Taken as it is from the quite brilliant ‘Song of the Weather’ and also for having been a life long fan of the pair may I again offer my sincere thanks to the late Michael Flanders and Donald Swann for providing the theme of my blog today. What with the unusually cold weather for the time of the year, that there are just two days to go now to the UK General Election, that we have the unusual status of UK gilt markets set to open at 1am Friday in response to election hung parliament concerns, that we now have to worry over Australian proposals for the implementation of a 40% ‘super tax’ on miners profits, that ash is yet again billowing from Iceland’s Mount Unpronounceable not to mention oil continuing to spew into the Gulf of Mexico from BP’s exploded well we may safely conclude that May hasn’t exactly gotten off to a very good start!
Now add in for good measure continuing concerns over how the Greek population will react to the seemingly stringent terms of the proposed three-year Eurozone based EUR110bn bail out package agreed between the Greek government, the EU and the IMF and you will see what I mean. In fact all this agreement does is to offer a temporary reprieve that comes in the form of payment in dribs and drabs made available with only one aim in mind – preventing the Greek government from being forced to default – as opposed to providing help that would allow Greece to redress the balance of twenty years of failing to live within its means and to help build the nation out from the ridiculous state of economic weakness that the government with much assistance and help from both the EU and ECB it seems as they failed to instil any form of financial discipline allowed. Greece of course is an object lesson if you needed one of never basing your future on the availability of cheap money.
Thanks mainly to the efforts of Germany, the money that Greece will initially borrow from the agreed bail out fund [up to EUR30bn initially although the agreement still has to be ratified by some EU/Euro governments] will not come cheap. Rightly though worryingly as well from both a human and domestic economic perspectives the deal places responsibility on the Greek government to bring down what in 2009 was a 13.6% deficit by no less than 11 percentage points through 2010 and 2011. Given that consumption would almost bound to fall back sharply meaning that GDP would further decline we do not believe such a target to be either realisable or even desirable.
To achieve the EU/IMF agreement objective Greece is apparently tied to implementing a range of measures including pushing up the official retirement age to 67 from the current 65 (nice idea but I will believe it when I see it!) scrapping the quite ridiculous process of paying 13th and 14th month (did someone forget to tell Greece that there was only twelve months in the Gregorian calendar?) bonuses plus a range of other supposed tax increases that would (if they were ever to be implemented) cut consumption steeply sending the Greek economy into a very serious deep and maybe very long lasting recession. The consequences of that could well be serious political unrest. However, while there are many in Euroland no doubt that would love to see Greece throw in the towel on the Euro bringing back the drachma we do not envisage such a situation will happen unless serious political unrest also occurs.
Meanwhile adding to the bad news flow is that the deficit worries in Greece have now spilled over into market and rating agency concerns on Portugal and Spanish deficits and debt (spurious market rumours around this morning suggesting that apparently Spain may need to request EUR280bn help soon). At the same time the overriding concern prevalent on the various Euro member state government deficits is compounded by serious questions of how the EU and ECB failed to get the act together let alone had a contingency plan in place to sort the problem out earlier. Whatever, whilst not terminal there is little doubt in my mind that the future of the Euro has been weakened. Sadly as if to show that they have finally got their respective acts together we now see an increasing number of the rating agencies – discredited in the eyes of some for their failure to spot problems that led to what occurred in the 2008 global banking crisis – attempting to redress the balance by now over reacting perhaps on rating downgrades of some other countries riddled with combinations of debt and public sector deficit. Portugal and Spain have already been hit – how long will it be before Italy and the UK also find themselves hit?
If I was a pessimist (in fact I am always the opposite to this) and was for some ridiculous headline grabbing reasons trying to make a bad situation even worse by stirring things up I might just [here in the UK at any-rate] be posing the question how markets, what with the election just two days away, would react if say one of those appalling rating agencies decided to downgrade Britain’s seemingly precious triple A rating this very day? No doubt all hell would break loose and that in itself could seriously jeopardise the election result so relax – they wouldn’t dare do that! One thing is certain though all or most of the above are more lines if a recipe that plays into the hands of those that thrive on market volatility!
Today we may have also learned that one of the same large and seemingly powerful rating agencies has decided that the Greek refunding package isn’t enough. Bully for them and thanks for nothing! Such untimely and unnecessary remarks do however go to the heart of criticising a management system that few of us particularly like. Certainly it questions the manner in which the EU has handled Greece whilst at the same time further exposing the weakness of the Euro concept. Indeed, the Greece affair has likely seriously damaged how the Euro will now be perceived by many that hold the currency internationally. It does also act as a reminder of just how powerful the rating agencies still are!
Putting it all the problems and issues together what we see unfolding should be good for those that thrive on market volatility. To make that theory work though you also need a little good news to sprinkle over the pudding as well! Let me be of help then – firstly I can offer you that US growth continues albeit at a rather slow pace, that commodity prices are growing and yet there are as yet few signs of inflation being out of control yet, that China plus other Asian states leading the pace of global recovery and finally, that hopefully three days from now Gordon Brown may not be UK Prime Minister any more and that in seven days may not even be Labour leader! Most of the bad and downright ugly news is what I have mentioned above but for volatility to thrive and prosper [active and aggressive selling and buying in probably equal amounts directed on the back of various individual fears] one does need the banking and particularly the investment banking sector to be at one with itself. It is though far from that – indeed markets are somewhat spiked by the determination nay insistence of various western governments too bite the very banking hand that feeds them. So far the various levels of proposed US, EU and separate UK regulatory legislation is still that – proposed and not yet agreed internally let alone in the case of the EU, by the group as a whole. Certainly they are not and probably never will be agreed internationally – something that I suppose is what makes the position even worse in terms of future domicile.
It isn’t that any of us are opposed to better regulation of banks of course. We might also accept an increase in regulation if we deemed that was necessary and not being done out of pure spite. Sure, we can probably agree that some form of insurance tax needs to be put in place in some form – something that could better protect taxpayers ensuring that never again would there be a repeat of what we witnessed in 2008. But whatever we do we should not need to open any more global banking market doors previously reserved for the west to our growing eastern cousins. Whatever we do in terms of future regulation we must ensure that we do not throw the baby out with the bathwater or, if you like, cut the nose off to spite the face! Bonuses…..yes there is room for change in the manner that remuneration policy for all those engaged in the banking and financial sector is decided but though maybe advised by national governments it should be directed by the industry itself and not by imposed regulation of those with a vested interest in Europe to see us here in the UK damaged. Indeed, far from trying to restrain banks by imposing more regulation it should be that we are encouraging our banking industries to go forth, grow and multiply! Sure we also need to ensure that in future a common sense approach is taken and that ridiculous levels of risk are never repeated but it does not need to be done this way. Neither do we need to hear from heads of state that banks must pay back every cent of what they borrowed – what on earth else would they want to do if they are to free themselves of state chains!
