Thursday, 27 October 2011

Eurozone Deal Mark 5

I occasionally get contacted by the Evening Standard for my take on matters financial. I reproduce the content of my email to them below. Whether they use it or not is up to their editor.

(What I find amusing is to hear my neighbour  Ashdown pompously declaiming on TV today that if we were in the inner EU group we could fashion EU rules to suit the UK . I stopped believing in fairy stories many years ago but I guess the sandals, beards and orange anorak brigade,  the Lib Dem's first of foot, still like a nice comforting bedtime fairy tale from Paddy.)

My email:

Your piece covers most of the angles but as always the devil will be in the
detail that has not yet been made public probably because they have not yet
thought it through to a proposal stage.

The Chinese think very long term, 10 years is nothing to them. They will
want a long term lasting solution to the Eurozone crisis before they would
have the confidence to invest. They will demand their pound of flesh which I
opine might be a long term secret most favoured nation status for Chinese
exports to the EU which probably Sarkozy and Merkel can deliver but in the
long run it will be a poor bargain for the EU. Of course the real point is
to save Sarkozy's, election next year, and Merkel's political skins.

The Chinese will of course insist their loan ranks pari passu with the IMF
and ECB so no haircuts for them!

I feel the EU would do better with a mixture involving the Middle East
sovereign oil funds plus possibly some from the Norwegians. The Arabs think
more short term. They bailed out Barclays in 2008 and then exited at a
profit within 18 months. A clean deal. Any Chinese deal will have a very
long tail.

We are deluding ourselves if we think we could have any influence in these
matters. Germany has the money, end of story. Merkel is also rattling the
European nightmare of aother European war. Completely impossible in my view.
The US would never stand for it but I am surprised that Merkel, a Prussian,
raised this. She must be desperate.

On the Eurozone itself I cannot see the other countries being happy long term
with Franco German domination. The Sarkozy Merkel humiliation of Berlusconni
will have been a bit scary for the other Latin countries.

It is of course another sticking plaster job avoiding the real reforms that
Greece etc have to make. It also creates huge moral hazard in that the
Portuguese, Irish, Spanish and Italians will demand the same treatment for
their debts.

It looks like its the private sector that will take the hit when a country
borrows too much. Very bad for a private sector led recovery. Public sector
holders of Greek debt apparently do not face a write off of some of their
holdings. Greek taxpayers will still have to pay interest and repay capital
to the various public sector holders.

Are  Euro area leaders going to say to private sector pension funds and
savers that they should not expect a Euro area government to
honour its debts and repay money borrowed?. It won't just be Athens that will
see street protests but Italy as well given the trouble already raging there on
raising the pension age to 67.

I hope these countries have enough police to provide their elected
representatives with a 24 hour police guard. They may well need it to
protect them from the enraged populace when the ramifications of the 'deal'
sinks in.

No comments: