Politicians are not hypocrites

Charles Saatchi has no moral compass:

Ever since our agency created "Labour isn't working" people occasionally enquire how deeply held are my Tory beliefs. I also, once, threw myself into the Health Department Anti-Smoking campaign, visited emphysema wards, studied pictures of cancerous lungs, and came up with the grisliest copy I could — puffing away happily as I wrote. How sweet of people to think that advertising copy is written from the heart.

The great ally of dozy, third-rate oppositions-in-waiting is the ennui of a jaded public who think "It's Time For A Change". In essence, politicians are like nappies. They need to be changed often, and pretty much for the same reasons. Nearly all political leaders don't seem to have adequate answers, until they write their memoirs.

The Left think they are where the righteous should be. The Right try so hard to scramble left, the damp middle ground has become an overcrowded swamp. Together when they see light at the end of the tunnel, they spend as much as possible to build some more tunnel. Our problem is, we all grew up to hear that anyone could become President or Prime Minister; and now we believe it.

No one comes closer to capturing the workings of government than Claud Schuster, who after taking office in 1915 served 10 different Chancellors during his 29 years as Britain's senior civil servant. His description of the relationship between the Prime Minister and the Cabinet was graphic: "Like the procreation of eels, it is slippery and mysterious."

As someone with a particularly small moral compass, demonstrated by the speed with which I dropped the Health Department anti-smoking campaign the moment we were offered the Benson & Hedges/Silk Cut cigarettes account, I would have made an outstanding Member of Parliament. With a limited skill base, minimal intelligence, and very little numeracy, I obviously stood an excellent chance of achieving high office and acclaim in politics. Or perhaps a senior post in the diplomatic service? Diplomacy is simple stuff; it's the art of letting someone have your way. And remembering to say "Good Doggy" while looking for a bigger stick.

Read it here. 

Saving The Euro - Part 20

Rob's 20th guest post on Saving the Euro.

Market Indicates...


Well irrespective of what Merkozy or Nick Clegg says about Cameron's decision the markets have stirred a little and are beginning to express their views – foreign exchange wise at least.

Euro/$ is finally going down – trading at 1.3175.

GBP/Euro – possible a better indicator of what they think – is slowly creeping up to 1.1825 – the strongest it has been for about the last 9 months.

In the polls, Joe Public has expressed support for his actions – always a good sign, and something that the markets do take in to consideration.

However, we have a long way to go before we see whether or not it was indeed the right decision.

I personally think that he was right to use the veto as the "Tobin" tax for example would have been incredibly unfair – the UK would have ended up paying around 35% of the total amount forecast. Also, unless it was a "global" tax it simply wouldn't have worked in the long run – even if only one country had opted out, the markets are highly mobile and would have simply re-located to that country to avoid paying the tax.

The UK may now actually be in a stronger position from being on the "outside" of the Euro Zone Plus group, especially if they want to use institutions formed in the EU, so the terms isolated and marginalised may be a little too dramatic, but that is the press for you.

I think that we are now in "wait and see" mode – being December, many operations have scaled down their trading volumes, and if a head of steam does build up, it won't take much to really move the markets.

The key level for Euro/$ is 1.30, and for GBP/Euro 1.20 – if they are broken we could be off to the races in a big way.


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The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 19

Rob's 19th guest post on Saving the Euro.

Was Cameron Right?


Firstly, I must say that I think that he did the only thing that he could to protect the UK's unique position in the financial markets.

Nothing different to the French attitude about agriculture, which they have protected from day 1 as it is a massive money spinner for them.

Will the "Euro zone plus" concept work, well "the proof of the pudding is in the eating" as they say?

The UK is not as isolated or vulnerable as some may think – still a couple of other countries not on the Merkozy train yet – and also it puts them in an interestingly strong bargaining position.

To push a number of directives through, the "Euro zone plus" group wants to use a number of EU organisations to monitor and enforce the dictates that will come out of the discussions in the coming days/weeks, but these organisations are financed by all 27 EU members including the UK and the other hold outs, and they have the right to veto their being used.

If the "Euro zone plus" group decide to introduce the "Tobin" tax within their countries, that may well convince more banks etc. to relocate their HQ's to London where the tax will not be introduced, thereby further strengthening London's position as the key financial centre.

What did the market think of this?

Bizarrely, once again we have a key summit which didn't go to plan and nothing whatsoever happened in the markets – stocks and currencies all ticking over as if it was a normal Xmas market – very quiet, very low turnover and volatility.

Having been a currency trader for more years than I care to remember, this is starting to freak me out a bit – I have never seen the FX markets in particular so relaxed about things.

I keep having to ask myself is it really this quiet, or have I missed something – is there pressure building up under the surface that I cannot see, and is it suddenly going to erupt in to a chaotic frenzy of trading?

Perhaps it is all a dream and I will suddenly wake up to the sound of frantic dealing, and markets spiralling out of control……..or perhaps not.

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The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 18

Rob's 18th guest post on Saving the Euro.

Missed Messages

The last week in the markets has been very interesting from a spectators view point.

