Once again, ee has taken the words out of my mouth :0) .. "Of course the possibility is a serious one that the Euro project is (and always was!) fatally flawed...and the only solution is one of:
a) full fiscal union (v unlikely)
b) formal defaults by Greece, Italy, Spain etc (also unlikely as Eurozone banks would need to take large haircuts and make substantial provisions - as RBS has already done with Greece, incidentally)
c) dividing the euro into a hard euro and a soft euro....or just chucking out those who don't pass the test. (the trouble with that approach is that markets will continue to pick off the weak until the Eurozone consists of Germany and France ;-))
But Merkel has already indicated she stands behind the euro. But she hasn't understood the scale of commitments that this implies. IMO they have to do a very much larger deal - and, for Merkel, it will probably cost her the next election....but it has to be done".
One thing seems certain: the euro cannot continue as at present indefinitely. The global economy and hence our investments are fundamentally affected by instability in Europe. I was at the first AGM of the JP Morgan Brazil Investment Trust (LSE:JPB) last week and was surprised and interested the learn that Brazil's largest trading partner (for exports) is not the US (9.5%), nor China (15.3%), but the EU (21.5%)!
So ISTM that it would be worth creating a place to discuss this topic.
My own view is that the most likely ultimate outcome is some sort of breakup of the euro, i.e. c) above - or even a complete breakup where each country reverts to their own currency. I take this view because I cannot see the German electorate being prepared to accept a German underwriting of PIIGS debt. Equally I cannot see countries being prepared to accept the loss of sovereignty that full fiscal union implies.
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It may be quite a while before we reach the point where something dramatic and decisive happens. Maybe sticking plasters can continue to be applied for some time to come - maybe not!
A particular aspect of this that I am curious about is the impact on contracts that are written in Euros. There are many types of contract written in Euros. Some that occur to me are:
- Trade contracts between customers and suppliers
- Mortgages, loans and credit card agreements
- Insurance contracts
- Corporate bonds and sovereign debt
The first of these seems relatively straightforward to me, as many contracts can simply be renegotiated. However, this is more complex and troublesome where the subject of the contract is a long-running project of some type. There could be a hiatus whilst the the two parties thrash things out. This takes me back to a conversation I had with HG Capital Trust (LON:HGT) 's manager earlier this year about this topic, as HG Capital is heavily exposed to the Eurozone (but mainly Germany and northern Europe). I imagine that contracts with customers in less indebted and more stable countries can be renegotiated relatively straightforwardly, because the supplier will have confidence in the value of the customer's currency. However, contracts with customers in the PIIGS could be more troublesome. Those customers will want to stick to their own currency at whatever exchange rate prevails when that country decouples from the "old euro", but suppliers will not have confidence in that currency and will either want a more favourable exchange rate (to compensate for the risk which they can then hedge), or for the contract to be rewritten in a more stable currency. It could take rather longer to renegotiate those contracts.
Medium/long term this could be good news for banks, as there'll be more requirement for FX and FX derivatives, between parties that formerly were using the same currency as each other but now cannot.
Thoughts on the practical implications, or if you disagree with my analysis, would be particularly interesting to me.
Regards,
Mark
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62 Comments on this Article show/hide all
In reply to SW10Chap, post #42
Hi SW10
I'm not sure how we reach that vision or even the possibility of it from where we are now, but I'm surprised to be so impressed by the article, and agree with your assessment that it is well worth reading with many good points - points that I had expected to be lost on the vast majority of journalists, particularly those from the BBC. Maybe there's hope for Aunty too.
In reply to SW10Chap, post #42
It may yet find it can attract refugees from the eurozone to its banner.
Maybe not too long to wait according to an interesting article in Der Spiegel entitled "Merkel's triumph will come at a High price": Barroso talking of "warlike conditions" and the Cypriot president of "engineering a revolution against Merkel and Sarkozy"?
In the preceding weeks, European Council President Herman Van Rompuy had begged the German chancellor to abandon or at least postpone her plans to amend the European treaties. Instead, Van Rompuy made the case for tightening budgetary oversight with the help of a protocol attached to the Lisbon Treaty, thereby avoiding risky referendums in the individual countries. But Merkel brusquely rejected the idea, permanently damaging the relationship between the two politicians. Van Rompuy said he was "very disappointed" by Merkel, on both a human and political level.
