Nothing is over till we say it is.

Mint – Bill Blain’s Morning Porridge  - March 25 2013

Nothing is over till we say it is. Was it over when the Germans bombed Pearl Harbour? Hell No!

Last minute Cyprus bailout - joy unconfined. Apparently the country won't default. No surprise to see Cyprus 13 bonds up 12 points this morning. I suspect the threats made about Cyprus leaving the Euro would have proved the proverbial "Grand Futile Gesture".

What does it really mean? European banks are even less safe. The last banking shibboleth has been breached - senior debt is being written off alongside depositors and sub in a state-mandated bank resolution. Should not be a surprise. It should further colour investment thinking about Europe's weaker bank names and domiciles. (Take a look at Moody’s on French banks this morning…)

Oh...the Russians are going to be quite unhappy and unpredictable. They have no-one to blame but themselves if they ever thought their dosh was safe in Cypriot accounts. Interesting to read in the FT how other European banks are now chasing their money.

The immediate result of the Cyprus bailout is markets are seeing something of a relief rally this morning. But I don't think it’s going to be particularly strong. Nothing fundamental changed. Other factors will quickly reassert themselves in terms of how much further equities can rally without a correction, and how the European growth outlook changes on the back of improved confidence?

In some ways it’s a shame a Cyprus euro crisis/exit and its effect on the Eurozone wasn't tested. On Friday I was lectured by US investors on the likely catastrophic market collapse that would inevitably follow a Cyprus event. They were 100% certain a messy Cyprus story would immediately trigger a "Lehman" moment with Spain, Italy et al going into irreversible debt meltdown in its wake. “Europe narrowly saved” is a view I expect to see paraded round markets. It’s nonsense of course.      

The euro crisis is ongoing. We are long past the stage where the imbalances will be resolved one-way-or-another "by Christmas". What we're looking at are years and years of trench warfare/emergency conferences as euro members struggle to adapt to the laws of a single currency in terms of economic restructuring, new legislation to allow banking union etc and heads towards developed fiscal union. The war will be won or lost on whether such change can happen before the currency union fractures under the pressure of austerity politics? It’s not about individual countries any more. A strong country losing patience as a weaker one pleads for rescue is just part of the political process of the war!

If Cyprus had crashed and burnt this morning, I reckon markets would have remained essentially constructive and quickly discounted it, correctly judging the contagion/knock-on effects would be limited.

Markets are differentiating the component parts of the euro crisis - and are highly cogent of the unique meltdown triggers in each euro state:

·         In Spain it's banks, property, and regional debt, with a threat of social instability from unemployment and associated factors.

·         Italy is all about political will to restructure the economy to create real growth - the fact there is no government isn't that big a deal yet. (It will become so if Berlusconi gets back in, Grillo is forced to take policy decisions, or nothing happens to move forward reform.)

·         Greece is about the next funding crisis, the next set of missed targets and how much pleading will be required to secure the next bailout.

·         Portugal is about a gallant country struggling with impossible odds to turn around the economy – while its efforts to reform and restructure should be rewarded by another bailout, it may fall victim to German reluctance.

·         Ireland is about smoke and mirrors... poster boy of the crisis, yet the banks remain mired in high NPLs and negative equity loans. We get told how well the economy is doing, but that’s largely on the back of tax-efficient P&L booking by multinationals rather than the Celtic kitty-cat’s recovery. A few Dubliners finally buying homes at knock down levels does not represent a property boom let alone a recovery!

·         France (yep, include them in the European litany of doubt), is all about unwinding the tortured interface between state and industry and creating an entrepenurial economy – something it has failed to nurture since...well the invention of economic history.  

There are two looming future crisis facing the European experiment – Italy... which I suspect will be another volatile election, and politics in general. The rise of counter-establishment parties across Europe and their refusal to address the issues of real structural change or austerity is going to create a massive problem. As a matter of principle if I found a member of the Pirate Party on my ballot paper, I’d be forced to give them my vote!

Let’s take a look and see what else emerges through the day, but it's buying boots on for the time being!

Out of time

Bill Blain

0207 786 3877

[email protected]

[email protected]