Here we all are, waiting for the next inevitable stage of the euro’s death cycle, and the whole continent has gone quiet. Perhaps, even in these extreme conditions, Europe’s traditional ability to take a long summer break trumps all other considerations.
It seems unlikely that the Greeks are entirely relaxed about their own predicament, with the international organisations that control their country’s finances tightening the vice by starving hospitals of vital drugs and other supplies, but the foreign press has grown bored with this story almost immediately after briefly noticing it. With Greece successfully reduced to the economic status of Burkina Faso, attention has turned to Spain, the sovereign debt market being the battleground.
Despite the promise of massive assistance to the nation’s banks, which is no doubt expected to find its way into their government’s bonds, the yield on the 10 year variety is stuck in the high sixes, just below the supposed panic level. This is of course an entirely corrupted market – as we wrote recently, it is difficult nowadays to find one that is not – since following the Greek restructuring debacle all genuine investors are presumably long gone, and speculators hoping to profit from shorting these instruments will find the process strewn with technical difficulties. All the same, we do not see how the present support program can do any more than put off the inevitable, but perhaps hand-to-hand combat really will be deferred until August is over.
The English speaking world does not appear to be put off so easily from pursuing its immediate business, and the Libor scandal continues apace. This week’s developments have been quite disappointing for those who had hoped that the players in this extraordinary affair might be divided into good and bad actors, with the former taking us forward into a better world and the latter mildly chastised. It is increasingly difficult to discern anyone who has not sinned in some way, at least by omission, and even their relative degrees of guilt are looking blurred.
We have previously expressed our belief that Paul Tucker, deputy governor of the Bank of England, represented the acceptable face of central banking, and with this our hopes that he would next year succeed Mervyn King as Governor. These seem likely to be disappointed, following revelations which came to a head during his disastrous appearance in Westminster before the influential Treasury Select Committee. Probably most of its members would not have minded giving him a relatively easy ride, but testimony the previous week from Bob Diamond, the highly aggrieved ex-CEO of Barclays Bank, made this impossible. At the centre of the evidence for the prosecution was a 2008 phone call between the two men in they discussed the evidently implausible information being submitted by banks relating to the rates at which they could borrow in the interbank market. Their recollection differed, and on the basis that Tucker is a fundamentally honest man and Diamond is, well, Bob Diamond, we knew whom we wanted to believe. Imagine our discomfiture as we confess that it is the Barclays man whose interpretation appears the more plausible. We hope that the deputy governor will retain a place in the regulation of UK financial services, where he has valuable skills, but his gubernatorial prospects must be slim.
Further revelations, in the form of emails from across the Atlantic, also make unpleasant reading for anyone hoping to find any merit in the way things have been done in London. It turns out that such dyed-in-the-wool bankers’ apologists as Tim Geithner and William Dudley had noticed the problem long ago ( although they did not pursue it with much enthusiasm ) and had asked their London counterparts what they intended to do. The reply, directly from Mervyn King, was to pass on their concerns to the banks who were submitting the dodgy data. This was of course symptomatic of the “light touch” regulation so favoured by the Labour administrations of Blair and Brown, and maintained with full vigour by Cameron and Osborne. It makes you wonder whether anyone who has been involved in any way with the process of bank regulation in London must be disqualified from consideration for the top job.
We are not taken with the fashionable idea that an American should be drafted in – after all, it cannot be forgotten that the whole disaster started with, even if it was not entirely caused by, the subprime problems in which the US regulators were remiss, and even complicit. The UK is not Greece, and it should be possible to find a British national who can fill the role. However, it might be worth placing a small wager on a candidate with no experience of any form of banking, and Gus O’Donnell, until recently the head of the Civil Service, is believed to be interested. Everyone agrees that he is formidably clever, and could probably master this new subject in the space of a year. The problem we foresee is that he also suffers from no lack of self-confidence, and probably believes that he could do it in a week.
Category: Market Commentary