Thursday, 23 February 2012

Greece. Europe's recession. Banks.

Not unimportant, but irrelevant
I received a couple of comments from readers who felt I was not right in claiming the Greek deal is unimportant. Of course it is important. For the Greeks, who have a huge job to do, if they want to turn the country into a modern welfare state within the next generation. Scores of reports have made it abundantly clear that the country’s political system and central administration rather deserve to be classified as third world.

The deal is also important for EU, who has essentially promised to prop up Greece, for as long as Greek politicians are serious about improvement.

Of course the deal is important for the banks, who have been forced into taking a haircut. But they have again and again been asked to make sure that their balances and provisions were adjusted to the coming reality of a haircut. If they have not done so, they only have their own pigheadedness as an excuse.

A few hedge funds piled in, hoping to be able to make a killing on a legal technicality. If they disappear as a result of their wrong bets, well, that is what capitalism is about.

So it is not that the Greek deal is irrelevant. It is just irrelevant for investment decisions. Of course we will have a chapter 2 and 3 and 4, but increasingly it will be question between EU and Greece. The financial markets are out of that loop.

Europe’s recession will end
Instead of trying to figure out how the next Greek bust-up will unfold, headlines could focus on the two real important factors in Europe. They are intertwined. It is the ill-conceived austerity programmes (“Pain without gain”) and the situation in the region’s banks. Neither of those have anything but a passing connection with Greece.

I have tried to introduce the two time dimensions in the markets, EHT (economist hypothesis time) and RMT (real market time). I have argued that for those of us who operate in RMT, Greece is only a sideshow. Those who operate in EHT still spend their time pontificating on the precise depth and length of Europe’s recession.

Using our own indicators, we have argued that Europe’s recession would reach its depth around a month ago and that signs of a moderate recovery would abound around the end of the first quarter. Despite some minor fluctuations, we are still on track for that scenario to unfold. The residual uncertainty concerns only the strength of the recovery. Given the austerity drive, it does not look good. But there is a world of difference between a 2% growth rate in the second half and the “depression” everybody feared in late November.

Europe’s banks
I am far more concerned about the banks. The equally ill-conceived idea of forcing the banks to solidify their balances at the same time may still give some highly undesired results. In the US, the banks were given a big check. In Europe, no real decisions have been made yet - with the predictable consequence that credit is not growing. It was highly symbolical of the difference that Wells Fargo bought an 11bn loan portfolio from BNP Paribas. European banks are still shrinking.

Under normal circumstances, the combination of fiscal austerity and abundant liquidity should drive interest rates and exchange rates down. But these are not normal circumstances. We are in the biggest deleveraging drive in 80 years. It short-circuits the normal rules in the textbooks.

Europe’s monetary policy is a huge subsidy to the banks. But it may not be enough. And it is not good news that there is no common plan for solving the problems. Increasingly we see a new North-South Divide. In the north and the UK, the problems are attacked head on. In the south, the governments still cosy up to the banks. Bank lobbies are still stronger than the democracy in some countries.

But this is all in EHT. In RMT, the European banks represent the strongest possible cyclical bet on the end of Europe’s recession. Or to be more precise: The strongest possible cyclical bet on market beliefs that Europe’s recession has ended. Curious, isn’t it?

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