Stock markets have rallied strongly – led by the banks – with Merkozy (that mutant being that has been created from the merging of Merkel and Sarkozy to become the voice of Europe) deciding for all the other nations in the Euro zone that they will become a more integrated fiscal, and by extension, political body. To do this they want to re-write the "Treaty" – a treaty is defined as "a formal agreement between two or more states in reference to peace, alliance, commerce".

Lovely sound bite, but how will they accomplish this – they effectively want to take away certain sovereign rights to manage a country's own economy, finances etc. and have them monitored and controlled by one central body?

I am not sure if that is covered by the term treaty, as if there is a substantial transfer of powers to Brussels, a number of EU members, including the UK, may have recourse to a referendum, and in the current climate of austerity, I think that there could be a chance that it won't get ratified at national levels.

In the UK, Cameron is definitely running scared, and is desperately sending out the message that any adjustments to the treaty will not be substantial and no more powers will be surrendered to Brussels, but that seems at odds with the comments from Merkozy outlining plans to re-write the whole thing, even if only for the core 17 members of the Euro zone itself.

As the old saying goes, "the devil is in the detail", and there is very little of that to be seen so far.

The stock market rally has eased off this morning – I admit that it could be short term profit taking, but FTSE really struggled yesterday to break 5,600, and is now slightly down on yesterday's high at 5.560.

My big concern is that the currency markets are singularly unimpressed.

Euro/$ is down at 1.3350 from last week's high of 1.3520.

GBP/$ is trading at 1.5600 from last week's highs of around 1.5750.

A small market fact that may bring this in to perspective – if you add up the total turnover in the global stock markets for one whole year, what does that equate to in global foreign exchange turnover?

1. 17 days
2. 34 days
3. 68 days
4. 136 days
5. 272 days
6. 544 days

The correct answer is just 17 days (a slightly old statistic, but it has not changed much in the interim).

So am I overly worried about what the stock market thinks?

A little perhaps, but not as much as I am worried about the Forex market – if you cannot get the currency traders on board, and they don't like what they see, read or hear, you are going to have one massive uphill struggle to make this plan succeed before they decide to tear the Euro apart.

As an example of the uncertainty within the market at the moment, ICAP – possibly the largest Forex broker in the world – has already been discussing with its clients (banks mainly) how to reintroduce the Greek Drachma in to the trading loop, and major Irish institutions have been told to come up with a contingency plan to cover themselves in the event that the Euro implodes.

S&P announced yesterday that 15 of the 17 Euro zone members were at risk of losing their top credit rating, especially if the Merkozy plan went through, as further integration would dilute their individual capital ratios.

Merkozy has come up with a plan, but there is a mountain to be climbed before it can be agreed, plus it needs more time to see if it then actually works.

I have said this before, traders hate uncertainty, and the longer they have to wait for results etc. the greater the chance is that they will simply get bored, fed up, whatever and choose the easy option.

The easy option is to sell every Euro they can lay their hands on – buy hard currencies like US$, Yen, Swiss Francs and even GBP, and keep selling until the Euro buckles and implodes – governments have very short memories, and forget that the Forex markets have an impressive track record of ignoring what governments might like or want, and simply forcing through change by sheer pressure.

Will be fun to see what the Year End brings.


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The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 17

Rob's 17th guest post on Saving the Euro.

Last Point Answered

There has obviously been a lot of behind the scenes discussion between non-Euro governments resulting in the announcement today that their Central Banks will facilitate access to non-Euro funding.

The Federal Reserve in the USA has also made it a lot cheaper for other Central banks to "buy" US$.

Result:

Stock markets have jumped between 3 and 4% - FTSE back over 5,500.

On the FX markets the US$ has weakened in line with the announcement and Euro/$ has risen to 1.35, and GBP/$ has jumped to 1.5750.

Is this the start of a global co-ordinated plan to rescue Europe, and by extension the global economy?

As I said below, I couldn't understand the "markets" reaction to recent events, but this would explain a lot – the markets are pretty incestuous and such negotiations between governments don't stay secret for long.

__________
The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 16

Rob's 16th guest post on Saving the Euro.

The Euro zone debacle stumbles ever onwards

Is there a white knight waiting over the horizon to rescue the damsel in distress that is the Euro zone?

I very much hope so as the longer this drags on, the worse the situation will become.

The Eurocrats, and so called Finance Ministers, do not fully understand how the "market" works – it is made up of thousands upon thousands of individual traders who have the same failings that we all do. Year end is coming and either boredom or frustration will start to develop – they all hate uncertainty, and all they need to see is a chink in the armour in the underbelly of that bloated behemoth that comprises the 17 member states of the Euro zone.

They have been probing and looking for weaknesses over the last couple of months, and in turn have put pressure on the Southern European nations driving funding costs in Italy for example (3rd largest European economy) up towards 8%. 

Governments were toppled, funding costs across the board have risen without a sensible plan to resolve the issue being agreed.

All you ever here is what "Germany" wants which amazes me. There are 17 members in the Euro zone – take out the PIIGS as they have nothing to contribute because they are effectively bankrupt, possibly also France as it is basically strapped for cash, and you still have 10 other member states and they have been totally silent – I think that is bizarre.

