May 14, 2012
Yesterday Mrs. Merkel has lost the elections in Vestfalia.Si thus adds another piece to the ongoing process of political and institutional changes the balance in the Eurozone.
We decided to write you back after the update on Thursday, because we have the firm conviction that they are the macro factors and the political-institutional factors that are, at this moment in history, determining the performance of financial markets in the world, meaning what the bond markets, equity and currency markets.
These factors, in the Euro, are critical in evolution, that are changing quickly and in such a way as to bring the whole area in the theoretical conditions of stress irreversible.
We therefore believe that the focus on them should be kept very high and constant in the short term, by making recommendations that result in the construction and modification of the portfolio.
The situation in Europe
We were surprised yesterday morning to read in the CdSera a phrase, attributed to an anonymous influence, which used the same terms we reported in the updated May 10, that "if monetary union were to lose one piece, ie the Greece, a dollar in a bank in Spanish or Italian would no longer be seen as equal to one euro in a German bank. "The concept of fungibility euro loss in the event of withdrawal of Greece from the Union, it is becoming clear to many observers, including journalists. (we attach the article with the quoted passage underlined).
It is becoming clear also that this time no joke anymore and that the possibility of a rupture of the Euro now exists as a result of mistakes made in recent years especially by the Germans and the errors which are likely to continue in the coming months, ie now the next Greek elections (almost certain now) and after that election.
In Anglo-Saxon world a successful break is covered in the articles of major newspapers yesterday Krugman put it in black and white on the NYTimes (enclosing article). In the first step out of Greece comes to the Euro, the possibility of the end of last ’Euro.Krugman synthesizes too, in our opinion: the ability to manage the crisis are more than those described, but we emphasize that gravity is manifested, and we have not talked about enough probably to avoid behaviors Panicali and capital flight to Switzerland and Germany.
We find most interesting commentary on today’s Financial friend Munchau Times.Munchau sees 4 possible scenarios of evolution (from the greek point of view):
1) The first is the status quo, with Greece accepts and implements austerity and economic reforms demanded by Europe. It ’s the worst scenario, he believes, because it means 10 years of depression in Greece. It considers also the least likely.
2) the second (not according to the article) is a voluntary immediate release: it is equally destructive of the previous scenario, it would jump immediately greek banking system (this we may add them but it would be almost certain) while the benefits for Greece would be in while laughable, because Greece has no significant export industries voted, so it would benefit from a “new drachma” devalued, with all due respect to all those commentators who compare with the case greek improvisation than a decade in Argentina ago.
3) The third scenario is the one desired by the leader of the Greek winner of the recent elections, the Syriza, the left does not europeista.La Greece does not adhere to the reform program imposed by Europe and the IMF, delete some of the reforms already made and try not repaying the debt to foreign countries that is still outstanding since the last renegotiation of February, the known PSI. Tsipras, the politician, argues that this decision does not take Greece out of Euro (and then he wants to stay inside the Euro, but by the first failure). He argues that the exit from the Euro and threatened by the ’bluff. Certainly, however, the Union would cease to lend to Greece where, NOT BEING IN PRIMARY SURPLUS, should borrow altrove.L ’only institution that could make loans, given the lack of credibility of Greece capital markets, would be the European Central Bank . Technically, says Munchau, the ECB could deny and force Greece to a “voluntary exit from the Euro” but, he says, would be an incredibly hostile act (and I would add that today, after the arrival of Hollande, I do not think there would numbers, in the Board of the ECB to do). But certainly we would still have extreme turbulence in the markets and for a period of uncertain duration: to be Tsipras and is a BET, and as such the outcome unpredictable and very dangerous. In the first place for his own people.
4) The fourth option for Greece is to expect to achieve a primary surplus and then the state would not honor that ’existing debt, then yes, but a defaul programmed, and not now. Greece thus would not need to look at the risk of loans not get it because its government revenues would be higher than the outputs, and should not pay interest on a debt that would have declared no longer honoring. This is the preferred option.
