None of us have heard of Herman Van Rompuy…

Mint – Blain’s Morning Porridge  November 29 2012

None of us has heard of Herman Van Rompuy… are you sure you haven’t made him up?

(I apologise for lack of porridge yesterday, but must thank my chum Jock Wishart, The Awesome Lunchmaster (aka Lawson Muncaster, publisher of City AM) and Boisdale’s Ranald Mcdonald for THE PARTY OF THE YEAR on Tuesday night. The “Great Scots” dinner is a real occasion, but yesterday was a complete write off. Lesson? Stick to Single Malts. Never touch blends….)

Markets remain highly nervous on the US Fiscal Cliff threat. Yes/No? A writer in FT used a great quote from Winston Churchill to sum it up: “America will do the right thing, but only after exhausting every other option.” If we wander off the edge, all bets off on US recovery next year. But it won’t.. so let’s go with the Bloomberg survey of 862 global investors saying the global economy is in good shape, with the US seen as top pick next year followed by China. Guess what…. Europe is seen offering worst returns next year.

So we’ve got markets more positive on Obama saying a deal in next weeks, Geithner working the room in search of consensus, and markets hoping for upside. Reckon it could take a while… after all, the Republicans are looking for that cold dish of revenge after their electoral defeat. 

Last week we were saying here in the Porridge we reckon next year’s top upside surprise could be the US economy – forget analyst expectations of 2% growth. Our target is much higher – and we’re finding that’s a view shared by many clients. That rather depends on avoiding the fiscal cliff.. and 75% of Bloomberg respondents agreed it will be. 50% say they will increase equity exposures in the first half of 2013.

While we prepare to go big on the States and China, let’s remember less fortunate places… and ask ourselves if Spanish banking is saved following the EU approving €bn in aid for pants Spanish banks? Dodgy assets will be transferred to the Bad Bank. Sub debt holders will be penalised – but senior and Cedula holders of Bankia, NCG, Catalunya Bank, and Banco de Valencia should be fine.

In return the banks have to dramatically delever and cut balance sheets by 60%. Ouch… But, this is merely scratching the surface. As said before, we don’t think Europe’s banking problems are anywhere close to solved. Although banks will try to delever, they still hold too much toxic sovereign, bank and other plutonium with a half life of a billion years.. and who wants that?

Funny answer is lots of people want toxic bank assets. You would think banks would be delighted to get shot of their crap and flog it to the hedgies who desperately want it. However, it’s better they hold it on banking books so they don’t take capital losses. It’s all about capital and accounting arbitrage. There is a price for everything.

Yesterday was a pretty strong day in Europe with the apparent Greek solution boosting assets, while Portugal was pretty busy on the back of budget and Prime Minister praising EU for cutting bailout loans rates to Portugal and Ireland. Do any of these developments actually change the basis of the Euro crisis? Nope. Yet more icing on the already stale cake. On the other hand, Europe has repeatedly proved its resilience and ability to “kick kicking the can down the road” – betting against it this year was costly!

But, at the same time as the market is praising the Greek solution, Moody’s opined Greek debt will remain unsustainable even after the deal, and a default is still likely down the road. German papers carry stories of remaining Greek funding gaps, and expectationsthat  further haircuts are inevitable for Greek debt holders! We knew that. Monday’s debt agreement was just another short-term holding action before the Greek debt edifice utterly breaks.

And there are significant doubts on the likely success of the planned Greek buyback. Many strategy notes reckon there will be a very large number of holdouts seeking better terms – exactly as we predicted… why take the first price Greece suggests when you know how important it is, and you know they will be bailed. Remember the IMF said they won’t pay up unless the buyback works!

 Greek bankers are opposing the buyback deal (in Greek papers), and there is as yet no clarity on which bonds and how the process with work. There are even noises it could be halted: because the deal effectively relies on the ECB giving the profits from its earlier Greek bond purchases to Greece, then it breaches fundamental European law about bailing out countries directly, and this could be challenged in the courts. So there is still massive potential to get messy.  

And just to add fuel to the fires, did anyone else spot José Manuel Barroso’s plan for a single European Treasury, the right to tax and issue Eurobonds, and effectively become the Eurozone area’s de facto government? It’s fascinating stuff..  Barroso says over next 18 months to five years Brussels should gain powers to veto or change national budgets and raise money through commonly backed Eurobills and then Eurobonds. Er.. didn’t the Germans already say no to that? I’ve admitted before on this blog that I slept through all my lectures on European constitutional law, but what’s the difference between Barroso as President of European Commission and Van Rumpled as President of the European Council? Remind me which one I get to vote for?

At this point I would normally write “Out of time..” But…

Personal Comment - December is just around the corner… so time to think about “Sports Personality of the Year”:

Apparently there is only one major international sporting trophy a UK team has never won – the Americas Cup in Sailing.

The world’s most successful sailor, Ben Ainslie hung up his Olympic boots this week to focus his future energies on winning the Americas Cup – which is also the oldest internationally contested trophy in international sport. First raced in 1851 around the Isle of Wight (and won by a Yankee bandit boat called America) it was summed up when spectator Queen Victoria turned to the Commodore of the Royal Yacht Squadron:

“Who came second?” she asked.

“Your Majesty, in sailing there is no second”, was the reply.

Dedication, unflinching effort and commitment sums up Ben Ainslie. In this year’s Olympic sailing Ben fought back injury, beat a fleet that was ganged up against him, and despite a couple of bad races dramatically won gold on the final day – a silver in Atlanta was followed by four straight golds from four Olympics.

While the UK can field a very strong team of Olympians and other sporting successes, (including a number of Scots), I’d urge you to consider voting for Ben as “Sports Personality of the Year” on the basis we’ve seen much, but there is so much more yet to come!

I thank you, and now I’m really out of time..

BB

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