Steen's Macro brief: All on RED........INTERNAL NOTE

Dear All,

 

All eyes on Wroclaw, Poland today as the world policy makers tries one-more-time to save the world by making promises which will start sometime before the end of this decade -  it should be seen for what it is: A manipulation and a circling of the wagons in good old Western movie style:

 

 

The EU program can be found here: http://pl2011.eu/en/content/informal-meeting-finance-ministers-and-central-bank-governors-wroclaw

 

The comments are already coming out of the pre-meeting interesting to note that:

 

Former Prime Minister Brown says: 'European grossly under-capitalized' and 10 minutes before Belgium Finance Minister Reynders says: 'European banks don't have a problem with solvency" ….also note how Finland, again, does not play by book: "Urpilainen sees no collateral solution at Wroclaw meeting"..

 

All in all the hopes are high for an easy solution – market will get: "extend-and-pretend" as per usual, the market reaction Monday will be interesting – if, that's if the EU can get something done it would be positive, but it needs to be solid, big and take care of underfunded banks and access to capital markets for countries which are presently closed out: Italy, Greece, Ireland, Portugal – that number is north of 2.000 mio. EUR and not the small amount of "leverage suggested by Geithner and embraced by weak European countries.

 

I am still long on the "Maximum Intervention' macro theme, but…. This afternoon I will update the strategy note, and it's likely to force a move to neutral, but more on this later.

 

Finally,

 

Quite a few people ask me to explain the complex potential solutions/path from here in EU debt crisis. It's relative simple in my view considering we know the tendency of politicians and policy makers to opt for the easiest solution, so here comes the Steen Jakobsen guide to EU debt crisis (it's incomplete but 90 per cent explanation better than zero!)

 

There are three major ways of dealing with this crisis:

 

1.       Japanisation – do like Japan – accept deflation, slow gradual restructuring, massive fiscal deficits, negative real-rates, housing prices lower than 30 years ago and a stock market valuation at less than 50 per cent of its peak in 1987 – the slow death.

2.      The Crisis 2.0 – my favourite scenario – 'the forest fire'  - deleveraging, political- and economic changes created by necessity and need for moving forward. A deep one-to-three year recession followed by better debt to equity, more realistic future expectations, a public sector under control.

3.      Monetization – the extend-and-pretend forever solution, buying time – more of the same, patch work solutions, slowly forcing Europe towards fiscal consolidation not changing the Maastricht but the ECB charter to allow it to be lender-of-last-resort .This is what I call the final phase of 'Maximum Intervention' – bigger and bigger direct support on liquidity(as seen today) and no impact on the solvency. Solving debt with debt the main nature of this exercise.

 

Any solution 'permanent' in nature is in violation of German Constitutional Court – meaning pretty much Euro-bonds is out. (As Germany would have to be lender-of-last-resort when everyone else goes bankrupt)……Any solution temporary could fly vis-à-vis the Constitutional Court but ONLY if approved by full parliament.

 

Everything else coming to the table is talk, talk and more talk. American "experts" fail to understand the above and …. Most importantly as you have heard me say 1000x of times: 'Never underestimate the political will of politicians to make this work/survive' – Never!

 

Prodi even predicted this early on saying a Euro-crisis would force into place the fiscal consolidation: "When the euro was born everyone knew that sooner or later a crisis would occur. It was inevitable that, for a such a bold and unprecedented project, in some countries (even the most virtuous ones), mistakes would be made and unforeseeable events occur. It was also clear that the stability and growth pact was – as I have said before – "stupid", not because it was mistaken in its objectives, but because it was founded on purely mathematical parameters without any discretionary powers or political instruments to enforce it. Germany and France were the first countries to violate it, although not in a destabilising way: their finance ministers decided to ignore the objections of the European Commission (possibly because they were "too big to fail").

Due to political difficulties it was not possible to protect the euro. I was warning years ago that, through no one's fault in particular, extraordinary events could occur that would force joint co-ordination of fiscal policies. Then the Greek crisis arrived – serious in terms of the sins that caused it but easily solvable, considering the modest size of the country's economy"

Safe travels,

Steen

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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