Monday, 27 September 2010

Meanwhile... the media continues to salivate over the 'Miliband of brothers', another crisis has been looming quietly but surely in the Eurozone. Despite claims and reassurances that the crisis was over, the markets are telling a completely different story. They have set their sights on Ireland and Portugal; both of which have seen their 10-year bond yields surge to euro era record levels. In effect sovereign debt is, one-by-one, being 'decoupled' and sent off to join Greece on a desert island.

A Fistful Full of Euro's likens it to the Agatha Christie novel; And then there were none (I notice that he wasn't brave enough to use the original title:) this sense the present European Sovereign Debt situation does rather resemble the plot of the well known Agatha Christie detective novel “And Then There Were None“. As told by M. Christie ten people, all of whom have in one way or another been previously complicit in an earlier death are somehow tricked into travelling to pass some time together on a secluded island. Even though the guests are apparently the only people on the island, they are – somehow, and one after another – systematically mysteriously murdered.

In a way which may eventually come to resemble scenes from the forthcoming meetings of the European Financial Stability Facility management board each morning for breakfast one less guest shows up. One by one and little by little, one participant after another becomes overcome by a mysterious and seemingly inexplicable bout of “systemic instability”.
AFFOE even goes onto, inadvertently, to disagree with Ed Ball's analysis that cuts have lead to the current Irish crisis (my emphasis)
In all these cases, including the Greek and Spanish ones, this issue is not simply one of stimulus versus austerity (a false polarity when it comes to the situation on the Euro periphery), the issue is how to restore growth to highly indebted economies, since without growth the debt to GDP ratios will not come down, and the burden of the debt will not be reduced. So more borrowing is not what these countries need right now (other than to aid short term liquidity), what these countries all need is more exports, and no one seems to be very clear how they are to achieve them.
In other words, the crisis stems from not having the flexibility of your own currency. He continues:

Morgan Stanley’s Chief Global Economist, Joachim Fels remains pretty unconvinced by all of this. “Strains,” he wrote in a recent report, have now reached a point where “one or several governments” may soon have to resort to the rescue mechanism. “Neither the European sovereign debt crisis nor the banking sector crisis has been resolved and both continue to mutually reinforce each other,” he said, adding that the EU’s stress tests for banks had manifestly failed to restore the necessary confidence.

None of this is a surprise, the Greek bailout was only ever a sticking plaster over fundamental cracks - a crisis postponed. A run of terrible data recently has not helped matters either: Irish GDP shrunk 1.2 per cent in the second quarter of 2010, European industrial orders figures slumped and speculation continues that Ireland may have to refinance its debt. As the Wall Street Journal today highlights regarding the bailout in May:

Over the next three days, Mr. Trichet sought a way out of his bind by pushing Europe's leaders to overcome disunity and act. His quest ran into the euro zone's biggest political flaw: There was nobody in charge...[and] four months later, the root causes of the Greek crisis remain: There is no central authority to even coordinate national tax-and-spending policies.

The endgame is clearly near, the Euro cannot continue in its current format. The only question is whether it voluntarily breaks apart - the South Med countries exit - or whether the markets call time and force it apart. Given the EU's glacier like ability to make decisions, and Merkell and Sarkozy's less than amicable working relationship I guess it will be the latter.

But that won't necessarily mean I will be dancing on the Euro's grave. I see its demise as inevitable rather than a cause for celebration. Britain, given its exposure to Eurozone debt will not be immune from the fallout, and the effect on world economic recovery is incalculable.

The single currency will also return in another form, probably I suspect based around the core economies of Germany and France. Moves to harmonise taxation, the first sensible step in currency union, in those two countries are already being prepared. The other countries with their economies broken as a result of the failed Euro experiment will be left to rot.

And nor do I believe that the crisis in the Euro will be the demise of the EU, despite Angela Merkel’s protestations. Like a shark that has to keep moving forward to survive so the EU has to keep on integrating for the same reasons. It will be badly damaged for sure, wounded, but there will be a resurrection - a different strategy - there always is.

It will be a battle won but not yet the war.

Update: Anglo Irish bank has had its credit rating downgraded this morning:
Moody’s Investors Service has today downgraded the senior debt rating of Anglo Irish Bank Corporation Limited (“Anglo Irish”) by three notches to Baa3/Prime-3 from A3/Prime-1, and is maintaining it on review for possible downgrade. At the same time, Moody’s has downgraded the dated subordinated debt held by Anglo Irish by six notches to Caa1 from Ba1 and has assigned a negative outlook…
Update II:
Irish 10-year yield spreads over German bunds are sharply wider this morning, at 0800 GMT, Irish yield spreads had widened to 4.53 percentage points, the highest since the introduction of the euro:
Unless the European Central Bank and national central banks step in "in a sizeable way" as buyers of Portuguese government bonds, OTs, and Irish bonds, Credit Agricole CIB expects these illiquid markets to slide further, "exacerbating the fear trade, boosting bunds."


  1. Personally TBF, I blame Bloefeld for all this 'bond' trouble - him and his bloody cat! Perhaps he should be given a good 'Rodgering', the 'Moore' times the better!

    On a more (apols no pun intended this time) serious note this latest crisis could not have happened to a more dispicable collection of morons.

  2. WfW I wonder if after said Rodgering Bloefeld will quip 'never say never again'. Nonetheless he would be in 'Moore' trouble if he dyed his cat pink.

    Agree about morons, unfortunately it won't be them that suffers as always.