European Politician Says Stupidest Thing Award

Newedge - Blain's Morning Porridge - September 29 2011

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

And this year’s FIM Award – for the European Politician who says the stupidest thing – goes to...

Another risk-off day in prospect as perceptions of an orderly solution to the European crisis wobble. Although Finland said yes to EFSF, and the Bundestag should approve the expansion of the fund (but raising further doubts as to Merkel's control of her party and her political longevity) there are just too many known and unknown unknowns to face the day with much confidence.

The likelihood of someone saying something spectacularly stupid is just one of the many threats to our sanity this fine and sunny day. On balance, however, we think the groundwork has been done, so there is more upside than down from some well chosen European plays!

The problem for the euro is irrelevant noise – which tends to get the focus. This ranges from the understandable frustrations of 'private investors' who signed up to the Greek exchange nonsense last month and now face not a 21% haircut, but seeing their agreement ripped up and replaced by a 50% cut.

Clearly an investor who could have bailed out of bonds with a modest loss is going to be mightily displeased when they now lose half. Tough - but that's the downside of holding risky sovereign debt - get over it...(And next time we say sell - do it! Remember Blain’s Maxim No 1: 'The time to sell is the moment you first think about it - not when you have to'.

More amusing, but a worrying sign of the lack of reality in Brussels was the EU's Barroso in full flow demanding a transactions tax - wisely 'pooh-poohed' by cooler heads in London who actually understand something about global markets. His demand for regulating rating agencies is equally offensive and ill-considered. Blame the bankers and playing to the political gallery as Europe's finances totter is not getting us anywhere. STFU please.

His comments on closer 'deeper' integration of the eurozone to allow for issuance of joint and several debt 'Stability Bonds' are a stumble down a blind alley, seeing that Germany has already refused it. If a senior EU figure still harbours delusions Europe's diverse tribes will sign up for closer fiscal union and Northern Europe is happily going to cut cheques to the poor South, then I'm worried. Very worried.

In this fervid rumour and sigh market, a client asked a very interesting question yesterday - are markets fully discounting the likely market ructions in coming weeks? Greek bonds are certainly trading through the expected 50% haircut, but do Italy and Spain bonds reflect the potential contagion effects?

Different opportunities for both we think. For instance, Spain is a banking crisis, that will be lifted by bank capitalisation support and the fact Spain already is addressing its crisis through FROB. I’m musing if Spain govies are therefore undervalued in the wake of an imperfect European solution, and reckon there are bonds – such as Cedulas – which are considerably undervalued.

On the other hand, Italy is a growth/debt crisis pure and simple. I’m struggling to see a long-term upside there. But Ireland – if the euro collapses, I’d be a buyer of the Irish – their crisis could essentially already be resolved.

That’s not an answer to the question is the crisis fully discounted, but there are opportunities. Stupid clownish comments by Euro Elites aside, it’s what follows Greek support in terms of banking support that is critical. The real issue isn't short-term – enough moving parts are in place to support upside already, but long-term.

The problem for the euro is what follows a quietus for Greece? Talk about fixing the core contradictions of the euro in terms of fiscal harmonisation and growth strategies for the periphery are needed. Hence the EURECA report we saw yesterday is interesting: it's full of the usual lack of market understanding, but does suggest a long-term economic programme to promote productivity, competition and growth. Like that.

All eyes on the German vote, then on to the next trip-wire...

Out of time...