About a week ago I was writing about how it was getting near that time for the politicians and central bankers to intervene. It all that smell about it of ‘Do something or this whole thing is going to blow’. I also wrote that I expected the positive market reaction to last a little less long than it has in the past (the LTRO news boosted the markets for all of about three months).
So the news on the bail-out for Spain was duly announced today amid shouts of ‘Victory for the euro’ from Mr Rajoy and others, and the market’s reaction…..Well, it’s flat after a euphoric 1.5% rise first thing today, but a) watch the currencies and b) of course, watch the Spanish (and Italian, and French) 10 year bond yields. The euro is 1% weaker today against both the pound and the dollar, and Spanish bond yields, far from falling in the wake of the €100 billion rescue, are up to 6.45% as I write. Sorted? Hardly, and that’s after throwing €100 billion at the problem. Over to the politicians and central bankers for more sticking plaster, fast.
It’s all getting near meltdown out there in the eurozone and the politicians had better come up with something PDQ. All the talk has been of open-ended ECB funding and/or eurozone bonds (effectively the Germans underwriting the periphery’s debts in perpetuity), which many are saying is the only solution. The price to be paid in those peripheral countries will be high – loss of fiscal sovereignty, endless austerity and all bowing to Berlin – and the Germans are probably none too enthusiastic about paying off Spanish and Greek debts for ever either. So nobody wants it and, just for good measure, it’s probably illegal under the EC constitution as well. Make up or break up, Dave? The making-up is a non-starter.
But here’s a thing. Talk to ANYBODY in the eurozone, from Greece to Spain to Finland to Germany, and they ALL want to retain the euro. Yes, even the Greeks. What they don’t like of course is the price they have to pay, but nobody has explained to them properly that the two things live together (look at what Syriza has been saying in the Greek election). The point is that the eurozone lacks democratic legitimacy because the people have never been asked if they support it. It’s just been rail-roaded through by the politicians and all the people can see is bureaucracy from Brussels and control from Berlin. The euro, if you like, had an illegitimate birth through the creation of the eurozone.
So here’s my solution to the euro problem. Ask the people if they want it. My guess is that the answer will be a very strong yes. And, whilst they’re being asked, the politicians should explain the price to them – obey the rules, get the budget deficits down, concede fiscal power to the centre, which of course they won’t like. But at least the people can say they’ve been asked and they’ve chosen a path.
Why has this never been done, you might well ask? It’s because the politicians were afraid the people would say no, of course. And they would have said (and would today say) no the wrong question, for example, do they want to join the EC (with all the stultifying bureaucracy that accompanies that thought coming out of Brussels)? But ask if them if they want to keep the euro and at the same time respect their intelligence by explaining what it means and my belief is that you’ll get a resounding affirmative. I would think it’s a matter of short weeks or months before a bank run in Spain or Greece finishes the whole thing off and then goodness knows what lies ahead. Get the polling done now and give the euro its legitimacy at last. It might even mean a few less riots this summer.
It’s that time again. The pattern goes something like this, and it shows why investors are loathe to put their money on what seem like banker bets (such as the collapse of the euro, which has seen many a hedge fund lose its shirt over the past two years). The markets (particularly the bond market vigilantes) drive the value of a financial instrument such as a 10 year Spanish or Italian sovereign bond to breaking point. When all seems lost and the breaking point seems finally to be reached, in comes the ECB, EC or whatever other life-saving body to announce some ground-breaking measure (it was the long-term refinancing option or LTRO last time) which dramatically changes the lie of the land. For a short few weeks, everybody thinks the problem might be solved – in other words, it’s RISK ON again and the markets charge north.
With Spanish 10 year bonds yielding 6.7% today, deep into the danger zone, and Italian bonds also now above 6%, the moment for the politicians/central bankers to intervene is upon us again. So expect an announcement of a radical sort any time now as another rabbit is pulled from the hat, but my guess is that the market won’t be quite so quick to believe the central bankers’ claim that they’ve solved it this time. They’ve come to realise that the sticking plaster solutions to the eurozone don’t work for longer than a couple of weeks and that major surgery is required which may even threaten the life of the patient. The fundamentals are out the window and nobody has a clue what anything is worth any more. Not easy being an investor in these markets.