Saving the Euro - Part 1

In these series of blog posts, Rob offers insights into the woes of the Euro Zone and the effect on the financial markets. 

Hooray Germany Votes To Save The Euro

Well that's jolly, the German Bundestag has agreed that Germany will back a toughened up European Financial Stability Facility (EFSF), which will guarantee that Euro 440bn will be made available to bolster European banks and buy what are essentially toxic Government bonds.

We can all sleep peacefully in our beds knowing that the Euro zone lives to fight another day, but can we?

The reality is that some analysts are now forecasting that it might take Euro 2tn (correct, tn not bn) to underwrite the problem.

Some bright spark has already suggested that the EFSF package of Euro 440bn be used as collateral, and leveraged products could be bought (invented even) that would allow the Euro 440bn to be used to protect that Euro 2tn requirement.

What planet are they on?

When you are stuck at the bottom of a deep hole, and you cannot get out, stop digging…..

Having just got the above agreement through the Bundestag – an action which many say is too late, and the scheme already obsolete – I very much doubt that the appetite is there to scale up the exposure to a possible leverage of 5:1.

Last night, Michael Portillo repeated a story that has been doing the rounds in the City for a few weeks now, that this whole process is basically "smoke and mirrors", and the Euro zone project is technically dead but is frantically being kept alive (on life support machines even) by the dodgy Eurocrats and MEP's in Brussels simply to keep the gravy train afloat and protect their gold plated perks – nothing whatsoever to do with saving any of the PIGS and alleviating the financial burden of their citizens.

Now, confessed cynic that I am, and not a great fan of the Federal States of Europe concept anyway, having seen over the years how much money is wasted by that over paid, unaccountable, bureaucratic machine, it does make me wonder how much truth is behind the rumour……

The major problem for the international markets at the moment is uncertainty as to how the problem with Greece etc. will be resolved, and that leads to lack of confidence in the whole system, which leads to weakness in the stock and currency markets.

I actually think that if a definite decision was made to sacrifice Greece (possibly Portugal and Ireland as well) that the markets would take heart from that and we would actually see a substantial recovery in the markets as the infected flesh would have been cut from the body which would then have a chance to heal itself.

As we speak, even though an agreement seems to have been reached to bolster the EFSF, the underlying view of the market is that it is too little too late – stock markets have given back most of the gains they made this week, FTSE back to 5140, Euro/$ down to 1.35 again………

Lots of quick fix ideas will be streaming out of Europe – my current favourite is the idea of placing a 0.1% tax on all bank transactions in Europe, heavily favoured by Germany and France as it would supposedly raise around Euro 55bn per year towards bolstering the EFSF.

The reality is that as around 75% of those transactions are dealt in London, or at least booked in the names of operations domiciled in London, this tax would have very little impact on either German or French financial institutions – as usual, the UK would be asked by Europe to shoulder a burden not of our making, and totally out of all proportion to our share of the problem.

Mike Spencer of ICAP London, possibly the largest global foreign exchange broker in the world, has already stated that if such a tax was imposed he would transfer all his operations to a country that was not included in the agreement.

Most financial operations nowadays can technically relocate at a minute's notice – just requires registration and a name plate on a wall, usually somewhere warm and exotic that doesn't ask too many questions – it would do more harm than good to the economies of all countries involved, especially the UK.

I know that I am not wearing my socially conscious hat here, but I think that there is a strong case to be made for financial "triage" in Europe – concentrate on treating/helping those countries that can survive, and letting those that cannot fall by the way side – it may generate a 2 tier Europe, but that would be infinitely better in the long run than trying to protect a one size fits all Euro zone, which could ultimately implode.

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The author, Rob (not his real name) is a treasury manager at one of UK's largest charities, he was formerly a trader.