As usual, we didn’t learn a lot from the G-20 major economies in the world meeting in Paris that ended on Saturday.
Nevertheless, the meeting helped us to know the U.S., the U.K., Japan, Canada and Australia have made it clear, especially to the G-20 members of various emerging economies, the IMF has plenty of resources on hand and is in no need of extra funding from its “financial reserves rich” members, at least not for now.
More importantly in the short term, the G-20 thinks the eurozone should sort out its own problems itself by addressing:
• a “serious” bailout of Greece;
• shoring up sufficiently the reserves of all the banks that will be in need or obliged to do so with Greek banks first, so they will be able to digest without risk of serious slippage (collapse) the Greek losses as well as the losses that will surely come in the foreseeable future from the other troubled eurozone countries;
• making the European Financial Stability Facility (EFSF), which is the eurozone’s bailout fund, extra-strong, which should make it substantially bigger than its actual size of 440 billion euros ($610 billion) the eurozone leaders agreed on July 21 in Brussels.
The G-20 wants it to have all the necessary power to function quickly whenever needed as the backstop apparatus of choice that would “reassure” everybody inside and outside of the eurozone. The big question remains if all this is doable in time before disaster strikes all these directly, indirectly and interlinked “eurozone’s sovereign contaminated collateral” holders.
In my opinion, investors should do well not becoming too overly optimistic in the coming weeks and certainly not before Sunday, October 23, for a realistically doable “grand plan” that wouldn’t be set up for buying time but that really provides a solution for the crisis and saves the eurozone in its actual concept.
Over the weekend, German Finance Minister Wolfgang Schaeuble said when asked whether there could be a Greek debt write-down of as much as 50 percent to 60 percent: “A lasting solution for Greece is not possible without a debt write-down, and this will likely have to be higher than that considered in the summer.”
He added: “Of course we would like, if possible, to agree the private sector participation together with the banks. That is why we will be discussing things with them. But it is clear, there must be a level of participation which is enough to bring about a lasting solution for Greece. That is enormously difficult.”
He also noted: “The details are being discussed now. They don't all have to be ready by the EU summit (next Sunday, October 23) but the principles must be clear.”
Regarding bank recapitalization, he said: “We need better regulation and we also need a better capitalization of banks, which is what we are doing in the short-term. Not everyone will like it, but it is the best way to ensure that we don't have an escalation in the crisis due to a collapse in the banking system.”
I know that for non-European investors all this is extremely complicated and difficult to understand. Please keep in mind the eurozone is “not” a single country as is the case with the United States of America.
On the contrary, Euroland is an economic and monetary “union” of 17 fully distinct “sovereign” countries that agreed to use a single currency without having a fiscal union that binds them.
This is the structural weakness that could cause at any time that so feared division within the monetary union when things become really unbearable and politically unjustifiable.
Remember the German constitutional court already ruled last month Germany will not cede its sovereign fiscal powers to the EU, period.
So, you don’t have to be a pessimist for expecting further difficulties ahead. I think, the lack of real solutions will cause further downgrades for several EU states whereby a couple of triple AAAs could easily go overboard, while banks aren’t off the hook at all and should also face further cuts.
Of course, the European Central Bank (ECB) could save Euroland but then at e.g. the cost of unacceptable high inflation rates in the core countries like Germany, the Netherlands, etc. I can’t imagine the German Bundesbank, the Dutch central bank, and others accepting that as the price to pay for keeping the actual euro structure in place. At least, that’s what I think.
Besides and maybe it’s no front news yet but the Financial Stability Board (FSB) Chairman Mario Draghi has a list ready of banks systemically important to the global economy that are factually in need of extra capital that will be published in time before November 3-4 when the G-20 leaders meet in Cannes, France. (The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. The Board includes all G-20 major economies, the Financial Stability Forum (FSF) members, and the European Commission and is based in Basel, Switzerland.)
Yes, these are “dark ages”-like times in the making for banks and you can be sure, it will take quite some time before things will finally clear up.
As said here before, I don’t participate in the actual ongoing “risk on” rally that is based on delusional hopes. I think we have again one of these “buying on the rumor and selling on the facts” situations. Of course, this is not an investing environment for long term investors.
Yes, we are living a time of heightened tensions with significant downside risks for the global economy that need to be addressed decisively “the sooner the better” to restore confidence, financial stability and growth. It’s evident that not a single one of these three pillars is now in place.
Unfortunately, uncertainty remains very well anchored and is showing no signs of abating soon. Long term investors should try to avoid at any cost that well-known but rarely admitted “overconfidence bias…”
My preference is keeping away from risk. Of course, that’s my personal opinion and is not intended as an advice whatsoever.
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