A couple of week ago, I sent a humble circular email to all and sundry in my electronic address book advising them that my firm, SwissInvest, had changed our email addresses. In return I received this unprovoked and mildly abusive response from the chief economist of an otherwise rather distinguished German banking institution which read simply “still (sic) predicting it will all end in tears in the eurozone because the silly continentals just can’t be as enlightened as the British…?”
I’m not quite sure what had overcome the man whom I have known for many, many years and I’d like to add, just for purposes of clarity, that although I have been and remain critical of the grand European unification project, I challenge him to find a single line in any one of my many columns which actually suggests that the euro will break up.
What I have, however, questioned for a very long time is firstly the cost of preventing it from doing so and secondly the manner in which the burden of cost will be distributed across the taxpayers of the various constituent members of the eurozone.
Although we are well beyond the dark days of the depth of the eurozone government debt crisis and although St. Mario’s extraordinarily bold “whatever it takes” policy really did face down the sceptics and bring stability in Europe’s bond markets, many of the issues which plagued us at the time have not been dealt with. Luckily we really are somewhat out of the woods for I read headlines in the news this morning which would, had they been in front of us just two years ago, caused untold market volatility. Try some of these for size (Thanks to Commerzbank’s overnight summary):
- Italy: The government is preparing new plans to sell state assets, FinMin Padoan said, without giving further details.
- Spain: Tens of thousands of people marched through Madrid to protest against austerity measures. A hundred people were injured as protests turned violent.
- Ireland: Moody’s says the outlook for the Irish banking system remains negative, mainly due to an “extremely high level of problem loans that amount to nearly 30% of the rated banks’ total loans”.
- Greece: “A haircut of government debt held by the euro member-states would constitute an aggressive move without any practical rationale,” Deputy PM Venizelos says, adding that Greek public debt is sustainable. Greece should not stop mid-course in its efforts to overhaul its economy, ESM chief Klaus Regling says in interview with Swiss newspaper Le Temps.
In a different time and in a different place, this kind of news would have had investors running for the hills. As is, we are not in a different time and a different place and in all likelihood nobody will give a fig. But maybe my old chum at Banco Santander in London, Steve Beck, another one of those chaps who has been around long enough to see some long bonds issued and mature questioned whether the extraordinary performance which we have seen in the peripheral bonds markets over the past two years might not have gone a bit too far now.
Money managers have been buying peripheral bonds not only because they wanted to but, to some extent at least, because they couldn’t afford not to, causing a self-sustaining rally.
Being underweight the Greeces, Portugals and Spains of this world would have been unimaginably expensive in terms of both relative and absolute performance. Beck wrote: “Truly Fortuna Favi Fortus for those souls that stuck their balance sheet on the line. Not sure if it was the SMT, Draghi’s Gandalf like ’whatever it takes’, Anglo Saxon QE or just the passage of time that has worked. I can also buy the logic that if you are a long only fixed income investor and you have ridden this move for a while and should you decide to exit an old PIIG, where do you put the cash?”
Good point – too many risk defying investment decisions currently seem to be driven by the raw frustration over the lack of viable alternatives. Steve then goes on: “That said, I’m starting to get a little twitchy about the PIIGS of old now they look like breaking through four year lows versus the likes of the US and whilst I can appreciate no one is quite yet ready to hit the exit button, I’m not sure I’d feel an overwhelming urge to wade in here as a fresh buyer.”
Portugal, Spain and Ireland are all back to more or less normal issuer status and Greece will be with us again before long. Athens got it horribly wrong when it cut the hedge funds out of its five-year bond in early 2010 in perhaps the single most significant event to befall the Emperor’s rich wardrobe of new clothes. It has been lucky that those hedge funds don’t bear grudges as they were also the first to buy back in again but that is not talked about as it doesn’t make good political press in the same way that castigating them for having sold does.
News from Europe is getting better – it couldn’t really have been much worse. The European economy is showing signs of recovery – it too couldn’t have been much worse either. But I wonder whether Steve Beck might not have a point and whether it might not be close to the time to take just a few of those peripheral chips off the table.
