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Complexities
May. 18th, 2010 02:04 pmSometimes so much is going on that my head finds it hard to synthesize it all. Hell, I know that is my job; and, as a rule, I think I am fairly good at it. I take long complex stories and turn them into 200 to 300 words of reasonably comprehensible English. Occasionally I even get the facts right.
When the problem is Greece (or Spain, or the UK), things can get complicated, but the whole caboodle seems possible to get a handle on. However, when it comes to the eurozone, the huge number of factors at play make it virtually impossible to synthesize things into something simple. Or, to put it another way, we aren't really looking at a single problem. When we thought it was "Greece, sort the fuckers out", then you could at least look at things and say whether the solutions proposed would solve the problem.
But now it's gone beyond that. It could be "the euro, sort the fucker out", or perhaps it's "global currencies and the current pegs. sort the fuckers out".
The FT today had about a dozen writers and 5,000 words just trying to define the situation, let alone work out any answers. Drawn into the debate was China (less likely to revalue against the dollar given the weakness in the euro) and California (huge economy, fiscally unsound, bonds beginning to suffer widening credit default spreads). And within Europe we have the ECB, Germany, and France, and the peripherals. Fortunately, the UK is almost an outsider here. We might have to stump up €6bn, but this is one European crisis where we can (relatively) say "hmm, good luck in sorting it out, lads". That doesn't mean that the crisis might not eventually hit our banks.
Germany and France don't have that "good luck, lads" option. There's one block of players predicting that the euro is on a one-way trip to parity with the dollar, before exploding in a disastrous fireball of its own creation. On the other side, there's, er, Jim O'Neill and me. That being, that the euro is at the moment subject to spectacularly high levels of short-term futures selling which will unwind sooner rather than later. Of course, the stopping point could still be lower than one would think (hell, it usually is).
But, I digress. Like I said, the problem is there is too much going on at once. The Germans have proposed a strict rule on eurozone budget deficits. The German balanced budget proposal is, er, peculiarly German and particularly suited to, yes, the German economy. It rather looks like an inflexible one-size-fits-all rule that would save Germany having to lay the law down to individual countries in a manner that would look as if the eurozone was controlling individual country's budgets.
The fall in the euro, temporary or not, also evokes different responses from within, let's remember, a group of countries sharing the same currency. Tourist countries are generally delighted (see Spain, France, Italy), because tourism tends to be an elastic demand commodity. But Germany, a country whose exports relied on quality rather than price, gains significantly less from a weakening euro. Imported raw materials cost more, but few extra sales are gathered at the other end, simply because, basically, a Miele or a Neff is not that price-sensitive. I have both, and I bought them because they were good, not because they were cheap (well, they weren't cheap, but you get my drift).
Incidentally I saw an interesting graph which should be compulsory viewing for all Germans who claim that the euro has been a curse for them and they are fed up with propping up those other lazy bastards using the same currency. It whowed that in 1999 German exports of goods and services made up 28% of its GDP, about the same as Portugal. By 2009, exports of goods and services made up 42% of German GDP (having reached a peak of 47% just before the recession hit). Portugal, meanwhile, remained at 28%.
In other words, the euro has been an absolute boon for German industry, with the EU "lending" money to the developing parts of the eurozone, which promptly bought German goods with the money lent. Result, German industry booms, everyone gets a BMW and a Mercedes and holidays in the Black Forest three times a year.
What else have we got? Oh yes, the really important bit, the ECB quantitative easing that isn't. Well, fucked if I know what is going on. My prediction is, as I said, that the ECB will either end up buying up tons of weaker government debt that the private sector won't touch, or it will end up swapping the weaker debt for the stronger debt of Germany and France.
The ECB has spent €16.5bn so far buying crap bonds, and today it is going to launch its "sterilisation" operation so that it doesn't become Quantitative Easing of the UK kind.
I'm afraid that this is beyond my expertise, since the balancing act is apparently going to be in the form of withdrawing one-week fixed term deposits.
The logical conclusion to this would be that there will be a shrinkage of liquidity in short-term instruments -- although €16.5bn isn't likely to make much of a difference.
Unfortunately it won't make much of a difference on the "fixing" side either. What happens if the ECB withdraws €150bn of one-week fixed term deposits? Darned if I know, but I shouldn't think that it will be pretty.
Pimco has already signalled that it will unload Greek, Spanish and Portuguese debt. Other funds have indicated privately that they will follow suit. In other words, the ECB's action hasn't restored confidence in these countries' debt. The ECB has just become a buyer of last resort. This is not good news.
What appears to me to be happening is that the actions of the ECB are attempting to rescue Greece by making the eurozone more interconnected rather than less. Kind of "if you bring Greece down now, Greece falls, but if you bring Greece down next year, Europe falls".
You can see the risk that this brings. There are a number of different players here (the EC, the ECB, individual members of the eurozone), all of whom want the euro to survive, but all of whom have different agendas. The creation of "interconnectedness" looks to me to reduce the risk of failure, but to increase the impact of failure, should it occur.
