Rob's 7th guest post on 'Saving The Euro'
Hooray, hooray the euro zone is saved.
Or is it?
OK, the 17 members finally came up with a package that they think will work, but it is already being dissected by the financial analysts to see if it is strong enough.
Firstly, they agreed to strengthen the EFSF rescue fund from Euro 440bn to Euro 1tn, but it is already being pointed out that actually the figure should be closer to Euro 2tn to guarantee that it will work. The problem is where will the money come from?
Germany doesn't really want to shoulder a greater burden than they have already agreed to, and France cannot afford to contribute more and most of the others are already bust.
Well actually on face value, nobody seems to be expected to stump up any more cash – they are going to go the market which has been vilified for creating exotic financial instruments with no underlying substance to create a leveraged vehicle which will enable the remaining balance in the EFSF fund of approx. Euro 250bn to be geared up to cover Euro 1tn of debt?
Can anybody else see anything strange or at odds in this?
Secondly, they want those same banks, and other investors, holding Greek debt to take a 50% cut in the face value of their holdings – what happens if they decide that they don't want to do that?
Thirdly, they want the European banks holding this debt to increase their capital by another 1 or 2% - approx. Euro 100bn – but a number of banks have already said that they would prefer to reduce the size of their operations and keep their capital the same, thereby increasing the ratios that way rather than trying to raise additional capital in the current market – basically too expensive a proposition in the long run as prices are so inflated at the moment. The knock on effect would be that the banks would become smaller, and hence be able to lend less, which is the opposite of what is required at the moment.
The big issue is how will this all be managed – it will be a massive, and incredibly messy, undertaking.
It seems that there will be a push for the 17 Euro zone members to come together for a much closer financial and political union, with the non-Euro zone members of the EU cut off from many of the decisions made within that group (Federal States of Europe looks as if it could become a reality……).
How has this been taken by the markets?
Well the positive view is that the overall package was better than many thought would be agreed, but less than some analysts have calculated would guarantee success.
Well, the Greeks, as you can imagine are ecstatic – they now only have to repay 50% of what they actually borrowed (assuming the proposal is universally accepted). However, many analysts estimated that a 60% "haircut" would be necessary rather than 50%.
The Italians, the next in the firing line, discussed the proposals in a diplomatic manner and debated how they would curb their spending, and then, as they couldn't agree what to do, decided to settle the problem with an old fashioned fist fight, for some supposed sarcastic slur made by one party to another…….diplomacy at its best!!!!
Perhaps that is how we should settle things in the House of Commons – a 3 way bare knuckle competition – Cameron versus Clegg to decide which way the ruling party will go, and the winner takes on Miliband – would cut out all the silly time wasting banter.
The Conservatives could draft in Maggie and her handbag (the one with the brick in…..) and Labour could bring back Prescott who has a decent track record in these matters………
The markets have reacted, but not as enthusiastically as some may have hoped.
Currencies – Euro/$ back to 1.40 and GBP/$ back to 1.60.
Stock markets lifted around 2% across the board – FTSE back to just over 5,600.
This is a pretty muted reaction to be honest – I wouldn't class it as an overwhelming endorsement.
This is partly due to the comments which accompanied the announcement – "this is a marathon, not a sprint", "we will monitor and see how it goes" etc.
Lots of issues to be ironed out, it might well be a "sticking plaster" rather than a cure, but it is a pretty big one so we will have to see how it pans out – I agree with the "marathon" comment and I hope that the markets do to, or this small market improvement could turn on its head in an instant and we will be back to where we were once again.
__________
The author, Rob (not his real name), is a treasury manager at one of UK's largest charities.
No comments:
Post a Comment