Reckoning in Europe begins with intent
We’ve talked about the Eurozone a lot these last few months. Investors have had to focus most clearly on Europe, it’s been the acute infection in a larger open wound that is the banking system. Admittedly, all is far from rosy elsewhere. Elsewhere is just relatively less bad. Issue fatigue, nay crisis fatigue, has been creeping upon us all. This is only natural.
However, after a potentially LTRO induced hiatus, and short-term political appeasement, the pressure is taking its toll in the Eurozone again. Two elections have recently been held, in France and Greece. In France, Sarkozy, who was politically joined at the hip with Angela Merkel, has been ousted. The conservative right, Sarkozy’s previous intellectual constituency, fractured with a significant part of the further right leaning vote opting for Marine Le Pen and the Front National.
Angry voters in Europe
France has now elected a socialist with a limited and inglorious political past. Francois Hollande won the French election on a ticket that said no to austerity and pain, and promised more borrowing and ‘growth’. The Franco-German alliance at the heart of European politics looks to be replaced with future squabbles over differing economic ideologies.
The election in Greece is more interesting in terms of politics deviating from the status quo. Since World War Two the conservative and socialist parties have held the mainstay of Greek politics; normally sharing around 70% of the vote. This Greek political mainstream was establishment, pro-EU, pro-single currency, in favour of bailouts and trying to work things through in accordance with the Merkozy inspired fiscal treaty, and most recently complicit with the European centre parachuting bureaucrats in to run Greek affairs. The long suffering Greeks have had enough and have voted in new directions. New parties such as the communists and radical left-wingers have experienced real success, whilst a new party from the far right, The Golden Dawn, achieved 7% of the ballot.
The Golden Dawn, let by Nikolaos Michaloliakos, is described as ‘genuinely Neo-Nazi’. If you look at their politics and practices this claim is difficult to refute. They embrace raised arm salutes and insist that members can trace their Greek citizenship back 7 generations. As Nigel Farage points out: “even Hitler only went back to your grandparents”.
The markets were bound to be disturbed by this, and have traded this week as such.
Dominos falling in the European banking system
We have also talked about Spain and her role in the unravelling of the euro. Spain experienced an even more spectacular property bubble than Ireland, and Spanish banks have been sweating under mountains of dodgy property loans that were made during the bubble. These loans, with inadequate provision set aside against them to cover potential defaults, are a ticking time-bomb waiting to affect the Spanish economy.
Property debt in the Spanish banking system is now coming home to roost. Bankia, the country’s 4th largest lender, was not able to manage its troubled loan book as a private company and fled into the arms of the Spanish government. The Spanish central bank reports a deal that will give the state a 45% indirect stake in Bankia in exchange for a previous loan of 4.5bn euros.
Reuters reports that: “since the banking crisis began, Spain has bailed out seven smaller savings banks, but the Bankia rescue is by far the biggest and it comes after a string of other banking reform plans revealed over the past week”. And, it looks like Spain is set to continue down this path. “We will deepen the process of cleaning up the banks” advised Prime Minister Mariano Rajoy.
The bailout precedent has been continued. A major banking domino falls in Spain, and whatever the full extent of Bankia’s problematic property loans are, the state will have to continue its support. If this Spanish policy response remains consistent then in the next few years the government apparently stands ready to take on what analyst believe is up to 100m of bad property loans.
Yet again the good times in banking were enjoyed by few, and now the losses and consequences are shouldered across tax payers generally. More debt will move from private balance sheets to the public balance sheet; an equity market problem moves on to add to a government bond market problem. Investors will require greater interest payments to hold Bonos and Obligaciones del Estado. Without a continued ECB bid, or LTRO financed private bid, in these debt markets the bond vigilantes can finally have their way. And, if easing and printing are continued as the mode du jour then yet more good money is being sent after bad.
Debt is being reckoned with in Europe; look out below. This is where assets that are nobody else’s liability earn their reputation and keep as part of a balanced portfolio. Gold is the king of these ‘real assets’. It cannot be frozen, repudiated or defaulted on. We may be bored of the ‘end of the bull market’ debate about gold, and the gold price might have disappointed investors these last 7 months, but hang onto old Yella’.
This might just be the “end of the beginning” of the Eurozone crisis.
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