Well, we've been there before, with the banking system. The fall of Lehman Bros left the global system looking into the abyss, and it shat itself. QE and a number of other measures were the result. If the "cure" worked, great, but if the "cure" failed, the impact would be worse when it comes.
The "free market" for European peripheral government debt is bascially dead. There are no buyers. And, I will predict, there won't be any buyers. Does the ECB want to end up like Robert Maxwell, when he was the only buyer in town for Macmillan shares?
Well, either it will, or it won't, and the implications of either decision aren't pretty. I would definitely prefer that the ECB wasn't, because that would at least bring about an early restructuring of Greek and, probably, Spanish debt. This in turn would lead to a banking "crisis" (anyone wanna buy some Santander stock?), but it would not lead to global systemic meltdown.
The longer the ECB, the EU and individual players try to keep the train moving along, the worse the mess will become when the shit finally hit the fan. Already there are signs that politicians and businessmen, even within Germany, are falling out. Ackermann of Deutsche Bank says that "basically, Greece is fucked", so the German economics minister Rainer Bruederle slams into him for "unhelpful" comments.
But not, you will note "inaccurate".
Cromme of Siemens points out that Germany lent the money to the peripherals so that they could buy German goods. This kind of hard home truth did not go down well. The Germans don't want to hear it.
Once again, for the few of you still out there who are economically naive, who like to ask "where did the money go?", let me give a poker comparison (because I love giving poker comparisons).
I play a game against a bad player, but he drives a nice car and lives in a nice apartment, and he's charming. "Zorba The Greek", as we'll call him, does his bollocks. He pays me 10% of what he owes me, and offers to pay the rest off at 10% a week. "Sure, I say". So he's paid me £100, and owes me £900.
So, the next week, he does his bollocks again, and he pays me the 10% of the previous debt (another hundred quid as promised) and 10% of the new debt (£100).
This goes on for a few more weeks until, after 10 weeks, he's accumulated £10k in debt. But, hell, he's kept to his agreements. Although I've only received £1,500 off him in payments, I've no reason to think that he will welsh on me.
So, I count that £10k as "effective money in the bank".
Now let's look at it from Zorba's point of view. That last week finally sent him skint. Not only does he have no hope of paying back the £8,500 he owes, but he can't borrow any more money to carry on playing. Oh well, he says, the other guy's got £1,500 off me. It's still profit for him.
So, where has the other £8,500 gone?
The answer, of course, is that it hasn't gone anywhere, because it never existed, except in the mind of the winner (me).
Well, Germany was the good poker player, and Greece was the bad one. Germany still thinks it will get its 100%. Greece knows that it hasn't got it. End of. No result.
______________
When the problem is Greece (or Spain, or the UK), things can get complicated, but the whole caboodle seems possible to get a handle on. However, when it comes to the eurozone, the huge number of factors at play make it virtually impossible to synthesize things into something simple. Or, to put it another way, we aren't really looking at a single problem. When we thought it was "Greece, sort the fuckers out", then you could at least look at things and say whether the solutions proposed would solve the problem.
But now it's gone beyond that. It could be "the euro, sort the fucker out", or perhaps it's "global currencies and the current pegs. sort the fuckers out".
The FT today had about a dozen writers and 5,000 words just trying to define the situation, let alone work out any answers. Drawn into the debate was China (less likely to revalue against the dollar given the weakness in the euro) and California (huge economy, fiscally unsound, bonds beginning to suffer widening credit default spreads). And within Europe we have the ECB, Germany, and France, and the peripherals. Fortunately, the UK is almost an outsider here. We might have to stump up €6bn, but this is one European crisis where we can (relatively) say "hmm, good luck in sorting it out, lads". That doesn't mean that the crisis might not eventually hit our banks.
Germany and France don't have that "good luck, lads" option. There's one block of players predicting that the euro is on a one-way trip to parity with the dollar, before exploding in a disastrous fireball of its own creation. On the other side, there's, er, Jim O'Neill and me. That being, that the euro is at the moment subject to spectacularly high levels of short-term futures selling which will unwind sooner rather than later. Of course, the stopping point could still be lower than one would think (hell, it usually is).
But, I digress. Like I said, the problem is there is too much going on at once. The Germans have proposed a strict rule on eurozone budget deficits. The German balanced budget proposal is, er, peculiarly German and particularly suited to, yes, the German economy. It rather looks like an inflexible one-size-fits-all rule that would save Germany having to lay the law down to individual countries in a manner that would look as if the eurozone was controlling individual country's budgets.
The fall in the euro, temporary or not, also evokes different responses from within, let's remember, a group of countries sharing the same currency. Tourist countries are generally delighted (see Spain, France, Italy), because tourism tends to be an elastic demand commodity. But Germany, a country whose exports relied on quality rather than price, gains significantly less from a weakening euro. Imported raw materials cost more, but few extra sales are gathered at the other end, simply because, basically, a Miele or a Neff is not that price-sensitive. I have both, and I bought them because they were good, not because they were cheap (well, they weren't cheap, but you get my drift).
