A couple of weeks ago, I was looking at the likely outcome in the euro zone, and last week, on the three issues that needed urgent attention. These were how much Greek debt needed writing off, who was going to pay for that, and how a superfund could be created that imagined away all problems.
Finally, an answer…..?
And thus, in yet another summit, the powers that be, (for the moment), toiled away on an answer, finally given in the small hours of Thursday morning. Queue rejoicing; Q3 was the second worst in the last twenty five years for equity markets, seriously jeopardising many business models. By contrast, the S&P 500 has surged more than 13% in October, the biggest monthly gain in more than two decades, helped by figures showing the American economy growing by 2.5% annualised, in the third quarter.
Devil in the detail……
But the real relief was that the crisis in Europe had been sorted. Until you read the detail, of which there is none.
It’s not a default…..
It is not clear who decided that 50% write off of debt was the right number; in reality, the Greek economy is going backwards at high speed, so their ability to service loans of any sort, is surely diminishing. This is not any default, either. It is “voluntary”, (as if), but with extended maturity (surely the most inappropriate term), and lower rates, so the banks can pretend that the money will revert to them. Maybe no time soon, or indeed this century, but eventually.
So, it is not a default, and therefore those who issued insurance against such an event, (Credit Default Swaps), can heave a sigh of relief.
Banks to sort themselves out…..?
The write down is still large, however. Most of us would notice a 100 billion euro hole in our balance sheet. The banks, pretty much, are to be left to sort this out for themselves, although an analyst in the FT reckoned that they might only need 20 or 30 billion of new capital. The rest is to be made up by “eliminating dividends, deleveraging, lower compensation and disposals.”
Christmas Bunny alive and kicking……
The term “compensation” amused me; clearly any front line employee, whatever their title, needs to generate more income than they, personally, take home. There are rents to pay, and lots of other costs. There are many people, in any organisation, that do vital jobs, without which the machine could not function. Tis a team effort. Not so at UBS; you may recall that they suffered huge losses recently from a rogue trader, but all is well. Even though the investment banking division made a loss in Q3, the Economist reports that 89% of the income was allocated to pay salaries and bonuses. The Christmas bunny lives on, for now.
EFSF – “an estimate based on the still untested ability to multiply a still unknown asset base”…..
The final stage is the EFSF, or bailout fund. Widely discredited, it limped through Wednesday night, with maybe 250 billion euros to spend, which is proposed to be leveraged, even though that was a major cause of these problems. No matter; borrow more. It might need another billion euros, probably more. As the FT puts it, “this is an estimate based on the still untested ability to multiply a still unknown asset base by four to five times.”
The final word, on this subject, this week, goes to Angela Merkel, the German Chancellor. “This is an approximate value; we don’t yet know this works”.
Back on this side of the Channel, it has become clear that the UK is going to become more marginalised as a result, which is no great surprise. The cost will be bourne by the Germans, and in return, they will demand, and get, much greater control over the 17. The 10 countries outside will still be important trading partners, but if you don’t pay, you can’t be part of the game.
With our own exchange rate, and financial services industry, we could survive, but it would not be easy. Are we going back to the EFTA of 1958, if anyone can remember that, (tariff free trade zone within Europe), or reinventing the Commonwealth, so shamelessly abandoned? Or will it swing more towards the Occupy camp, outside St Pauls? When I went past, ten days ago, the taxi driver reckoned that he had seen many of the faces before, at different protests. Whatever, they have a view which should be debated.
Protestors……opportunistic and cynical?
I suspect the weather will move them on, but it has given the authorities a few problems. It is, apparently, the first time the church has been closed since the Blitz, and the gift shop is loosing £20/- a day. Or, failing to make that much. So, they have sided with the City of London Corporation to have the tents cleared away. Which is fair enough; that is the law. Interestingly, the local restaurants and shopkeepers complained, initially, that it would ruin their trade, but the opposite has happened, as people have come to watch the protest.
Lord Carey, a former Archbishop of Canterbury, questioned the morals of the protesters, describing their monopoly of Church land as “opportunistic and cynical”, according to the Telegraph.
It is a long time since my History of Middle Ages O Level, (now GCSE), but did not the Church acquire much land by far more dubious methods?
Back in Italy, where I have been this week, there is no sign of any slowdown, albeit that the tourists are American, Asian, German or French. Notwithstanding, the crews of the excellent vaparetto service went on strike Thursday morning, coinciding with the first high tide of the winter. Extended pension age, without consultation, has arrived in that most beautiful of places.
28th October, 2011