Last week Germany got a taste of what it was like to be a PIIG as a relatively routine debt auction turned into a complete disaster – they were unable to realise as much funding as they wanted, and the price they had to pay rose significantly, actually pushing the cost of funding above that of the UK for the first time in a number of years.

Germany is paranoid about letting the ECB act as a real Central Bank – lender of last resort, and unleashing it to support Euro zone debt issues – and have concentrated upon bolstering the EFSF, but the general view is that the EFSF alone will not be sufficient to stem the rot – they are desperately calling upon cash rich sovereign funds elsewhere to bolster the funds available.

Germany will also fight tooth and claw against anything that might raise the "I" word in Germany – INFLATION.

Up pops the IMF – is this the white knight?

The next tranche of the bail out to Greece has now been approved, and the IMF is due to pay about 1/3 of that, but will they be willing to pay more in the future – the Euro zone Finance Ministers certainly hope so?

The IMF has a "war chest" of around $390bn to play with, but this is to cover global issues, not just the problem in Europe.

Both the USA and the UK have stated that they will be willing to bolster the funding of the IMF, providing it is not all immediately channelled in to Europe.

I suppose the question to ask is will the combined cash available at the IMF, ECB and EFSF (EFSF funds will be leveraged under a new plan to cover about 30% on any initial losses on Government bonds) actually be enough to set Europe back on its feet?

My honest answer is that I don't know – the longer the problem stays unresolved, and the longer they have to pay inflated funding costs, then the harder it will be to come up with a viable rescue package.

I am still amazed however, that the currency market has not hammered the Euro beyond recognition – it is currently trading around Euro/$ 1.33, but 18 months ago it was down below Euro/$ 1.20.

By comparison, GBP/$ is around 1.55, and it has happily traded in a range of about 1.55 to 1.65 for about the last 18 months – so no real back lash there either.

Europe is really in limbo-land at the moment.

________

The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 15

Rob's 15th guest post on Saving the Euro.

Euro zone debt map....this is interesting

Have a look at the attached interactive map (thanks to the BBC), and see if you now agree with the concept I suggested a while ago.

http://www.bbc.co.uk/news/business-15748696

The problem throughout Europe is the sovereign debt issue, and I suggested somewhat tongue in cheek a little while ago that they could simply "net" off what they owe to each other, thereby bringing down each country's requirement to finance their outstanding holdings.

As an example (assuming the figures in the map are correct), compare the UK to France – what do we owe each other as nations?

Believe it or not we owe each other around Euro 210bn, why not simply net it off and reduce the overall sovereign debt burden for both countries by a significant amount?

I accept that there are different maturities and interest rates involved, but this is just a simple case of financial mathematics – the overall cash burden would be reduced significantly.

If you look at the UK and USA, you could net off around Euro 600bn……..

The UK and Ireland could net off around Euro 105bn…….

A little simplistic I know, but I have yet to come across an overwhelming argument why this could not be done.

________

The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 14

Rob's 14th guest post on 'Saving The Euro'

Another New Government.

What can I say?

Cameron basically came home with his tail between his legs after Merkel basically told him to get lost, and refused to consider any of his proposals.

Major German papers ran headlines ridiculing our Prime Minister and made reference to the fact that the UK would have to join the Euro whether we wanted to or not – sadly that was repeated in the UK by Michael Heseltine.

Seems to be a one man band running things in Europe at the moment and the conductor is named Merkel.

We now have a new government in another Southern European country – Spain – 3 changes in less than 2 weeks, but it is having very little effect upon the market, confidence is still weakening.

I mentioned a couple of weeks ago that this reminded me of the ERM crisis in the early 90's, and this morning's comments by Moodys about France will only add fuel to that fire.

Though Sarkozy has seemed to be Merkel's shadow over the last few months, he has gone very quiet over the last couple of weeks. France is not another Germany, they simply don't have the cash available to back anything they might want to do, all he can do is support Merkel verbally, make suggestions as to what might help France , but as the junior partner he can only accept what scraps he is thrown.

His argument for the ECB to become the lender of last resort and for it to hoover up Euro zone government bonds to stabilise the market (a suggestion also made by Cameron) was dismissed out of hand by Merkel – again making blanket decisions for the other countries in the 17 country group – I still cannot understand why all the other countries are so quiet.

France is definitely creeping in to the sights of the dreaded "market", and if it forces France's debt financing rates up to anything like the levels paid by the "PIIGS", be prepared for a bumpy ride.

Stock markets are down across the board by about 2% again – each day they open a little lower each time – FTSE trading around 5250.

Currency wise, I am still a little confused as to why the Euro has not been hammered – but that could simply be down to a lack of players – Euro/$ weakened a little and is hovering around 1.3450, dragging £/$ down with it as well to 1.5650. The interesting point to note is that GBP has lost ground against the Euro – it seemed quite comfortable at 1.17 but is now headed towards 1.16.

I am very surprised that other international players – USA, China etc. have been willing to sit back and let this sad story unfold.

The likes of Obama are constantly preaching to Europe to get its act in order, but all we have seen so far is uncertainty, wishy washy ideas, 3 governments turned over, stock markets falling daily, cost of debt financing rising and no clear plan to resolve the problem.

It is a complete mess……..I don't know how much more time the "market" will give Europe to sort itself out.

