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Head of Investment
27 October 2011
There is some good news today, in that the Eurozone leaders have made progress on what to us are the three key issues. They have further written down Greek debt, instructed banks to recapitalise, and increased the size of the Stability Facility.
We now, and at last, know where some of the pain is going to hit. There has been perhaps as much as a trillion euro (so far) of misallocated and destroyed capital in the Eurozone, and 100 billion of it is now being forced onto the imprudent private sector creditors of Greece, which is to say the banks. They have taken a 50% loss, for a guarantee on some of their remaining investment. It is appropriate that they take this hit, rather than tax payers, and also appropriate that they recapitalise themselves so that they are not a danger to the financial system. No doubt some will, in effect, have to be nationalised, or tap the Stability Facility themselves. This exercise could spell the end of France’s AAA credit rating.
So, on a positive note, the Greeks live to fight another day, and the banks are less of an immediate concern. Furthermore, the intention to leverage the Stability Facility means that there is a chance that Spain and Italy can be supported if and when necessary. These are all steps in the right direction, and furthermore we have avoided some of the worst case scenarios.
However, the devil will necessarily be in the detail, and execution, as ever, will be everything. The cynical might say that Eurozone leaders have merely searched for the best way of buying some more time, and avoided making even tougher decisions, for now. It is encouraging that at least it is finally and openly admitted that Greece is insolvent, but the suggested measures really attack the symptoms rather than the disease, and in any case a 50% write-down is probably not nearly enough. Much of Europe still has far too much debt, from under which, with stagnant economic growth and ageing populations, they have little hope of escaping. Der Spiegel newspaper describes Italy as the Eurozone’s “Achilles Heel”, and our view has been that it actually has the most to gain from leaving the club.
We maintain the expectation that Greece will depart the Eurozone in due course, in a “managed” way, once its short term finances are on a slightly sounder footing. This would be the best news all round, as otherwise it will continue as a lame duck with a depression style economy. The same could also be true of Portugal, and it is entirely plausible that the Portuguese and indeed the Irish electorate might ask for their own debt to be written down in a similar manner to Greece. Perhaps they will receive alternative “sweeteners”. In the meantime one wonders how much of the next 100bn euro of loans that the IMF and Eurozone are sending to Greece they actually expect to receive back.
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