In this game it is absolutely no use talking about a problem or criticising unless you stick your neck out and put forward possible solutions. Yesterday afternoon in a short if somewhat intemperate piece (enclosed in Word above) I outlined the debt related problem as I saw it and which in market terms a complete loss of political and economic confidence in the ability of Eurozone and US lawmakers and authorities to solve it had sent markets into a tailspin. Put another way, this was reaction related to confidence loss that in turn led to the creation of fear, further contagion, recession and horror of horrors, a double-dip. The problem yesterday and through today (at least until a better than consensus US employment report in terms of newly created jobs eased some concerns) is a result of a combination of concerns all coming together. Result? Carnage!
Before talking possible solutions let me be clear that when we see equity and bond value destruction in the form that we have over a week best to assume there may be even worse to come. Investors caught up in this mess should play for time; sit on their haunches avoiding the temptation to get sucked in on the back of any short term rally. OK, nothing keeps going down for ever and I doubt that it will this time but remember that in past situations when confidence has been rocked to such an extent creating such real and underlying fear it is usually best to believe that the bears will soon be back.
Any government or group of governments that may prefer to believe that the problem of lost market confidence might be resolved by a few hastily convened meetings of Europe’s lawmakers or by the ‘printing’ of masses of new dollars and euro’s is living in cloud cuckoo land. In terms of both European sovereign debt issues and ongoing concern with regard to the US economy and potential recession there can in terms of markets be no form of acceptable short term solution. This is of course a political problem requiring first and foremost political solutions. As my colleague Anthony Peters at Swissinvest said in his blog today the difference between the 2008 financial market crisis and the one in front of us today is that if the previous one was a crisis of capitalism the current one is a crisis of socialism. I share this view though I have tended in the past to avoid pushing the socialist aspect!
One way out of this crisis of confidence in respect of European sovereign debt is for Europe’s central bankers and lawmakers to go public in accepting that in its current form the Euro has already failed. Secondly although I dislike saying it, Greece cannot be allowed to continue darkening the Euro skies indefinitely and to that end the authorities need to accept the need to somehow remove Greece from the official Euro area although most likely allowing the nation to continue actually using the currency. Easier said than done of course particularly with so many Eurozone member states and the IMF tied up in knots holding seemingly worthless Greek bonds. Most important of all though is tying up both words and tune so that all are singing from the same hymn-sheet – in other words message and communication as opposed to each leader banging a different drum making noises that suggest nothing is wrong – as the Italian leader did earlier this week.
Whatever, if the Euro is to have any future in a new form and if the EU is to survive rather than individual EU leaders talking with forked tongue as have waffling on about the priority is to protect the Euro and provide Euro area stability, rather than the likes of President of European Commission Jose Manuel Barroso talking about the EUR440bn Eurozone bailout facility from which Ireland, Portugal and Greece have helped themselves needing to be expanded to facilitate containment of contagion now spread into Italy and Spain, rather than European Central Bank President Claude Trichet just saying that the downside risk has increased what we need now is for all EU politicians to come into one place accepting what rather too many within financial markets have been saying for months – that the single currency experiment in its present form really has now failed.
Even so, just because the Euro has in its present form failed to provide what its German and French masters had intended when they designed it does not mean that the single currency should just be allowed to wither and collapse. Having accepted the inevitability of defeat the EU (as opposed to those charged with responsibility for the Euro) must formulate and agree an acceptable way forward. This could be a two-tier Euro, it may be a Euro break up with some countries continuing and some not or it may be a blank piece of paper to start all over again.
Of course it is impossible to turn the clock back to the pre Euro days of 1998. Whatever occurs from here on repercussions for Europe’s bond markets of any change from here on would be formidable. Time will be required – maybe a year or longer – but if markets can believe that the authorities are serious in their intentions to accept change they will I believe buy into it. Whilst the idea of scrapping the Euro in its current form and perhaps moving to a two tier based currency system with fewer members can easily be rubbished but until some better idea is put forward it is hard to see how markets will be appeased.
As to the wider problem in the US and as to whether recession and double dip is inevitable on the back of their politically induced failure to convince markets as to the seriousness and practicality of the deficit proposals all that I can say is that if the US is to move forward from here it will need a lot more that bipartisan political agreements to convince markets that it lawmakers are serious – it will need great effort by the President and maybe tax rises!
Howard Wheeldon is the Senior Strategist at BGC Partners