Last week I wrote that the markets timeframe and European policy makers were at odds and that while Europe sought a long term solution the market just wanted to get on with it. So while it is easy to worry about all of the problems that arise or potentially could arise I think the key, for me at least, is the determination of European politicians to get things sorted.
To wit the comment from European Commision President Barroso that:
This is a marathon, not a sprint. The technical work over the package will be completed in the coming weeks.
This needs to be viewed through the long lens not the snippy derision that I am seeing in the Twitterverse so far.
For thousands of years markets of all shapes and sizes have existed at the pleasure and whim of the political class of the day. Be they Emperors, Kings, Sultans, Presidents, Parliaments or even lowly European politicians (I am be facetious by the way) they hold in their hands the ability to change the rules by which markets operate. They can suspend them, close them down, legislate them and regulate them or legitimise them. Whatever they so wish.
So for all the smoke, mirrors, stuff and hyperbole it is the politicians, once emboldened and with a clear direction, who hold the whip hand not the market. I’m probably out on a limb here but I believe the market has overplayed its hand in flogging the CDS of sovereign nations and enraging the political class. To be sure, this is a small example of a bigger problem but to me it seems to be the one that has crystalised the push toward reform and solution.
Quite possibly once the European politicians have worked out their end game and enforced their will on the market in terms of haircuts and the like I’d guess that there is more regulation to come in order that it is easier for politicians to enforce their will on the markets. Just look at the history of anti-trust style attacks by Europe when companies get too big, at least in their eyes.
Don’t poke the bear!
Now you might be thinking I’m on the Europeans side here but you’d only be half right. I think in breaking their own rules of entry in expanding the Eurozone, in diverging from important precepts like the Maastricht treaty through time and in allowing the basis of the Eurozone to slip anchor and expand when entrants were, or are, clearly not ready was to set up this mess.
But I think the mess turned into a shambles because of the structure of markets since this great NATO recession took hold. We are neither where we were before the turn of this century or where we need to be in a Basel III world. Like the European situation I reckon their is a growing belief that market structures need to overhauled to better serve their economic purpose. But that is for another day.
So to the good news – Europe seems to have agreed a plan.
The Australian Dollar is at 1.0490 looking like it just might be the little currency that might. The 3 year swap rate in Australia is up at 4.35 washing away the CPI induced rally and market participants have slightly downgraded their view of rate cuts over the next year from 120 bps yesterday to 110 now (I think 50 bps without catastrophe). The ASX 200 is finally breaking out of its downtrend and is up 2.39% in trade today.
The FT wrote around an hour ago:
European leaders reached a deal with Greek debtholders on Thursday morning that would see private investors take a 50 per cent cut in the face value of their bonds, a deep haircut that officials believe will reduce Greek debt levels to 120 per cent of gross domestic product by the end of the decade.
The agreement, made just before 4am after nearly 11 hours of talks at a summit of eurozone leaders, includes a new €130bn bail-out of Greece by the European Union and the International Monetary Fund.
Here is the link to the Statement by IMF Managing Director Christine Lagarde on the European deal that has been struck. I’ve slightly paraphrased but essentially the deal is as follows:
- …on Greece, the agreement reached on key parameters for private sector involvement is of the utmost importance to improve debt sustainability. It is based on a realistic assessment of the Greek economy and an appropriate burden-sharing between the private and official sectors.More immediately, I intend to recommend approval to the IMF’s Executive Board of disbursement of the next tranche of our loan under the current program….
- …the decision to leverage the capacity of the European Financial Stability Facility (EFSF), including through the use of new Special Purpose Vehicles (SPVs), can strengthen Europe’s defenses against contagion and help ensure the proper functioning of the sovereign debt market.
- …the agreement reached on a coordinated mechanism to recapitalize banks and strengthen their funding is a major step forward. Restoring growth depends on a financially sound banking sector and reinforcing the banks’ capital buffers is key. This should be achieved mainly through the provision of additional capital and not by lower lending within or across countries.
You can hear the siren song of more regulation for global finance in those last 2 points I reckon.
There is no panacea for this debt induced mess. Many are culpable and it will take years to fix up. If this deal sticks, which I believe it will, risk assets will rally and rally hard, but ultimately too much debt and delevering at various national levels and globally means that we still have a few years of troubled growth ahead of us. This will take the wind from the sails of an ebullient market in time
Let’s see if we can’t ride the wave of good news and positive sentiment for as long as it lasts but don’t hold on too tight because we might need to jump off in a hurry.
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Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.