Archive for November, 2010

Nothing like a crisis: Game On!

November 25, 2010

Angela Merkel has been speaking today in the Bundestag on a plan to impose majority voting in the terms and conditions of certain Eurozone bond issues. She said “This is about the primacy of politics; this is about the limits of the markets.”

In any market segment the majority of issuance is usually held domestically (for obvious reasons) and the banks are often the biggest holders. This is particularly so when the “bank recapitalisation carry trade” is advantageous.

Should it be necessary for an issuer to seek an extension in maturity; a cut in coupon; or a reduction in maturity proceeds (generally known as a restructuring on, or prior to, default) majority voting would tend to eliminate private bond holders (such as individuals, overseas pension funds and mutual funds) from the voting process creating de facto senior and junior holders.

Now if those banks were the underlying problem who do you think they are going to vote for? Would it be the individuals, overseas pension funds and mutual funds; or the troubled Government best positioned to reciprocate the favour?

The first rule of fixed income investing is “Get Your Money Back”. Yesterday I suggested that a crisis can have its uses. Today Merkel seems to have started playing the anticipated game.
Game on!

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Nothing like a crisis, or two

November 24, 2010

There must be those in the EU that actually quite like a crisis or two. Firstly, crises tend to push currencies down which can be good for stronger, exporting, countries. Secondly, for those stronger countries the chances are capital leaving the weak will stabilise or perhaps even reduce their interest rates. So if you are called, for example, Germany an occasional crisis in the Eurozone might not be all that bad. If you were uncomfortable with a set-up where fiscal policy was divorced from monetary policy you might even see a reason to endure a further crisis or two as a means of pushing the ever closer union.

I am, of course, glossing over the obvious inconveniences and dangers inherent in the current crisis in the Eurozone but my point is this could be a moving-ahead moment, not the big step backwards anticipated by some in the marketplace.

What should policy makers be worrying about? The perennial question mark that hangs over Spain and its miracle banks. This elephant in the room is of such size that it could be the catalyst that, rather than seeing the EU experiment disintegrate, actually takes it forward.

From a policy prospective it must to attractive to have urgent circumstances that precipitate the fiscal and regulatory components missing in the single currency equation. Bailing out Greece and Ireland places these issues on the agenda; however  should Spain need bailing out, then that would require, for the first time a fiscal transfer, and in doing so take Europe closer to its desired ever closer union. The mechanism already exists in the form of the European Financial Stability Facility which allows multilateral debt guarantees or, to put another way, a mechanism to transfer economic ownership of debt financing obligations from one country to another.

Now creating a pan-European tax base would, of course,  be contrary to public opinion within the EU: a very inconvenient impediment to thinking at the heart of the European project. But in times of crisis deals are done without democracy getting in the way and I am very sure that such an opportunity will not be missed.