If the "market" gets the bit between its teeth and decides to really put the squeeze on the likes of Greece, Italy, Spain and now even possibly France, I wouldn't be surprised to see one of them go for pulling out of the Euro – would mirror the UK pulling out of the ERM as the "market" pressures were simply too much for the UK government to bear.

The only difference in this case is that the UK was, and still is, a sovereign country with its own currency – GBP. 

There was never a plan "B" for those that joined the Euro to be able to revert back to their own sovereign currency – that is the tricky bit.

__________
The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 13

Rob's 13th guest post on Saving the Euro.

The Plot Thickens

What is Germany up to?

First thing I read this morning was about a leaked German memo outlining a secret plan by Germany to block any move the UK might make to have a referendum on anything to do with treaty changes in the EU and any proposed claw-back of controls from Brussels.

Then I read about a row breaking out in Ireland over how the German parliament had got hold of a draft of the next Irish budget before it had been reviewed and discussed in Ireland.

There was an article in the press yesterday which, when referring to Germany, stated something like "you no longer have to worry about Jackboots in Europe but you do have to worry about Bossy Boots" a rather unflattering reference to Merkel who is emerging as some kind of European control freak.

What is she trying to do?

She runs a very strong risk of creating a situation that she supposedly is very much against – members of the EU (not just the Euro zone) revolting against this "I am in charge, you will do what I say" attitude.

Such actions (as above) will only add fuel to the fire in the UK for not just a review of our relationship with Europe, but also whether we should be in it at all as it looks increasingly likely that decisions will no longer be made in Brussels for the good of all members, but in Berlin for the good of Germany.

This is all adding to the uncertainty within the markets, and global stock markets have all opened lower again this morning – FTSE 5390.

Currency markets are still holding fire – Euro/$ still around 1.3500 – which concerns me somewhat. Volumes are very low, and I don't know of many people that are actively trading which in my experience is very strange.

Cameron is meeting with "Bossy Boots" today to discuss the "Tobin" tax amongst other issues, and I am of the opinion that the leaked German memo is an orchestrated attempt to put additional pressure on Cameron to toe the German line on Europe – I am hoping he has the gumption to tell her where to stick her Bratwurst as I am one of the growing crowd of those that are becoming somewhat concerned at how Germany appears to have taken advantage of the economic situation to extend its control over Europe.

Germany has already facilitated 2 changes in Government in Southern Europe, which will now be run by Technocrats with historic links to the EU bureaucracy – who will be next?

More elections in Southern Europe over the week-end – will we see more puppets in power with their strings being pulled by Germany?

__________

The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 12

Rob's 12th guest post on Saving the Euro.

Germany Kicks Back

The German government is pushing for the UK to contribute financially to saving the Euro zone, and, as I suggested below, are getting fed up with Cameron telling the Euro ministers what to do. They want the coalition government in the UK to accept a tax on all financial transactions to raise cash for a "fighting fund".

This will be heavily opposed from the UK (unless Cameron has totally lost the plot) as the bulk of all international trades are booked through London, and will have very little impact on the likes of Germany or France, but will unfairly penalise the UK where approximately 30% of GDP is generated by the financial services industry, and its ancillary businesses.

Volker Kauder, the parliamentary leader of the Christian Democrat Union in Germany, certainly won't win any older British Euro-sceptics over with comments like "Europe is speaking German" when he argues for more financial assistance from the UK. I think the point he wanted to get across was that more Euro zone members are beginning to support the German stance on the proposed tax, rather than suggesting that Germany was quietly taking over Europe, but this will play straight in to the hands of the likes of UKIP in the UK (and unfortunately the more extreme elements like the EDL).

The rift between the Lib Dems and Conservatives in the UK over the Euro zone issue is beginning to open cracks in the coalition government, and these cracks need to be plugged very quickly before "the market" decides that there is a political crisis on the horizon in the UK and acts accordingly.

Cameron is in Germany today, and it will be interesting to see what he comes home with – the UK in a strong position to renegotiate its position in Europe, or a complete "cave in" to the demands of Germany – from recent experience, if I was a gambling person (very PC) I would put my money on the latter. Cameron is definitely not another Maggie Thatcher when he negotiates on the UK's behalf.

Without a doubt, Germany is running the show at the moment, you never here from any other members of the Euro zone, and even France has gone a little quiet, as the reality sinks in that they also have no cash, and cannot argue from a position of strength, unlike Germany.

The situation in Greece and Italy is still unresolved, and the longer the in-country haggling between the various political factions takes, the less confident are the markets that the problem can be contained.

Euro/$ traded lower again today, down to Euro/$ 1.3450, pulling GBP down with it again to £/$ 1.5775.

The link between GBP and the Euro still remains around £/Euro 1.17.

Stock markets little changed from close of business – opening flat to a little down – FTSE trading around 5,515.

The Bank of England looks set to cut its growth forecast from 2% to 1% in its quarterly inflation report due out today citing fears of a Euro zone melt down.

Further afield, Japan cut its own economic assessment again citing fears of the ongoing debt crisis in Europe.

The longer this issue goes unresolved, the more uncertain the markets will become, and the economic situation in other non-Euro zone nations will worsen.

