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Ad Hoc Commentary

Monday September 24th 2012

 
Monday, September 24th 2012
 
At Least When It Comes To Golf, We Are All Good Europeans!
 
At the end of the week, all who hail from the "old continent" will be eager to be wrapped in a flag of blue with gold stars upon it as we cheer every drive, approach, chip and put when the United States of America plays host to Europe at the Medinah Country Club, Medinah, Illinois (September 25-30).
The game will play by a set of rules that are understood. If a player makes a wayward shot and request relief...they will accept the ruling of the match referee...no player will demand to know what penalty will be applied if he were to ask for help...before he asks for help.
 
As we look ahead to the start of this week it seems such a shame the same degree of enthusiasm for other European team efforts and the rules of the game cannot be mustered by the regions leaders, be they elected or appointed.
 
At the top tables of Europe it would appear that we once again have reached an impasse as:
 
Next weekend, European golfers will, if need of leadership turn to Captain, José María Olazábal. He can lead by example given has 2 green jackets *  in his locker so he knows what winning on American soil is all about. He will be leader commanding authority and respect 
 
In the Euro Zone we seem sadly short on driven leadership as:
 
German Chancellor Angela Merkel and French President François Hollande have, this weekend shown public differences over a timetable to introduce joint oversight of the region’s banking sector, with Merkel rebuffing Hollande’s appeal to activate it “...the earlier, the better...”
 
 
These are the 2 leading nations in terms of economic ability and political credibility and yet the Franco-Germanic visions of the Euro Zone's future appears to be on perpendicular paths. It is an unexplained curiosity that Hollande is keen for European integration at this level and yet reluctant to concede the level of sovereignty surrender that would be required for the socialisation of European sovereign debt.
 
However, does not the root of this particular problem run deeper. The idea that 1 regulator, housed within the ECB would take oversight for 6000 banks was introduced by the European Commission President Jose Manual Barroso even though  Michel Barnier, the EU’s financial services chief had already stated that 1 person could not possibly supervise 6000 lenders.
 
The German's, who really should have acted faster and gone further in reforming the Ländesbanks, are opposed to their domestic, regional banks being under the control of such a banking union and hardly consideration has been given to how the banks within the 10 EU but none Euro Zone nations will be addressed.
 
Sadly the Barroso plan, which was delivered amid much fanfare, pomp and circumstance appears to have rushed out in an attempt to grab headlines.
 
We can all see how effective the message from ECB President, Mario Drgahi was on September 6th in reducing the tension within the yield curves of peripheral nations yet still the nations the OMT plan was targeted at have not issued any formal request for aid.
 
The drop in yields has emboldened the Spanish Prime Minister. Echoes resonate around European dealing rooms of politicians pointing to lowered yields and spreads amid claims that the market has spoken...and spoken favourably. If plugging debt issuance in increasing amounts into domestic buyers is a sign of financial success...one wonders why international players are avoiding the longer dated paper...which lies outside the ECB's locus of intent. Unless enacted, the impact of OMT's possibility will suffer from a rapid half life rate of decay.
 
Sovereignty Surrender, or Sovereignty Salvation?
 
The EU/ Euro Zone is comprised of sophisticated nations that have hundreds if not thousands of years of great history...of course each nation is proud and unwilling to bend the knee if it can avoid doing so.  However, in C21, the scale of the deficit dilemma facing many sovereign states implies that sooner or later a request for external help will be required. When such help is sought...it is for the lender to specify the terms and conditions with which the assistance is offered. No one wants to see any nation squeezed so hard that it is choked to death...conditionality has to be reasonable...but it is not for the borrower to dictate terms. Somebody at one of the elements of the Troika really ought to speak plainly and frankly to the Spanish Deputy Prime Minister Soraya Saenz de Santamaria and to Italy’s Under Secretary of Finance, Gianfranco Polillo. It does not serve their respective nations any good to continually utter on the international stage about what is or is not acceptable.
 
If the reality of the situation is that there will be no national economic recovery without a devaluation in real terms that simply cannot be delivered by austerity alone then the solution is simple...how can the devaluation to re-establish a competitive equilibrium be established...if it means leaving the Euro ...then do so.
 
Politicians, bureaucrats and central bankers like to believe they can out run and outgun the market. By announcing the architecture of OMT, the market has been handed a licence to not be short of cash exposure but to use straddles, strangles or cylinder options by which the range can be played. the market will always expose that path to profitability that offers the least resistance.
 
 
* José María Olazábal won "The Masters" twice in his career; 1994 and 1999. On winning in 1999 he won by 2 strokes, beating a certain Davis Love III of the USA. That gentleman just so happens to be the USA Ryder Cup captain on this occasion...we wonder if Augusta 1999 will echo across the tees, fairways, hazards and greens of Medinah in 2012?

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