As you can see three options on four plan to FAIL, that is not servicing its existing debt, but only to leave the euro. Besides local polls again yesterday claimed that 78% of the Greek population wants to stay inside currency unica.Non curiously the possibility of a bankruptcy greek been regarded as almost inevitable by Munchau, and we think similarly, but this does not mean going out of the EURO. The problem to be solved is then how to allow that Greece fails without leaving the single currency, and is a political problem, because it means that all member states will be burdened with a cost, “greek” as consideration for the rescue of the single currency. (We written already in November that probably the greek total debt cancellation would be the only possible solution to stop the crisis. not to resolve it definitively, but to obtain this result we argued and we support the need for a political union, with a European finance minister , a debt and a shared ECB lender of last resort, but for these institutional changes will take several more years).
Have the changes to policy framework is then necessary for the formation rates of majority in the immediacy of institutional consensus on the project’s total debt cancellation greek, agreed that a permit to DEFAULT.L ’arrival Hollande is in this sense, the defeat of yesterday Mrs. Merkel anche.Sempre in this way should go to the next G8 meeting at Camp David on May 18 and 19 (where American and French will probably push on Merkel to help Greci.A fourth article in this regard, I enclose)) and the G20 June in Mexico, where many times we talked about here as a possible real turning point in European debt crisis).
Conclusions and recommendations
In this respect nothing nuovo.E ’likely, in the absence of final decisions on the possibility of a described DEFAULT greek agreed and shared, and then until after the Greek elections, the markets remain extremely reluctant to take risk of any type ( the so-called RISK OFF position) and then give priority to the placement of the traditional bonds of issuers Triple A Northern European or supranational bodies, and exposure to alternative currencies or U.S. dollars. The G8 summit next week may spark some hope, and then generate momentary rebounds especially on European equity markets, but we believe it is still early for these events if they occur, are durable, so you should take advantage of any European stock resumed shortly. It follows then, as mentioned several times in recent months including May 10, that we are not weighed on European stock markets, and also neutral on the U.S. stock market: this market deserves more attention not just to its prospects for growth (which are well priced as it sells at 14 times 2012 earnings versus 10 times in Europe) but because of the possible strengthening of the dollar. For the next few weeks so still cautious, and careful observation of the development of both European and global political situation. We will come back to you as soon as possible to get more visibility on the evolution of the processes described.
May 10, 2012
After three weeks since the last update could come back to say that prudence suggested several times that we had proved to be appropriate. All stock markets have corrected in the period while the bond markets have held, starting with government bonds of European countries Triple A. Following the reduction in returns of Triple A, even though our BTP have generated a positive return for the period: the widening of spreads was more than offset by the reduction in German yields, so the efficiency of our government bonds fell in absolute value, and their price has gone up. We had suggested 3 weeks ago to hold these bonds (while recommending a small reduction in exposure to BTP) as well as to reduce exposure to European equities.