I suggest once more that if they want the Euro zone to survive as a credible and viable union, then they need to perform "financial triage", and cut away the dead and dying flesh so that the rest of the body can survive.

It will be incredibly painful in the short to medium term, but if they stick with the idea that they want the Euro zone to survive "as is" they run the risk that they will simply run out of time and financial resources, and simply implode.

__________

The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 11

Rob's 11th guest post on Saving the Euro.

The Full Monti

New Governments in Greece and Italy – Papendreou and Berlusconi dynasties over (well for the time being anyway as Berlusconi has hinted that he might throw his name in to the pot at the next elections…..)

The Dynamic Duo, Batman and Robin (sorry Merkel and Sarkozy) should be happy as the 2 perceived sticking points in their great plan for the Federal States of Europe have been removed and things should have taken a turn for the better.

However, the markets don't appear to have taken recent events very well.

Stock markets opened down again across the board this morning – 1% in France and Germany, but only about 0.3% in the UK with FTSE around the 5,500 level.

Currency wise – the Euro has lost ground against the US$ again at around 1.3550, and, as usual, pulled GBP down with it to £/$ 1.5875. However, against the Euro, GBP is still holding in at around 1.17 so it could be argued that this recent dip is a US$ led move rather than particular Euro weakness.

We really need to see Monti lead Italy from the front and come up with some real fundamental changes to get the debt issue under control – without an all party consensus and support, and some real tangible austerity plans Italy will struggle on as they did under Berlusconi with lots of parliamentary haggling and in-fighting, and the odd fist fight to liven up the day.

Greece will become a secondary issue, and if it becomes "business as usual" in the Italian government then the recent uncertainty surrounding the Euro zone will pale in to insignificance.

No matter how much money the IMF, ECB, EFSF etc. chuck at the problem, without fundamental changes in how these countries (and others in the "contagion" zone) manage their finances, it will ultimately fail as they will simply run out of resources – you cannot keep pouring money in to a bottomless pit.

The only countries with pools of cash to play with (China, Gulf oil states etc.) are all sitting on the side lines waiting to see what happens. They are not naïve, why buy Euro zone assets today, when you can possibly hoover them up at half the price in a "fire sale" in a few months time?

In the UK I confess to being a little confused at the Government's attitude towards the Euro zone.

I agree that we need a stable Euro zone as it accounts for approximately 50% of our exports, and Cameron keeps making statements to the press that they must sort out the problem quickly, but they are getting fed up with his constant badgering which will ultimately alienate them, irrespective of the outcome.

He also says that it is possibly a good time to "rethink and redraw" our relationship with Europe, yet when he had an opportunity to do just that, with a solid mandate from the people, he crushed the vote in Parliament, although it did expose the depth of feeling within his own party.

We need clarity from Europe (especially Greece and Italy) as to how they will get on top of the debt issue, and in the UK we need a clear lead on what our relationship with Europe will be going forward.

Without it the markets will wallow in limbo, and in the current climate it is much easier to sell than it is to buy.

__________

The author, Rob (not his real name), works in one of UK's largest charities.

Saving The Euro - Part 10

Rob's 10th guest post on Saving the Euro, in which he remembers the now defunct European Exchange Rate Mechanism of 1979.

Looks like a re-run of the ERM crisis in the early 90s

Anyone remember the ERM? - the forerunner of the Euro zone.

The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro, which took place on 1 January 1999.
                               -Wikipedia

Back in the early 90's the core group of nations that make up the Euro zone, including the UK at that time, operated a set of fixed exchange rate bands between the member countries.

A bit like the Euro today, it restricted the individual countries ability to influence their own import/export markets etc. by manipulating the exchange rate.

Pressure built up, and the speculators - the dreaded market - attacked each country in turn trying to take advantage of this inflexibility. In some instances, this forced the country concerned to raise short term interest rates to mind numbing levels to combat speculative sales of the currency - over 1,000% for overnight funds.

If the country didn't crumble they moved on to the next until they started on the UK.

On one day the markets went crazy - exchange rates were quoted with 500 point spreads (£/$ is usually quoted with about a 5 point spread) interest rates started to rise, and there were a number of "official" rate increases announced by the government to punish short sellers.

Pressure was too much for the government to bear, and once the markets had closed that evening they announced that the UK was pulling out of the ERM and all interest rate increases etc. were now cancelled.

A colleague, who had gone home to write his resignation letter, because he was sitting on a £3m loss, came in the next morning to a £400k profit......totally bonkers (I had to laugh when he said with a straight face that he was confident that his positions would come good - when I last spoke to him that fateful evening he was crying in to his 7 or 8th pint of beer.....).

The current crisis in the Euro zone has some startling similarities - the market is trying each country in turn, to find a chink in the armour.

Ireland first - they crumbled

Portugal and Spain - tried but they didn't break (yet)

Greece - they crumbled

Italy - doing their best to break them, but could they be the "UK" of this crisis - their economy is the 3rd largest in the Euro zone and 8th in the world - if they go, the whole pack of cards crumple.

Interest rates are going up in all the Euro zone countries being targeted, they cannot manage their own FX rates as all now using the Euro.

