Friday, January 7, 2011

No Peace on European Sovereign Debt

When I read the news coming out of the Eurozone these days I get a very strong sense of déjà vu, all over again.

This feeling comes from hearing over and over again, leaders, whether of nations or of corporations, complaining that “the markets just don’t understand us!”

My response in cases like this is that the markets understand you…too well!

We have been going on and on about the fiscal crisis in Europe for at least a year now. And, things still are unsettled. (See my post “Four Uncomfortable situations to watch in early 2011”, http://seekingalpha.com/article/244531-four-uncomfortable-situations-to-watch-in-early-2011.)

And, the resulting financial crisis is not because there is not enough liquidity circulating around in world markets. The European Central Bank and the Federal Reserve System have seen to that. (See my post “Is QE2 a Bubble Machine?”, http://seekingalpha.com/article/245255-is-qe2-a-bubble-machine.)

As evidence of this I point to the fact that Brazil has launched a fresh attempt to limit the appreciation of its currency, “Brazil in Push to Curb Rising Currency”, http://www.ft.com/cms/s/0/7becb4e4-19c6-11e0-b921-00144feab49a.html#axzz1AMDfgcKJ.
And, it is not that Europe is not getting a sympathetic response from other countries. China, especially, has moved to provide funds to purchase sovereign debt. However, China is not that excited about further bailouts.

Still, Greece is continually fighting off concerns about how it is handling its fiscal affairs. (See http://professional.wsj.com/article/SB10001424052748704415104576065250841058220.html?mod=ITP_pageone_2&mg=reno-wsj.)

And, “Portuguese yields near euro-era high” (http://www.ft.com/cms/s/0/d2b3d95e-19c3-11e0-b921-00144feab49a.html#axzz1AMDfgcKJ). “If Portugal’s borrowing costs keep rising, then the government will reach a point where it will have to seek financial assistance from the international community.”

The major rating companies continue to put out downgrades of government debt and voice their concerns that further downgrades will be necessary. Investors also continue to translate this viewpoint into market prices: “The costs of insuring against a default by Western European sovereign borrowers in the credit default swap market surged, briefly touching a record on Thursday, according to data provider Markit. Swaps prices for Spain, Belgium, and Ireland closed at records, according to Market. The gap between yields on most European sovereign bonds and relatively safe German debt also widened.” (http://professional.wsj.com/article/SB10001424052748703730704576066243894186226.html?mod=ITP_moneyandinvesting_0&mg=reno-wsj)

The fact that this situation still exists after a year of massive efforts by the nations in the European Union and the International Monetary Fund and that lots and lots of money has been spent to resolve the underlying problems indicates to me that somebody is on the wrong page.

Furthermore, given that the situation has not gone away during this twelve month period indicates that the problems have not just been created by the “greedy bastards” known as speculators that have turned against a weakened opponent. If anything the leaders of the European Union have created “one-way bets” that have drawn speculators to feast on their difficulties. (See my post “Interventionists are Setting Up One-Way Bets for Traders”, http://seekingalpha.com/article/237076-interventionists-are-setting-up-one-way-bets-for-traders.)

My final comment on the behavior of the leaders of the European Union with respect to their sovereign debt crisis goes back to one of my favorite Stephen Covey quotes: “If you think the problem is out there, that is the problem!” It is very easy to pick out people in the investment community as a scapegoat for the problems you experience, especially if you can brand them as “greedy bastards.” Yet, pointing fingers at others and calling others names seldom, if ever, solve problems.

The leaders of the European Union need to face reality. Somewhere, sometime, the value of the debt that is being questioned is going to have to be written down. These leaders are going to have to accept the reality that they did a bad job in managing the responsibilities that they were given.

The process that these leaders are going through now is taking up too much time, is costing too much money, and is drawing the focus of these leaders away from things they really should be dealing with.

My experience is that when things like this are drawn out for such a long time and do not seem to be resolving themselves, it is time to “bite-the-bullet”, admit your mistakes, and move on.

This is a difficult thing to do but it is time to start attacking other problems that need to be dealt with.

1 comment:

theyenguy said...

Simon Kennedy reported in Bloomberg on January 7, 2010: “Fears of a sovereign default are ‘manifest’ in Europe and will soon spread to Japan and the U.S. as governments struggle to control deficits, according to Citigroup Inc. economists led by former Bank of England policy maker Willem Buiter. ‘Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving … There is absolutely no safe sovereign’

It is true, there is no safe sovereign ... The sovereign debt crisis will only get worse ... And then out of Götterdämmerung, an investment flame out, a European Chancellor, will arise to establish order.

This Sovereign will likely be a European Leader, who has credentials, such as that of having been awarded the Charlemagne Prize. Candidates inlude Herman van Rompuy, Angela Merkel or John Redwood or Tony Blair

And a Banker, that is a Seignior, such as Wolfgang Schäuble, or Olli Rehn, or Jean-Claude Trichet, or Gordon Brown or Jose Manuel Barroso, or Giulio Tremonti or Jean-Claude Juncker will rise to provide credit.