The policy framework in Europe
The most destabilizing factor in the period were expected to be the French presidential elections and the Greek parliament. While the first, after the first week of balloting, have moderated their effects on markets, even as we see beginning to change the attitude of rigorous Germany, Greek elections have generated the dreaded situation of balkanization of the local parliament, creating a wave of fear on the permanence of the country in the Euro and thus destabilizing the entire area again. The current situation in Greece seems to lean toward new elections in June, it is impossible to form a majority government. This outcome would be acceptable to the markets: it is estimated that after a first round of elections dominated by the rebellion, the return to the polls again to push the electorate greek traditional parties (PASOK and New Republic), which are explicitly European. The general European framework, however, changed in the last 3 weeks: the victory of Hollande led Germany to revisit (even if not explicitly) its rigorous approach. One can not ignore it when people send strong signals. In addition, the fact that domestic opposition to Germany (SPD and Greens) is re-gaining force, and this party have long said it will help more European countries in difficulty expressing more support for growth projects, including when financed deficit. Very surprising then the front page of today’s Financial Times where, quite unexpectedly, dominates the signal of willingness on the part of the Bundesbank, to accept a higher level of domestic inflation in Germany as part of a process of rebalancing the eurozone economy, which allows an improvement of competitiveness of the countries hardest hit by the crisis of sovereign debt. In our last update on 16 April, we said that one of the conditions required to move toward the closure of the crisis was just the acceptance of a higher rate of domestic inflation on the part of Germany. As the FT confirms, that acceptance signals “a new flexibility in the German way of thinking.” The European policy framework seems so is opening up possibilities for cooperation between EU countries has so far not covered either by commentators or the markets we believe that changes are not forthcoming Strategic route but at the same time we think that these signs of change lead in new strategic directions in the coming months. A few weeks ago we found the G20 to be held in Mexico in June, a turning point decision in the management of global debt crisis, and especially European, and we remain of this idea. We finally, with a dose of possibilism, that the Greek situation will lead to new elections as opposed to the present: in the meantime, anyone who is in charge ad interim, receive calls Dragons, Merkel and Lagarde for the country to honor its payment obligations to carried out in May on debts owed to private and ECB, while an easing of conditions required for the next tranche of loans will be presented as possible. Politicians outside Greece Greek politicians to ask the time to change these conditions, and Greek politicians will seek to calm the inner turmoil. It is ascertained fact that most of the Greek population wants to remain within the Euro.
A note on the now familiar cacophony that goes wild every time that the situation reoccurs in Greece for some reason: some commentators, including some men of the market, lightly raises the hypothesis output by the euro in Greece, as if it were a lesser evil and a hypothesis easily negotiable. The drama of this event is completely underestimated, as it is burned with the desire to express an opinion on the matter. Yesterday the Courier appeared a small article that you enclose: Fubini, the reporter finally takes seriously the attention of readers the fact that Greece’s exit from the Euro may generate a contagion of other countries, like Ireland, Portugal, Spain and even Italy. The contagion would be generated through the mass exodus from the deposits of local banks by citizens of these countries and the opening of deposits at branches of banks of countries considered safe, such as Germany, or Switzerland. Fubini cites Arnaud Mares of Morgan Stanley, which we have read two months ago (his report is dated 22 February 2012) and that we can not attach because Morgan Stanley Reproduction without prior permission of his analysis (research is titled: "GDP Debt Due Us Part "and is searchable on the web). The concept that Mares is explicit that, if Greece leave the euro, the Euro becomes REVERSIBLE, and now IT IS NOT. Other countries may therefore leave the Euro. But if the euro becomes the currency EURO reversible then it would not be fungible, ie within the same everywhere. There would be more than EUR EURO others, from which the flight of depositors of weak countries to banks expression of strong countries, the countries of Triple A or Switzerland or the United States. But that’s not all: taking an argument of Tommaso Padoa Schioppa, 30 years ago, Mares said that if the Euro went disgregasse under attack and dissolve even the Common Market. You lose 60 years of work and cooperation between peoples. Truly the consequences are unimaginable. Conclusion: Greece may NOT leave the euro, otherwise the unit described. We believe that the shrewdest politicians in Europe are aware of this risk and that they will move accordingly.
Conclusion
There is still time to return on European equities nor sovrainvestire on bonds of peripheral European countries. The turmoil in the markets we fear will persist until the G20 in June, and perhaps even beyond. We suggest for the moment to maintain the existing exposure on Triple A European government bonds and U.S. dollar exposure. On the equity front, the preference remains for now to the U.S. equity, even if that market will be influenced by the negative performance dell’azionario Europe. The currency exposure should, however, partly offset the risk of consolidations. The European equity is cheaper than the U.S. but has “momentum” from the third quarter we believe will increase the attractiveness of European actions to coincide with a desired stabilization of the sovereign debt crisis. We maintain moderate exposure to emerging countries, and begin to collect evidence of industry companies of precious metals, gold in particular.