Spookily reminiscent of the early 90's ERM scenario, but the only difference is that they all had their own currencies to fall back on then.

The UK pulled out of the ERM, but as we were (and thankfully still are) GBP based we were able to survive, and some would say prosper for the next 10 years.

What would happen if Greece or Italy had to bail out of the Euro?

Absolute chaos in the global markets - the Euro zone never had a "Plan B" for withdrawing - the idea was that if you joined, you joined for life.

Greece and Italy have a short grace period to put their respective houses in order, but if we are still having the same conversation at year end, then 2012 is going to be a very turbulent year on the global markets, and irrespective of where you live or what you do you will be affected, and not in a good way.

__________

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

Saving The Euro - Part 9

Rob's 9th guest post on 'Saving The Euro'

Lost for words - and that is rare.

After a butt roasting session with Merkel and Sarkozy, Papendreou returns to Greece and walks straight in to a cabinet revolt led by his Finance Minister.

Conspiracy theorists once again out in abundance and are suggesting that he was persuaded out of his sick bed by a call from the above dynamic duo – if so, I wonder what promises were made, I wouldn't even draw the line at a financial inducement to be honest. What is a few million Euros against the fate of the Euro zone?

Greek TV and state news agency declare that Papendreou is resigning and a new government will be formed.

Markets begin an immediate rally on the basis that referendum is now very unlikely.

An hour later – all change, they got it wrong, markets immediately drop again.

Papendreou then comes out with a completely bonkers statement saying that he didn't really plan to go through with a referendum anyway…..and he has no intention of voluntarily resigning.

Markets are in complete limbo at the moment, they don't know what to do – if somebody had written a fictional book with this as the story line it would have been deemed total rubbish and complete fantasy, but here we have it.

Total madness – I don't actually think that he is looking past his own personal position, and that millions of jobs etc. are at risk.

Markets hate uncertainty, and the slightest comment one way or the other will have them jumping through hoops.

The one question I would ask is where are the other members of the Euro zone, you only ever see Merkel and Sarkozy – it seems to have become their private little club?

If I had my trader's hat on at the moment I would be running no positions, turning my phones off and reading a good book until it was all over – any position taken now would be simply a gamble on the toss of a coin – heads you win, tails you lose with nothing in between.

__________

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

(15 Reasons) Why The Greeks Will Say No To Eurozone Deal

1. Income tax threshold would be lowered from €12,000 (£10,300) to €5,000 (£4,300) 


2. Retirement age would be raised from 61 to 65 


3. VAT would rise from 19 to 23 per cent 


4. Higher property taxes 


5. Monthly pensions above €1,000 (£860) would be cut by 20 per cent 


6. Excise on fuel, cigarettes and alcohol would rise by a third 


7. To qualify for a full pension people would be required to complete 40 years work 


8. Retirees aged under 55 would lose 40 per cent of their pensions over €1,000 (£860) 


9. Public sector wages would be cut by 20 per cent 


10. Employees of state-owned enterprises would have their wages cut by 30 per cent 


11. A cap would be introduced on wages and bonuses 


12. 30,000 civil servants would be suspended on partial pay 


13. All temporary contracts for public sector workers would be terminated. 


14. Just one in 10 civil servants retiring this year would be replaced 


15. New levies on household incomes of between one and five per cent

Saving The Euro - Part 8

Rob's 8th guest post on 'Saving The Euro'

Back to life, back to reality

A classic line from Jazzy B and Soul II Soul.

As they say, the devil is in the detail and a bit of reality has descended upon the markets as they have just had a week-end to digest and further analyse the reaction to the package announced by the Euro zone group.

Results:

Euro/$ back down to 1.3700.

Stock markets down about 2.5% across the board.

To rub salt in to the wound, the Greek government has decided to hold a referendum to ask the people if they are willing to endorse the austerity and loan agreements before finally accepting the conditions of the deal, and the earliest this is likely to take place is mid-January 2012, and there is a massive groundswell of opinion in Greece to reject the terms, leave the Euro, default and devalue the new currency to create a competitive edge.

I don't think they care what happens to the rest of Europe – Greece entered the Euro on questionable financial terms at best, some might even say the numbers were rigged, and were welcomed with open arms by Germany and France as they sought to incorporate every European country in to the Federal States of Europe. The conditions were totally wrong then and the guy in the street feels exceedingly hard done by today having been forced to accept a massive cut back in their standard of living – admittedly totally inflated in recent years by the Greek government's overly generous welfare reforms which have proven to be unsustainable.

However, when you are stuck at the bottom of a deep hole, for heaven's sake stop digging.

Europe has gone out on a massive limb to try and rescue Greece from years of financial mismanagement, and when they have finally come up with a package that might actually do the job the Greek government comes up with this completely bonkers idea.

The market is full of conspiracy theorists, and the latest one doing the rounds is that this is a carefully orchestrated move by the leaders of the Euro zone – Germany and France – to shunt Greece out of the Euro, but saving their face and reputations by enabling them to say "we tried our best, not our fault" that it all went horribly wrong.

European banks, especially French banks, are taking the brunt of the fall out from the Greek referendum announcement and their shares are down around 10-15%, having seen their prices jump up around 35% last week on the announcement of an agreement on the bail out package.