Incidentally I saw an interesting graph which should be compulsory viewing for all Germans who claim that the euro has been a curse for them and they are fed up with propping up those other lazy bastards using the same currency. It whowed that in 1999 German exports of goods and services made up 28% of its GDP, about the same as Portugal. By 2009, exports of goods and services made up 42% of German GDP (having reached a peak of 47% just before the recession hit). Portugal, meanwhile, remained at 28%.
In other words, the euro has been an absolute boon for German industry, with the EU "lending" money to the developing parts of the eurozone, which promptly bought German goods with the money lent. Result, German industry booms, everyone gets a BMW and a Mercedes and holidays in the Black Forest three times a year.
What else have we got? Oh yes, the really important bit, the ECB quantitative easing that isn't. Well, fucked if I know what is going on. My prediction is, as I said, that the ECB will either end up buying up tons of weaker government debt that the private sector won't touch, or it will end up swapping the weaker debt for the stronger debt of Germany and France.
The ECB has spent €16.5bn so far buying crap bonds, and today it is going to launch its "sterilisation" operation so that it doesn't become Quantitative Easing of the UK kind.
I'm afraid that this is beyond my expertise, since the balancing act is apparently going to be in the form of withdrawing one-week fixed term deposits.
The logical conclusion to this would be that there will be a shrinkage of liquidity in short-term instruments -- although €16.5bn isn't likely to make much of a difference.
Unfortunately it won't make much of a difference on the "fixing" side either. What happens if the ECB withdraws €150bn of one-week fixed term deposits? Darned if I know, but I shouldn't think that it will be pretty.
Pimco has already signalled that it will unload Greek, Spanish and Portuguese debt. Other funds have indicated privately that they will follow suit. In other words, the ECB's action hasn't restored confidence in these countries' debt. The ECB has just become a buyer of last resort. This is not good news.
What appears to me to be happening is that the actions of the ECB are attempting to rescue Greece by making the eurozone more interconnected rather than less. Kind of "if you bring Greece down now, Greece falls, but if you bring Greece down next year, Europe falls".
You can see the risk that this brings. There are a number of different players here (the EC, the ECB, individual members of the eurozone), all of whom want the euro to survive, but all of whom have different agendas. The creation of "interconnectedness" looks to me to reduce the risk of failure, but to increase the impact of failure, should it occur.
Well, we've been there before, with the banking system. The fall of Lehman Bros left the global system looking into the abyss, and it shat itself. QE and a number of other measures were the result. If the "cure" worked, great, but if the "cure" failed, the impact would be worse when it comes.
The "free market" for European peripheral government debt is bascially dead. There are no buyers. And, I will predict, there won't be any buyers. Does the ECB want to end up like Robert Maxwell, when he was the only buyer in town for Macmillan shares?
Well, either it will, or it won't, and the implications of either decision aren't pretty. I would definitely prefer that the ECB wasn't, because that would at least bring about an early restructuring of Greek and, probably, Spanish debt. This in turn would lead to a banking "crisis" (anyone wanna buy some Santander stock?), but it would not lead to global systemic meltdown.
The longer the ECB, the EU and individual players try to keep the train moving along, the worse the mess will become when the shit finally hit the fan. Already there are signs that politicians and businessmen, even within Germany, are falling out. Ackermann of Deutsche Bank says that "basically, Greece is fucked", so the German economics minister Rainer Bruederle slams into him for "unhelpful" comments.
"I find the declarations strange, surprising and annoying."
"At a time when the debate is being carried out so publicly, such a strong statement on the television is not helpful".
But not, you will note "inaccurate".
Cromme of Siemens points out that Germany lent the money to the peripherals so that they could buy German goods. This kind of hard home truth did not go down well. The Germans don't want to hear it.
Once again, for the few of you still out there who are economically naive, who like to ask "where did the money go?", let me give a poker comparison (because I love giving poker comparisons).
I play a game against a bad player, but he drives a nice car and lives in a nice apartment, and he's charming. "Zorba The Greek", as we'll call him, does his bollocks. He pays me 10% of what he owes me, and offers to pay the rest off at 10% a week. "Sure, I say". So he's paid me £100, and owes me £900.
So, the next week, he does his bollocks again, and he pays me the 10% of the previous debt (another hundred quid as promised) and 10% of the new debt (£100).
This goes on for a few more weeks until, after 10 weeks, he's accumulated £10k in debt. But, hell, he's kept to his agreements. Although I've only received £1,500 off him in payments, I've no reason to think that he will welsh on me.
So, I count that £10k as "effective money in the bank".
Now let's look at it from Zorba's point of view. That last week finally sent him skint. Not only does he have no hope of paying back the £8,500 he owes, but he can't borrow any more money to carry on playing. Oh well, he says, the other guy's got £1,500 off me. It's still profit for him.
So, where has the other £8,500 gone?
The answer, of course, is that it hasn't gone anywhere, because it never existed, except in the mind of the winner (me).
Well, Germany was the good poker player, and Greece was the bad one. Germany still thinks it will get its 100%. Greece knows that it hasn't got it. End of. No result.
______________
