There’s an important election coming up on 22 September. Germany goes to the polls and everyone’s expecting current Chancellor, Angela Merkel, to be reinstated. If you didn’t catch my previous post, click here to get a quick primer on the election and the parties involved. Regardless of where the votes go later this month, there are several policy steps that Germany will have to address in 2014 regarding its European neighbors: bonds, bailouts, and banking unions. Read more
Posts tagged ‘Europe’
Last September, you may recall, the European Central Bank (ECB) announced their new bond-purchase plan, Outright Monetary Transactions, or OMT. What’s interesting is that the OMT hasn’t purchased a single bond, and yet Spanish and Italian bond yields have fallen a few hundred basis points since then, making the debt burdens in those countries a bit more sustainable. So besides the power of its name, how did the OMT turn things around? Read more
One big concern for long-term investors is systematic risk, or risks that are endemic to an economy as a whole. Systematic risks, as opposed to company-specific risks, were behind the majority of the pain suffered during the global financial crisis. And I tend to think that in the United States, the systematic risks that came to a peak in 2007 were purged from the system pretty effectively by the intensity of that same financial crisis.
Europe, though, I fear still has a lot of systematic risks that are being masked by the massive liquidity injections from the European Central Bank. Like a bandage that’s covering a particularly nasty wound, programs like the LTRO (Long Term Refinancing Operations) are perhaps stopping the hemorrhaging, but they’re also obscuring complications that lie beneath.
A program like the LTRO has led to “round trip” financing of the debt of troubled governments by the European Central Bank through to those countries’ own local banks. I can’t but feel that this will all end somewhat badly for the Eurozone sometime in the next two to four years. Let’s say Spain defaults on its sovereign debt in the coming year or two. As it stands now, that default would hit local Spanish banks (big holders of Spanish sovereigns), and the ECB (another big holder of Spanish debt), and…and not many other people hold their bonds.
If you extrapolate that out to other troubled economies in southern Europe, I suspect that systematic risks would include the potential undermining of the Italian, Spanish, and Portuguese banking systems. It’s likely this bandage of liquidity that’s preventing this systematic risk from showing up in conventional volatility spreads.
It used to be that Ireland had a bit of an image problem, perhaps not with the rest of the world, but with itself. Irish playwright George Bernard Shaw said, “I showed my appreciation of my native land in the usual Irish way by getting out of it as soon as I possibly could.” For much of the 19th century, following the Great Famine, socioeconomic conditions were such that a culture of emigration took hold in Ireland and its citizenry left in droves for England, the United States, Australia, and Canada. By some measures, this lasted right up into the 20th century, until the Celtic Tiger (a catchy name coined by a Morgan Stanley economist) economy sprang forth and Ireland’s prospects started to look positively dazzling. A number of factors including low corporate taxes, infrastructure upgrades, and education improvement drew businesses (particularly tech companies) to the Emerald Isle.
The new prosperity not only made things better for the average Irish citizen, but even started attracting immigrants from abroad. Incomes rose, unemployment fell…and then in 2001, this economic expansion started to reverse and it appeared that the Celtic Tiger had been declawed. After a bit of a rebound, the global financial crisis struck in 2008 and this cat appeared to have used one more of its nine lives.
However…after some time to lick its wounds, the Tiger is potentially gaining strength. Several factors are combining to make Ireland an attractive investment in my opinion. While Ireland still has a way to go in its recovery, there are several fundamental factors that point toward renewed prosperity.
Wednesday, September 12, 2012 delivered some clarity and some confusion in Europe. In Germany, the judges of the Constitutional Court, wearing their red robes and hats, cleared away objections to German approval of the European Stability Mechanism, the Eurozone’s permanent bailout fund. Ratification of the ESM was challenged based on an argument that it contravened the German constitution. With this obstacle removed, the proposed €700 billion fund can continue to move forward; however, the German high court established a price. The judges ruled that a cap of €190 billion must be placed on German contributions before official ratification could occur. The ruling evidently doesn’t preclude Germany from contributing more in the future, it just establishes that the parliament would have to return, hat in hand, to ask for approval.