Things are still not looking too good over the pond in the USA – MF Global, possibly one of the world's largest commodity brokers, filed for bankruptcy and the knock-on effect was immediately felt. They were the largest brokers by volume on NYMEX and COMEX, second on CME and third on CBOT. In Australia the wool markets had to close as MF Global accounted for around 80% of all trading.

I have in the past, rather tongue in cheek, suggested that if a solution could not be reached on the Greek/Euro zone problem, a good investment would be to buy bottled water and dried food. 
Scarily the ILO (International Labour Organisation) has researched 118 countries, and identified 45 where there is a significant risk of severe social unrest if there is a global double-dip recession, so perhaps that wasn't such a bad suggestion……

This is going to get very messy before we see a real improvement.

__________
The author, Rob (not his real name), is a treasury manager at one of UK's largest charities

Saving The Euro - Part 7

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.

Saving The Euro - Part 6

| Rob's 6th guest post on 'Saving The Euro'

Is reality returning?

UK inflation rates hit 5.2% - now even those lucky souls that have some cash to invest are losing money - annual bond prices now only yield about 3.5% max.

I actually think that inflation has been undervalued - look at the price rises in energy, petrol, food stuffs etc. - I would be ecstatic if they were only 5.2%.

Key forecasters - the ITEM club - have dropped their forecast for growth in the UK this year to just 0.9%.

German ministers finally brought some realism to the market yesterday when they issued a warning that the key meeting of Euroland finance ministers would be making some important announcements about debt management/rescue next week, but they wouldn't be a total panacea for the Euro zones debt problems.

China's sky rocket economic growth seems to be running out of steam - down to 9.1% from 9.5% as they try to deal with inflation.

France is under the cosh once again - Moody's warned that they may change their stable outlook on France's AAA rating to negative if the Euro zone debt problem did not improve in the near future - bearing in mind the comments made out of Germany, that doesn't look very likely as we speak.

So, once again, more negative news.

However, it is having relatively little impact on the markets as a whole.

Yes, stock indices are down, but not crumbling in panic e.g. FTSE down to 5,375 (about 1%), with other indices posting similar losses or more (especially in Europe), but that is after a week of strong gains across the board.

Euro/$ rate down to 1.3675 from a recent high of 1.39, and £/$ down to 1.5725 from 1.5850.
The question was "is reality returning"?

From a trading perspective I would have to say no - these movements are relatively tiny in the greater scheme of things.

The world and his dog are waiting for some apocryphal announcement out of Europe over the week-end which will wipe away all of Europe's debt problems in one clean sweep.

Don't hold your breath, it won't happen - the German's are already trying to manage the market's expectations and talking down the scale of announcements that will be made.

However, there is a school of thought amongst some traders that this is in fact a "double bluff" - talk the market down, and when they announce a better than expected package there will be a greater bounce in the market than if it was only what had been forecast by the analysts.

That is one risky gamble to make......

I am in the school that thinks that the package is being talked down in advance because it won't be considered strong enough, but that is just me........

The USA and UK have already made their position clear - they will not help bail out the Euro zone (the Euro currency) - it is something for Europe to resolve.

The USA has also said that it agrees that the IMF needs to be bolstered and will support that effort providing the funds are not immediately paid out the back door in additional bail outs to Europe.

From a global perspective, the Eurocrats in LaLaLand (sorry should read as Euroland) are on their own, they need to come up with something highly constructive over the week-end or they can kiss the Federal States of Europe goodbye.

As they say when you ride "Big Thunder" in Disney - "keep your arms and legs in the carriage at all times, hang on to small children and take off your hats and glasses - its going to be a bumpy ride ahead...."

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

Saving The Euro - Part 5

| Rob's 5th guest post on 'Saving The Euro'

Have I missed something?

Why are the markets improving?

Spain just been downgraded.

The increase in powers of the EFSF will very likely go through now that

Slovakia seems to be toeing the party line - took the fall of the
current democratically elected government to do it though, but do the
Eurocrats care - not really, Slovakia only represents about 1% of
Euroland. Doesn't matter providing France and Germany get what they want
out of it.

Large European banks being downgraded again, or put "on watch" for
further downgrading.

Pressure on the banks to bring their capital ratios up even higher to
around 10% to ensure that they can weather the impending debt storm -
the cash amount has been calculated at around Euro 200bn. However,
rather than increase their capital in the currently over priced market,
many banks would rather sell off assets and bring the ratios in to line
that way.

Governments don't like that idea - smaller banks, with higher capital
requirements would very likely lead to less lending and an increase in
the credit problem.

I do have some sympathy with the banks because a couple of years ago
they were all told to increase their holdings of various "liquid"
instruments, and high on the list of acceptable products were European
debt instruments - ooppssssss.

IMF now also puts Japan under scrutiny as having the largest debt ratio
to GDP of all the industrialized nations.

A number of key meetings in the pipeline - G20 and the Euro zone
ministers meeting to come up with some kind of solution to this rapidly
worsening problem, but will we see action?

There must be some very perverse logic at play at the moment.
The news is constantly negative, but what are the markets doing?
You got it - going up again.

