The Triumvirate

It was pleasing the notice the stark difference in the treatment offered to M. Monti from Mr. Sarkozi and Ms. Merkel, as opposed to how the two of them made Berlusconi a laughingstock, only a few weeks ago. In yesterday’s three nation reunion, the continent’s top three economies made a show of unity, even as not much substance was disclosed.

The bottom line continues to be that, having been burnt by Greece and Italy already, Frankfurt and Berlin will only capitulate on the issues of QE and/or Eurobonds, at the very last minute. We have two observations/analogies to make.

The first one is that the European and world leaders are keenly aware that this train is headed towards a big wall, and they must deviate it pretty quickly, and that there are few alternative routes and not much time before the sheer speed will make it difficult to call if it is not too late to make the change.

The second is that we read yesterday that Germany has bought a first class ticket on the Titanic. This is an apt comparison. Germany is betting that by delaying to the last possible minute the inevitable decisions, it will ensure that the profligate southern Europeans will execute on their promises this time rather than just doing lip service. The problem is that with regards to Italy at least, even with Monti at the helm, Germany doesn’t trust parliament to vote for his measures, given that Berlusconi can ‘switch Monti off at any time,’ as someone attributed to Berlusconi.

Basically, we probably have good pilots driving our Formula One, but the terrain is wet, the track is tricky, and visibility is decreasing…Let’s hope that they know what they are doing.

Getting Ready for the Worst, Just in Case

During the weekend before Lehman failed, its general counsel quietly asked outside lawyers to prepare for a filing, just in case. He obviously did it very quietly, as the sheer notion that bankruptcy was even an option being considered would have thrown the whole industry into chaos. At the time feverish negotiations with the government and competitors were taking place and most pundits were expecting a Fed led takeover, a la Bear Stearns. Unfortunately, Sunday night and Monday morning the draft filing was made formal and it was indeed filed on that fateful September, 15 2008.

In the last few days I have started receiving emails and calls about how a euro breakup would play out, from a legal standpoint…which bonds would be repaid in Drachmas or Lire, which in the surviving euro currency, etc. This kind of preparation is the equivalent to calling the bankruptcy lawyers, just in case, except that since the Euro is not controlled by one single entity but by seventeen European governments, the chance of this staying quiet is virtually nil.

Read More…

Europe’s Options

After requesting, and obtaining, the heads of the three Prime Ministers of Greece, Italy, and Spain, the markets do not appear at all satisfied with the simple notion of change. As we discussed last week, the cure that would have done the trick a few months ago, is now treated as ‘probably too little, certainly very late.’

What is happening now is that the markets will continue to test the new weak link, with France in the sights of the markets because of the exposure of its banks, until, probably a minute before it is too late—if we are lucky—mighty Angela Merkel will save the day.

Read More…

Monti’s Challenges and Europe’s Hopes

Mario Monti, Italy’s new prime minister was the professor we all wanted to listen to and the one we tried to avoid at exam sessions. He is brilliant and very serious, and paradoxically, the inverse personality type compared to his immediate predecessor, Mr. Berlusconi. The task Mr.Monti has in front of him is also very serious and daunting.

Italy’s problems, and its potential are not new, and the recipes needed to fix them are also generally known to many. The new facts are that, as every trader knows, once you start breaking through historic support levels, coming back up is not going to be easy. An equilibrium was broken and even if the situation were to revert to what it was ex ante, the markets will not return to normalcy until there is either: a. A confirmation of a long period of budgetary prudence that credibly brings debt/GDP ratios towards and eventually below 100%; or b. A bazooka from the European Central Bank (ECB).

Read More…

1 2 3 4 5 6 7 8 Scroll to top