Below is an entry by Jill at nakedtrader.com. Check them out!
First of all, we must confess to getting last week’s column wrong, when we said that the stock markets were back in the mode of treating bad news as good news. Over the past seven days we have been exposed to stories of economic distress from all parts of the globe, more than sufficient to satisfy any bad news junkie, but traders have concluded that that the printing presses will be set to full ahead and then switched to what is nowadays known as “risk off”. We need to investigate the question of whether lending money to the German government for two years, at a rate indistinguishable from zero, really is as risk-free as it sounds.
To reprise an argument we have proposed before, but not for a few months, the global community is split into two groups of people who appear to share no common language. The Mediterranean world ( we do not forget the fact that France has a southern coastline ) needs something like three trillion euros to keep its banks afloat – we have an idea that we quoted a trillion less back in January, but if you are in a hole and keep digging that’s what happens. Meanwhile the solvent Eurozone nations, a group which now seems to consist solely of Germany and Finland ( the Dutch having dropped out and Luxembourg being safely ignored ) have about three trillion euros in net assets, if you include German gold assets.
The symmetry screams out, and the solution is obvious, right? If you’re France’s recently elected president Francois Hollande, or Italy’s proudly unelected Mario Monti, it certainly is. The big transnational banking institutions feel the same way, to judge by statements from the ECB’s mendacious Mario Draghi ( but wait, we’ve mentioned Italy ) and the IMF’s brainless Christine Lagarde ( ditto, France ). The only people too uneducated to grasp what needs to be done are the Germans, who for some reason seems to feel that handing over their nation’s credit card to a bunch of deadbeats should not be done without a little thought. This is clearly going to get us nowhere, since the implementation of such a policy depends crucially on removing any rational input relating to self-preservation from the process.
What happens next? With every passing month the Club Med says look, we’re in an even deeper mess than we were before, so it’s even more important that you underwrite our losses, and the Germans reply that this makes them even less willing to do that. Suffice it to say that stories about the two sides moving closer to some inevitable agreement can safely be discounted.
Getting back to our earlier question of whether it makes sense to lend money to Germany for a locked-in rate of next to nothing leads us to wonder what else you are supposed to do with euros. Our feeling is that a big reason for European currency’s weakness lately has in fact been not so much that investors don’t want to hold it, as that they cannot think of a sensible way to do so. It goes without saying that you don’t want to deposit money with any of the continent’s banks, since who knows which of them will need a bailout tomorrow, and if so whether they will get it? You can lend dollars or pounds to the governments which control their issue ( please don’t bore us with stories of central bank independence ) and be sure that you will get them back, even if you may be less than impressed with the amount of produce they will buy. You can’t lend euros to the ECB, and even if you could their guarantee to repay would be suspect. Finally, the textbook backstop that you can keep banknotes in a safe deposit box doesn’t work, not merely because it’s impractical but, crucially, since the communal currency comes in many different flavours, and you cannot be sure that what you have tomorrow will be the same as what you think you have today. For neurotic global institutions, these are real problems.
This inevitably leads back to the point that there is nothing better to do with euros than to lend them to the region’s biggest and strongest economy – the best and most likely result is that you will get your money back, while the alternative outcome is unquantifiably worse. To put one interpretation on this, if anyone at all is speculatively buying the currency at the moment, they must really like it.
Category: Market Commentary