History speeds up…

This has been a momentous year. On the 17th December 2010, unemployed Tunisian youth, Mohamed Bouazizi, after having his vegetable stall removed by the police, sets fire to himself in protest. He later dies – this was the literal spark the garnered Tunisian youth into rebellion. Within a month, Tunisian President Ben Ali, had fled to Saudi Arabia, his regime collapsing.

This movement was soon adopted by the Egyptians, Jordanians, Palestinians and Syrians, to a greater or lesser degree of earnest application, and repressive crackdown. Syria is ongoing; Libya spawned a Conflict all of its own, involving a myriad of Nato forces – though, no manpower on the ground. So. we heralded the “Arab Spring”…the US, for once impressive in its restraint, adopted  a “wait and see” policy – one it still maintains.

The year moves on: Mubarak finally resigns (“finally” in this context should be qualified: after a 30 year reign, to take a couple of months to oust, is no mean feat.) Libya, however, entrenches – Colonel Gaddafi isn’t going anywhere…months of violence ensue, cities are bombed, thousands displaced, hundreds killed. The western countries follow an aerial bombing campaign, a war of attrition from the sky begins and formal alliances with the rebels are established. The bombing begins to co-ordinate with rebel movement on the ground; Gaddafi flees. He is later captured, physically violated and killed by those he has ruled for 40 years, those who he swore would die to protect him…

Meanwhile, back in Europe, things are not looking quite so rosy either. We enter the fourth year of either recessionary or significantly below trend growth. The countries of the Eurozone experience further problems in their fiscal positions. Europe, in the main (Italy always being the exception), has a recent history typified by stable government. The problems of the Euro and unsustainable debt begin to take their toll – as does almost 40% youth unemployment in areas of some member countries. Individual nations begin circling around that great spiral known as “Default”. The prospect of an ignominious exit from the greatest project of European unity, now seems an all too certain outcome. Greece is likely to be the first taker. Ireland, once the doyen of the Euro enthusiasts, now is littered with entire apartment blocks nobody wants to buy, and heartbreakingly, a new exodus of its’ talents…the first mass emigration out of the western European nation’s…

So…what do we conclude? Simply, that few things are knowable, that history itself  is speeding up and our path uncertain. That mass media and technology act as both a catalyst and spur, and moreover – witness. We are all participants, we are all stakeholders and some of us get to be drivers…which direction shall we head in 2012?

Deal for the Eurozone?

As compromises go, this is no better or worse than most others. The Eurozone member States have come to the (temporary) rescue of the beleaguered Greece. Temporary, because even at €1 TN, there are real concerns that the newly leveraged EFSF is not large enough for future crises, in the short to medium term not to mention beyond that.

There are a number of outstanding questions:

  • There effectively become two classes of debt: those provided by official sources such as the ECB, and the private sector bondholders. The 50 % “haircut” is expected to come out of the private bondholders’ debt. How sustainable is this, given the expectation of future default, in the possibility of raising additional credit in the markets?
  • In a decade’s time, Greece’s debt will remain at 120% of GDP. Again – how much of a forward move is this, given it leaves no room for manoeuvre and future shocks the country may face.
  • What is the legal status of the new bonds? Under which law will they be governed? Are there not implications for non-Eurozone EU member states in restraints on the scope of the EU budget, as it rightly affects them?
  • How will the EFSF bond insurance scheme work? Will the EFSF have its own CDS?

Then of course, the insufficiently spelled out: the consequential considerations of fiscal deepening across the EU member states…the very presence of this deal strengthens the hands of those who would will greater integration on the rest of us – despite the fact that the necessity for it in the first place is sufficient evidence to the contrary.

Testing the Euro as a reserve currency…

After such a faltering decade of mixed growth, and different prospects for the members, the Euro is having it first true test as a reserve currency.

After a recent vote the German parliament has passed (by 523 to 85) a vote to bolster the € 440bn eurozone rescue fund, the European financial stability facility (EFSF). As the FT says, the vote

“would strengthen the hand of the government, and revive confidence in Angela Merkel’s ruling centre-right coalition. They said it should alsosend a strong signal to eurozone partners that Germany was “ready to resume its responsibility” in the eurozone crisis….“Within the coalition, it is a very strong and comforting signal,” said a senior adviser. “But we are under no illusions that the next steps are just ahead, and they are going to be every bit as difficult.” “

The EFSF could easily become the most powerful tool available to the EU. It needs ratifying, and all decisions require unanimity. This is both a strength and a weakness: the market needs assurance that any action will be sufficient and responsive. Weeks of political negotiations will not be acceptable, the market will make its own decision.

Greece has to decide if, in addition to it’s fiscal retrenchment, that it wants private creditors to increase the haircut they have presently accepted, by taking a bigger writedown on the value of their bonds.

It is certain that even at € 440bn, the EFSF is not large enough to deal with a new bout of market speculation. By investing the facility with institutional powers, and giving it the power of leverage, this problem could be solved. Even with a small leverage ratio, the EFSF would remain a desirable investment. With the US recently losing it’s triple A status (and the world not ending), even if EFSF didn’t attract a triple A, it would still be cheap at the price to stop a run on Spanish or Italian debt.