In these shoes? I doubt you’d survive… Honey… Let’s do it…

Mint – Bill Blain’s Morning Porridge  - March 28 2013

There is so much I simply don’t understand about markets… Like why investors pile into things like corporate hybrids or bank knockout CoCo bonds. Because the yields are so attractive isn’t a good answer. They are likely to prove volatility squared – that’s why investment banks love em! When the markets turn, they could prove toxic.

Timing on Barclays’ new CoCo is extraordinary in the wake of the “new template” Cyprus wipe-out bail-in, and the Bank of England telling UK banks they need a further £25bn capital*. I’m sure the deal will go extraordinarily well, but I’m really struggling to understand why. I suppose yield overcomes rationality. Meanwhile, European headlines once more dominate the mood and threaten to derail April markets.

I spent yesterday running round London seeing clients and such...and doing some fun TV stuff. It struck me how absolutely convinced everyone I met in London was about the imminent collapse of the euro. Cyprus, Italian elections, German voters, French misery, Slovenia spreads… you name it and Europe looks messy, horrible and ripe for collapse…. Reading some of europhobic vitriol in the press it’s easy to see why the euro is a hopeless cause.

BUT BUT AND BUT… That’s all from an ANGLO-SAXON PERSPECTIVE.

We Anglo-Saxons believe the euro is utter bad pants and we get very frothy whenever the temperature rises.… We’ve been saying that for so long. And we’ve collectively and repeatedly been so utterly, completely and thoroughly wrong. It’s still going.

The euro has shown remarkable resilience… far more than we supposedly financially literate and rational Anglo-Saxons have ever given the damn thing credit for… Collectively they’ve been able to insert control rods into the runaway reactor on at least three or four China Syndrome euro moments. Perhaps we doubt it because we aren’t part of it?

So try putting yourself into the shoes of the average European financier, entrepenuer or politician… Try to understand the imperatives they perceive for the euro to survive. How much political and economic capital has been invested in the single currency, and why it can’t simply be squandered. Get past the image of the euro as a bunch of suited euro elites in Brussels or Frankfurt and look at Europe as a whole. Sure the solutions to each crisis have been messy, ad hoc and defy Anglo-Saxon sensibilities.

Anglo-Saxons say the euro elites just don’t know when to give up. The euro elites understand the potential future rewards of making it work. While we see the euro elites guilty of catastrophic blundering and contradictory policy making on the hoof, Europe sees the bizarre euro dance as complex financial diplomacy navigating an extremely difficult course through entirely uncharted waters fraught with unchartered political reefs and indebtedness rocks.

Perhaps what we perceive as a wild and crazy dance is like hammering hot iron – it's actually making the currency union stronger. What looks like chaos might actually be moving in the right direction.

While Anglo-Saxon history is a straightforward narrative of which king slew which and who refused to pay taxes and then had a bit of a falling out, Europe’s history is far more brutal with religious wars, paranoia, complexity, linguistic distrust, greed and destiny playing a far darker role.

Anglo-Saxon tribes differ in critical terms like the sarcasm gene (absent in North America), how to pronounce aluminium, or what shoes we prefer to wear. (The slip-on loafer is an affront to heaven.) We tend towards intellectual lethargy – if we don’t understand it… it doesn’t/can’t work.

Europe’s many and diverse tribes differed in terms of who committed genocide against whom, multiple religious jihads, fought to the death for meaningless strips of land, thousands of years of insincere flattery, and competitive “who hates the Germans/French/Italians/insert-country-here” mentality. It’s an absolute wonder they’ve managed to pull together to the extent they are making the greatest economic experiment in the history of the planet even look a possibility. What amazes me today is just how many Europeans actually consider themselves European despite the history.

Hats off to the Europeans. Austerity is painful. Most euro-politicians deserve praise for not surrendering to easy politics and placating the crowds with easy rhetoric. Is it working? Are the fundamentals of the poorly aligned and mis-based economies being addressed? Perhaps.

Structural change is happening slowly. Spain is becoming more competitive. Italy is slow but is removing many of the hurdles to business – and pays far more tax than we give it credit for. Even France is becoming aware it's part of the problem. There is still a long way to go, and it’s inevitable there will be more micro-crises (like Slovenia tumbling into the debt death spiral in next few weeks.)

But, if any country is failing to play by the new euro rules, then perhaps it is the Germans for being too unpraising of the efforts the rest of Europe is making. Time for more carrot and less stick perhaps? Perhaps. German politicians are terrified to support pro-Europe policies to aid the process of structural change. It’s easier for them to win votes by bashing Europe, rather than face the uphill task of selling Europe to the electorate. It’s called political self-interest. In that respect German politicians are little different to Italian or Greek ones.

And therein lies the real challenge for Europe. Can the desperately required structural change and internal revaluations happen without the option to simply devalue currencies, before politics makes the adjustments impossible?

Lazy politics is taking the path of least resistance. What’s to stop Italian politicians taking the easy populist option of blaming the euro and Germany. The big risks to Europe are political – especially when naïve “movements” like 5-Star lack the wit, wisdom or maturity to understand the euro imperative, confuse political change with just saying no to whatever went before. They will be throwing the baby out with the bathwater if they think it’s the euro that underlies Italy’s problems. 

So, as we break for Easter, take another look at Europe. Italy heading for another election – Bersani’s comment about anyone wanting to run the country being “insane” was a classic – and the likely winner will be anti-austerity to a greater or lesser extent. Slovakia is the next basket case. Next week might get tense as it becomes apparent how much money was siphoned out of Cyprus ahead of capital controls. Banks will continue to widen.

But I suspect none of it will break the euro. It will further test it. And by testing it, bashing it, twisting it and quenching the iron repeatedly in the cold water of economic misery… the long-term sustainability of the euro will grow given time for readjustment and structural improvements.

On the other hand… maybe it’s all an ask too much… Maybe it just won’t survive. Bottom line… Trade the markets moment by moment..

Out of time and have a great break..

NB       *I dangle the line about £25 bln new UK bank capital in the hope some salesman selling the Barclays CoCo will call to tell me how Barclays isn’t capital-strapped… and then I can ask for a detailed breakdown of how they capitalised themselves through the 2008 crisis…

Bill Blain

0207 786 3877

[email protected]

[email protected]