Euro/$ trading at 1.38, was 1.33 just a few days ago.
Stock markets strengthening - FTSE 5,450, and most other European
indices showing similar rises.

In the UK the government seems to be on the back foot with internal
party issues clouding the need to get the economy back on track -
construction figures down over 4% bon a year ago, Uk hedge fund managers
under scrutiny over lack of performance and loss of funds under
management.

All looks pretty dire to me......

I will stick with what I have said previously, Europe needs to come up
with a plan and stick to it - if it means chopping off the dead wood so
the tree can survive then so be it, it cannot go on day after day
fighting a rear-guard action against adverse news, downgrades etc. - at
some point it will simply run out of options, or the resources to mount
any kind of viable defence.

As a back stop, you could think about laying in stocks of bottled water,
dried food stuffs etc...............I am.

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

Saving the Euro - Part 4

In this post, Rob argues that it's time to 'pull the plug on Greece'. See all related posts here

European Democracy At its Best

Democracy in Euroland at its best – we saw it in Ireland when they voted no to the Euro, but were then told to go away and have another vote until they got the right result – they were finally worn down and voted to join the Euro zone – what a great decision.

Now we have Slovakia voting "no" to an expansion of the EFSF bail out fund – what do Germany and France say – "ignore them and let them vote again" bound to come up with the right answer at some point.

Greece failed to meet its deficit targets to ensure a further tranche of bailout funds, but what do the EU inspectors say – "never mind, give them the Euro 8bn anyway"

Ratings agencies are happily cutting European bank ratings across the board.

Barroso the EU Commission President came out with some interesting logic the other day – the UK should help bail out Greece (and hence the Euro) because we helped out Ireland with a unilateral loan of £7bn. Absolutely no comparison – we have huge trading ties with Ireland, and irrespective of whether you agreed with it or not the survival of Ireland is vastly more important to the UK than the survival of Greece. One of the most telling comments I have read is "Since when has it been acceptable for a club to demand a massive subscription from people who don't belong to it?

Totally bizarre – Euroland is in a complete mess, but the market is clutching on to any bit of good news – Euro/$ has risen to 1.3775 and £/$ has risen to 1.5750.

Stock markets looking higher – FTSE trading at 5,400 with most other indices showing strong gains as well.

I fail to see on what basis any of the above is considered to be good news – they are all decisions based upon flawed fundamentals.

On top of that, UK unemployment has hit 17 year highs and growth in the UK economy was an anaemic 0.5% in the 3rd quarter – similar news out of Europe is equally as bad.

I think that France and Germany have simply decided that Greece and the Euro zone will survive, or they will go down in flames trying.

The Euro zone concept is on life support – if ever there was a case to be made for euthanasia then this must be it – pull the plug on Greece and let them go with a degree of dignity.

______

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

Previous installments:

• Saving the Euro - Part 1
• Saving the Euro - Part 2
• Saving the Euro - Part 3

Saving the Euro - Part 3

Rob's third post on the scramble to save the Euro

Down, down, deeper and down.

What are they doing?

The Euro zone ministers have cancelled the meeting scheduled for 13th October to ratify the next tranche of the agreed bail out package on the basis that Greece will not meet it's deficit target, and as a result they may not now get the money until the end of November.

Greece has already said that they need the money by mid-October or they run the risk of defaulting on their debt repayments so what are they playing at? Jean-Claude Juncker, the chairman of the Euro group managing this project thinks that Greece will be able to weather the storm until mid-November – well that makes it alright then I suppose.

Finland has threatened to block any new bailouts unless they receive collateral to back up any loans they might make – seems like a good idea to me, surprised that nobody else has thought to ask.

As you may have gathered, I am a cynical about anything these guys say and do – are they forcing a default on Greece, but without taking any responsibility for it – just a bad timing issue?

Word on the street is that this is the preferred German option, but you won't see that officially quoted by them. Add to all this the fact that Dexia may have to be broken up to prevent a failure, then things in "Euroland" are not looking too healthy.

The lack of positive action, one way or the other is the major cause of the market's despondency – again I say that if they positively cut Greece off and get the default out of the way, the market would breathe a sigh of relief and get back to business – the uncertainty is creating more problems than anything else.

Stock markets down again – FTSE down around another 2%, through the psychological 5,000 barrier trading at 4,900.

Euro/$ down to 1.31, dragging GBP with it – GBP/$ trading at 1.54. However GBP is still holding out against the Euro and trading higher at 1.17.

It is not surprising therefore that there are strong calls from within the UK Tory party itself on a referendum on Europe – I am not 100% sure that the UK would benefit by being outside of Europe completely, but I would advocate redefining the relationship, and possibly reverting to the original concept of a managed trading block like NAFTA, rather than a Federal States of Europe, which is the way France and Germany have tried to push it.

It is all looking very, very messy.

A "kill or cure" decision is needed by the core Euro zone nations; further delays will just exacerbate the problem.

Bear in mind that a debt ridden, economically frozen Europe will affect you (and the UK as a whole) as well, and not in a good way – pray for positive action

______

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

Previous installments: 

• Saving the Euro - Part 1 
• Saving the Euro - Part 2