 bn euros of bills, with Spain, Portugal, Germany and France issuing 13 different maturities in coming days. Italy’s auction did not go down as well as hoped and there will be some focus on that issue in the coming weeks. But overall the results point to continued improvement.

The country’s 10 year yields now stand at a sky-high 16.40% after having been higher than 18% last week. Predictably, it has led some to believe that Portugal’s refinancing costs have increased just as much, and that the country is about to be insolvent.

I am surprised some people still have not realised that the purpose of the bail-out from May 2011 was to allow Portugal to stay out of the markets for something like three years. The country steadily makes some auctions but they are small enough not to imply an imminent insolvency. Contrary to the case of Greece, nobody has accused Portugal of lying about the true situation of the public finances.

It does not imply that Portugal is safe yet. The government has embarked upon a major labour market reform. About time to clean up after the dictatorship imploded in 1974. But that kind of initiatives only work slowly, however well-intended they may be.

The fall-out from the RBS story continues. Sir Fred Goodwin, the ex-CEO of RBS is now ex-Sir Fred. He was stripped of his knighthood, just because the government had to step in with a modest GBP 45bn to save the bank. He must feel that he is being treated very harshly.

As a small compensation, I guess that Fred will keep his bonuses, contrary to the current CEO, who was brought in to clean up. Steven Hester waived his bonus of less than 1mn GBP after a public outcry that had nothing to do with his actual results.

We still need a serious discussion about how to device bonus systems for bank CEO’s. I still believe that looking at the returns created on the balance is better than the current obsession with return on equity. Using the RoE creates a strong incentive for the likes of Fred Goodwin to gamble. And as we see, again a ruthless and greedy bank CEO privatised the gains and socialised the losses.

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