Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Tuesday, 26 March 2013

Gun to the template

Notable points have been obscured amidst all the meaningless discussion on whether Cyprus is a template or a unique case and whether depositors in Italy need to go to the mattresses. The following signals should be picked up from the noise:

  1. Northern Europe is running out of patience – The pounds of flesh demanded per Northern European Euro is rising fairly dramatically. The spin that Cyprus was a special case targeted because it was politically impossible to be seen supporting a “Russian money laundering haven” should be taken with a pinch of salt. Given prevalent southern European stereotypes and voter disenchantment with bailouts in Northen Europe, it is going to be as hard if not progressively harder to hand out money to Italy or Spain or anyone else. In fact given the size that Italy and Spain might require, private sector bail-in is guaranteed.
  2. IMF is running out of patience – Despite a European head it seems that voices inside the institution are attempting to stem its rising exposure to a sinking Eurozone. This puts the burden of support on Northern Europeans and based on the observation above, it makes private sector bail-in more likely in future.
  3. Poor decision making without regard to consequences is the only constant amongst “unique” cases – Very little has changed since beginning of 2010 when Greece first discovered it needed some money. If an infinite number of politicians were put in a room, one of them might come up with a solution but that is not what will be finally adopted by the Eurozone. Expect great albeit contradictory soundbites, few solutions and much volatility.
  4. Invocation of force majeure is likely to be more frequent – Capital controls are prohibited by Article 63 of the Lisbon Treaty but Article 66 allows them in “exceptional circumstances”. As fundamentals keep worsening, presumed legal rights and protections are going to be torn up by a desperate elite in their bid to keep the grand design alive.
  5. OMT is empty – Actions speak louder than words and ECB just became the backstabber of last resort. Northern European hard money influence is unlikely to allow emulation of Ben’s ‘money for nothing’ policies. Yet again expect great soundbites but little help.
The upshot is that private investors are increasingly on shaky ground. Unless growth miraculously arrives or a change of heart leads to fiscal transfers it looks as if political will is about to meet its match in economic won’t. 

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