European Commission President José Manuel Barroso even spoke of "warlike conditions." According to Barroso, Merkel and Sarkozy are trying to impose their views on everyone else, even though they themselves can hardly agree on any issue. The fact that the majority of countries bowed to the German-French duo in the end shows how dependent the EU is on its two biggest financiers. Cypriot President Dimitris Christofias described the dilemma in a nutshell: "We really ought to engineer a revolution against Merkel and Sarkozy, but each of us needs the two of them for something."
and later: "The Bundestag will carefully review possible constitutional problems that could result from direct intervention by the European Commission or a European currency commissioner in national budgets and thus the parliament's budgetary powers," says Lammert. "The Bundestag will take great care to ensure that such constitutional risks are avoided."
First, however, investors will have to be convinced that the approved measures are in fact sufficient to save the euro. The head of the European Financial Stability Facility (EFSF), German economist Klaus Regling, encountered skepticism when he spoke with investors on the phone on the evening of the summit. They told him that they intended to reduce their exposure in the euro zone.
The whole of this article is well worth reading too on the arguments leading up to the summit: http://www.spiegel.de/international/europe/0%2c1518%2c803097%2c00.html#ref%3dnlint
I have been surprised by the tone of some posts on bulletin boards and reports in the media. You would think that all other 26 members of the EU had signed a new treaty on Friday. It seems that many have forgotten that it hasn't even been written yet. The FT reports that there are already some having second thoughts (four governments) depending on what the detail will be.
http://www.ft.com/cms/s/0/3d75ccb8-25b5-11e1-856e-00144feabdc0.html#axzz1gVCC8gAv
I find the whole process hugely irritating, sometime ago at a summit that was supposed to fix the Euro the then trumpeted plan was to leverage the EFSF to €1 Trillion. Now it seems the EFSF and its replacement the ESM are to be limited to €500 Billion in total. I predict that the plan as announced last Friday will either morph immensely or fail completely. Politicans seem oblivious to the damage being done to confidence that may well push parts of the EU in recession, further aggravating the problem
I am finding it difficult to motivate myself to research individual stocks at the moment as share prices seem dominated by the macro picture which itself is dominated by the Eurozone crisis. The effect is far reaching across equity markets all around the globe.
Given the track record so far the potential exists for this to carry on for years rather than months.
Unwise
German Chancellor Angela Merkel said there is no easy solution to the European crisis after rejecting an increase in the upper limit of funding for the region’s permanent bailout mechanism.
http://www.bloomberg.com/news/2011-12-14/commodities-fall-most-in-four-weeks-on-european-debt-woes-macro-malaise-.html
Well one easy solution would be if you're not going to provide meaningful support then just SHUT UP.
Not sure if this is the correct thread for this question, so sorry if not!!
Q. Is it time to start reducing and/or closing?
The markets have a had a good run, so feeling a tad apprehensive that we might get a wallop again this year. Any thought as to how the funds are going to play the market for the remainder of 2012? Long? Short?
Is the end near for 3-year-old bull market?
http://www.usatoday.com/money/perfi/stocks/story/2012-03-07/bull-market-turns-three-years-old/53404148/1
Reportedly there are already 57% acceptances for the Greek bond swap and the markets are trading up on optimism that the deal will go through and pass the two-thirds hurdle for acceptances by 8pm tonight.
Others will have a better idea than me of the amounts held by certain hedge funds and other potential hold-outs, but I would still ignore all the optimistic talk until it can be definitively announced that the threshold for acceptance has been passed. One simply HAS to sound optimistic at this point - but it is still no guarantee.......and I can easily see some of the hedgies holding firm and then challenging the outcome in the courts if the vote goes against them. Though I'd still expect the two-thirds number to be passed.....just.
ee
fuiseog,
10 years ago, I did a scuba dive at Port Bou, a small Mediterranean town on the Spanish - French border. The dive lasted about 40 mins, and I did not see a single living thing; no fish, even tiny ones, and not even one baby prawn.
Foreign nations, including those from the EU, with a reputation of overfishing; must be barred from our waters.
MadDutch
EE,
Thanks for the Reuters article link, I tend to agree that, come down to the wire things tend to go through. But it all seems to be never ending and moving from one big potential flare point to the other, is it all just plugging the dam?
In 2008 I was slow to react and regret not being more in cash, with all the economic pressures we are facing, and it seems weekly we are hopping from one potential global flare point to the other my apprehension levels are increasing! With the DOW having gained 100% since March 2009, are we going to be manipulated down? Or is there another titanic situation due this year?
For the time being I’m uncomfortably sitting on my hands.
According to today's Daily Telegraph [Business News] Greece needs 95% of its creditors to back the proposed bond swap. The deadline is 8 pm tonight and the DT this morning reckoned that only 40.8%of Greece's creditors were in agreement so far.
This enormous shorfall seems hardly likley to become 95% this evening.
