We have lost 1 Euro Zone Prime Minister, though 2 others need to receive their red cards. Mr Papandreou is out (great news) and either the Finance Minister or (more likely) Mr Papademos (the former deputy to Trichet at the ECB) will be appointed PM – with general elections to be called in Feb 2012. In the interim, an unity Government is to be formed. This just buys time. Greece will come back, again and again and…….
3 more countries need to be sorted out imminently, though others such as France and Belgium, remain a significant concern.
Recently, Portugal has missed a number of its fiscal targets. In addition, it has been hit by additional (and previously unreported) debt incurred by Madeira. It is clear that Portugal will not be able to service its existing debt load and a haircut on it’s existing debt (possibly as high as 40%) is a virtual certainty. However, Portugal has tried (unlike Greece) to meet its obligations and fiscal targets. Their problem is that, even in the better times, Portugal grew by less than 1.0%. With the severe austerity measures currently in place, Portugal is heading for a serious recession, which will make its task all the more difficult – indeed, impossible in my view.
General elections are due in Spain later this month. The current ruling Socialist party will be out – not before time. They have lied about meeting their fiscal targets, as we will find out in the next few months, I assure you. Spain remains a serious threat to the Euro Zone, as far as I’m concerned.
The bigger issue, for the present, is Italy. However, with Italian bond yield continuing to rise (currently 6.64% for the 10 year) and the need for Italy to finance large amounts, I believe Mr B’s days are numbered. Yes, he has been a survivor, but this is different. There is no love lost between Mr B and Merkozy and Italy needs help, which is unlikely to be given to the degree necessary, as long as he remains in power. I had thought he would be out by March next year, but I think it’s now a matter of weeks, if not days.
Mr B reported today that he can still command a majority in Parliament – apparently, he has been offering “interesting positions” to those who will support him. However, these politicians will realise that these “benefits” will only be of a temporary nature. As a result, I remain sceptical as to Mr B’s claims. Mr B is likely to face his 57th confidence vote this week – he needs to pass a bill relating to the 2010 budget today.
I remain of the view that the Italian crisis is more of a political issue, rather than a financial one, but clearly the market has Italy in its sights. Indeed, Italy has amongst the highest net assets per capita in the Euro Zone, even after deducting Government debt. In addition it has had and still maintains a primary surplus. However, the exit of Mr B, will be welcomed by markets, especially if a technocrat administration, lead by Mario Monti, is established – to take the necessary, though deeply unpopular measures.
The new ECB President was a refreshing change from the (lunatic) Trichet. He is clearly looking ahead to set monetary policy and, importantly, the rate cut was supported unanimously. Whilst he reiterated the ECB’s position on buying Euro Zone bonds ie it was temporary and limited, I believe he will be more receptive than he suggested last week. He (surprisingly) suggested that the ECB would not be the lender of last resort – that’s interesting, as that is
clearly one of the key roles of a Central Bank. He did suggest that the Euro Zone would dip into a “mild recession” – quite frankly this is an optimistic view – I expect the recession in Europe to be significant – indeed, numbers, even from Germany, reveal a sharp slowdown. Mr Draghi is brief in his comments – don’t expect major interviews, fireside chats, etc.
Mr Draghi will cut rates further – personally, I will not be surprised if he cuts rates below 1.0% – considered to be the lowest level previously. In addition, I believe the ECB will (ultimately) follow the US and the UK and go for QE. There is no alternative, though this will be tough for the Germans to buy into, but (ultimately) they will have to concede.
The FT reports that the G20 is likely to call for another meeting, possibly as early as December or January. A number of financing solutions were considered, though Germany objections resulted in failure to reach a deal – however, as the pressure mounts, Germany will have to change it’s mind.
All of the above suggests to me that markets (ex other issues) may well rally short term, particularly if Mr B is (finally) ousted, which, I believe is likely, imminently. However, medium to longer term…
Kiron Sarkar is an investor and advisorin London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.
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