What goes up goes down so they say and occasionally what goes down also goes back up! So it was that yesterday following yet another horrid few days that Gold took a breather and equity markets chose to rally supposedly on the back of hope that something positive may soon be about to happen. Not that anyone was or is particularly sure of what that might be of course but here in Europe following the 275 point rally in New York last night it seems that after a jittery start markets are proving to be in positive mood again today presumably on the basis that hope springs eternal!
Misplaced that any euphoria across Europe was yesterday following the German Constitutional Court ruling that funds already provided by the German government to the EUR440bn European Stability Fund had been legally done actions speak louder than words. Pity though that markets failed to take that much notice of the small print that could yet be the sting in the tail. Whilst the court acquiesced to past moves by the German government it also said that there can be no further bail out contributions by the German government unless they have first been passed by the Bundestag budget committee. Other countries that admire the tougher stance taken by Germany in terms of approving EU requests will likely also decide that in future a full parliament as opposed to a handful of hapless politicians will in future decide whether or not to contribute to bail-out requests!
Fellow EU member states should take seriously that the German court also decided that Article 38 of Basic Law in Germany does [in future] prevent transfer of decisions such as a further agreement to fund sovereign debt bail-out plans without first being agreed by the German parliament.
So what was all the excitement about yesterday and that has continued this morning? If it wasn’t all about Germany then perhaps it was the thought that ECB President Trichet might after all listen to market critics deciding to cut interest rates later today or that across the pond, President Obama will get a fair hearing in Congress when he announces maybe $3bn of infrastructure spending plans and whatever else that will be aimed at creating new jobs. Indeed, perhaps markets have gotten wind that the FED really will after all and notwithstanding that it hinted nothing last week when the opposite was expected by some will announce a third phase of Quantitative Easing over the next few weeks? Maybe although hardly likely to have caused that much of stir perhaps there is also growing expectation that when the minutes of the MPC meeting are published in a couple of weeks they will show that possibilities that the Bank of England will launch a second round of QE are also growing.
Whether or not all, any or none of the above events occur remains in the lap of the gods. We as considered specialists can only give a view but in situations such as any of those described above it is never easy to be a specific judge of actuality or timing. Having watched how markets reacted yesterday my concerns today are more serious than whether or not any or the above events described above occur of not. They are that the perceived message and the speculation caused by the German court decision yesterday that all was well sends to the most troubled countries – those that through their respective failing or whatever got us into this mess in the first place. Take Greece for example. Word on my particular street from Greek colleague is that following the decision by the German court yesterday not to contest previous actions of support to the European Stability Fund a bout of near euphoria appeared to break out in Athens. Indeed, such was the positive interpretation of this one single event that Finance Minister Evangelos Venizelos went out of his way in attempts to convince the Greek public that the German court decision would not only mean that Greece would definitely receive the full bailout package now but also that as the government was ‘enforcing’ all agreed measures placed on it by the EU in terms of collecting taxes that all was now really well.
OK, so Venizelos proves that you should never appoint a former defence minister as finance minister! A day on and we note that the Greek 10-year bond yield has risen to a Euro era record of 20.13%. There is no doubt that the people of Greece are feeling the pinch of course but for the nations hapless politicians and particularly one who clearly fails to understand just how grave the situation is for the Greek people to even think of allowing the public to believe that from now on all will be well is treasonable at best. It is no use blaming banks for the European sovereign debt crisis of course as it is politicians that are purely to blame. Banks having risen to the challenge are as a result stuffed full of fast devaluing government debt for which they will get little if any relief. That is not to suggest that banks are blameless in the various separate debt instruments and packages that they allowed to be created and of how these were sold and then sold on yet again. But the bottom line is that politicians caused the current crisis and they have as yet failed to step up to the plate and admit it. Worse is that as they have yet to accept the extent of the sovereign debt problem that exists and even less how to resolve it. However, my hope is that behind the scenes in Brussels and elsewhere unknown to the rest of us my guess is that thousands of European bureaucrats are day by day huddling together to work out how if the Euro cannot be saved a plan ‘B’ of how it might be broken up could work!
Howard Wheeldon is the Senior Strategist at BGC Partners