Analysts were reported [again by the DT today] to expect that Greece will have to resort to using the Collective Action Clauses [CACs] in their contracts with their lenders. This will force the lenders to accept a reduction of 75%. This is expected effectively to mean a Greek default tomorrow.
What interesting times we face!
In reply to p3dr036, post #51
According to today's Daily Telegraph [Business News] Greece needs 95% of its creditors to back the proposed bond swap. The deadline is 8 pm tonight and the DT this morning reckoned that only 40.8%of Greece's creditors were in agreement so far.
They would like 95%, I'm sure though they've sai they are hoping for 90%. However, they only need 75% to be able to push it through, and the Beeb are quoting a "greek official" as saying they already had that a while back.
DT are now saying that, after all, the requisite 90-95% threshold of creditor acceptances was achieved
Hi p3dr036,
Whatever your views on the future of the Euro, it seems that DT has an 'agenda'.......as someone once said to me, when looking at a piece of information (in this case , not even 'news' ie fact, but really 'speculation') :
........"consider the source'.........
I personally set little store in what either the red-tops or the 'blue-tops' (?) say !
ATB
Everybody has an agenda!!
Interestingly today's DT is now saying that the acceptances by creditors were between 60-75% - their source is "Greek Officials - so that makes it very likely (not!)
The DT are supposedly merely reporting the facts but these seem to me to be a bit "variable"!
I expect Greece to default eventually as I doubt the population there will accept the regime they are forced into. It may take a year it may be next week/month. But I think it is inevitable.
Also I think it likely that Greece will be followed by Portugal, Spain over the next year or two.
The undemocratic experiment of the "one size fits all" Euro is failing as it was inevitably going to. It would have only worked with a United State of Europe with a Central Bank. That was never the case of course and the idea that the economies of Germany and Greece could be forced to act similarly was always pie in the sky.
The one thing that we can regard as a success from Gordon Brown's disastrous reign as Chancellor is that he kept us out of the Euro disaster! Pity he sold so much of our gold reserves though!!
Will taking a bit hit have repercussions? Will they need to sell other assets to cover the book loss? Will they and their peers re look at their exposure profile?
Looks like the Telegraph has now credited some proper sources!
Nevertheless, I would still think it quite likely that some of the hedgie hold-outs will mount a legal challenge, based on the contractual documentation of the bonds they hold. I do not expect this to be "the end of the matter"....far from it!!!
The next step is of course for ISDA to decide whether there has been a default that triggers CDS payments - and that could open a whole new can of worms.
Furthermore, there are going to be lots of countries thinking "if Greece can get away with reneging on its obligations, then why can't we?" - and that, in all probability, will mean much more market volatility for sovereign credits that are suffering economic problems. Watch, for example, Ireland and Portugal.....and indeed various "developing world" credits.
Major investors will have swallowed hard on Greece - but they will certainly be modifying their risk profiles going forward to significantly reduce such risks in future.
ee
In reply to emptyend, post #57
There is an interesting update on the Telegraph link cited earlier:
Two points really:
1) Most of the hedgefunds who might fancy holding out would likely hold the foreign law bonds
2) Mr Venizelos would be naive to think that bondholders who haven't yet accepted and who hold bonds under foreign law (without the "collective action clauses") will merely fold their tents and submit to the Greek terms without testing them in the courts.
I haven't seen those documents and I don't know who holds the bonds, but we may only be weeks away from Greece being sued in a London or New York courtroom (the foreign law will likely be one or the other).
ee
ps....I've just read in the FT an excellent summary of the situation and what is likely going on behind the scenes - the gist of which is precisely what I would have expected, though doubtless things have moved on a bit since that piece was written.
A 75% hair cut is going to cause contagion, implications short term are bound to affect Portugal, Italian, Spanish and Irish bonds. China’s growth is slowing, false economy low interest rates, bailouts, stress tests etc it’s painting a bleak outlook. With the DOW having gained 100% since March 2009 I feel a reversal is looming.
Indeed, I tend to agree on the reversal looming front Elias.
Still, I think there is a bit more juice to come..Will definitely be selling in May this year!
Fangorn, do you recon a double top on the indexes, then possibly look to reduce?
I was hoping for 6000 Ftse before going short myself. Unfortunately it never quite made it there. Too many negatives out there for the index to appreciate significantly, despite the constant press comment that Equities are "cheap!"
And the Greece situation merely kicks the can down the road - am pretty sure they'll be back for another (aka third) bailout within 6 months. The United Europe dream is doomed imv. Just a matter of time. Unfortunately we are all going to pay for a misguided ideologically driven dream.....