Catalonia

Spain’s Prime Minister Mariano Rajoy just achieved what many thought impossible having in just twenty four hours succeeded in putting Brexit on the back-burner on the ‘list of things to worry about,’ for the EU. His heavy handed and insensitive approach to yesterday’s referendum has put succession tension in the region on the world’s front pages and will have unquestionably strengthened local resolve and pushed many ‘no,’ voters across to the independence camp simply out of family and community loyalty.

Images of ordinary decent citizens being beaten up by para military police are shocking. These weren’t the usual protesting unwashed anarchists we are used to seeing ripping up paving stones at G7 summits. They were mothers and fathers, aunts and uncles, brothers and sisters who were simply out and about with the intention of casting a vote. Rajoy has blown it and there will be consequences beyond Catalonia.

A positive vote with a convincing turnout was always a low probability event but Rajoy now has a simmering feud on his hands which will be a persistent and long lasting issue for future successive Spanish governments. And let’s not be naive here. The separatists managed to manoeuvre the national government into a no-win situation by refusing to engage and offering no optionality forcing the government down a path of action which would have negative repercussions across the worlds press. Of course, the federal police agencies weren’t forced into their heavy-handed actions. That simply amplified the impression that normal people are being denied their democratic rights. Moreover, the reported 42.3% turnout lacks legitimacy even if 90% of the votes were in favour of separatism. Legislation for the vote was only passed 4 weeks ago and opponents of independence simply refused to debate or engage in any meaningful way. The referendum was held in a manner that would not pass any independent audit with separatist movements issuing their own ballot papers and the local government suggesting that voters even download their ballot papers from a Catalonian government website.  

Prime Minister Rajoy’s credibility though is shot to pieces. Rajoy anyway relies on minority parties to help him with his legislative programme in parliament and some of those may be less well disposed to sit in his corner. The problem for the EU is that this comes at a time when many national governments in Europe, including Spain, have minority governments and with Merkel struggling to form a coalition there is a striking lack of leadership across the EU with the possible exception of France where of course Macron is flying into strong headwinds of his own with his reform programme.

I have consistently repeated two views regarding the EU and Brexit. First, that we are better off out because the whole monstrous construct is structurally flawed and will anyway, implode at some future point because of accelerating national divides, (watch the trend in popularism infect Eastern Europe, Belgium and Italy in the months ahead), and economic disparity between north and south. Second, that whilst an advocate of Brexit my long-held concern is that Westminster lacks the expertise, experience and wisdom, both politically and within the civil service to ensure a smooth and elegant exit. Funny how both are manifesting themselves simeoultaenously. 

Europe; Coming Unglued

 The financial media have, as usual, been watching a different movie.

The financial media have, as usual, been watching a different movie.

A friend recently said in reply to a comment, 'I think we're going to hell in a basket.' She is probably right but not for the reasons she thinks. My friend was referring to the consequences of Brexit. I am referring to the structural issues which are baked into the Eurozone and which are coming unwound at a pace which is very likely to accelerate throughout 2017. Standing close to an exploding bomb is never a good idea. The further away we are the better although it will take more than the English Channel and the political aspiration, if not commitment to leave, to save us from at least some of the backblast.

Political risk in Europe appears to be growing. The truth is, it never went away. It was simply subdued temporarily by successive ECB bailouts which have rescued (some) ailing banks but have done nothing to correct the systemic flaws in the Euro which have ruined southern European economies. Now, as political risk takes front and centre stage with Le Pen soaring in the polls the underlying economic risks which have been fermenting for years are at risk of ripping loose. The means of transmission are again, most likely to be the banks. You see, nothing has really changed.

We saw during the last period of Euro stress in 2011-12 that a sell off in bonds hit the balance sheets of European banks who tend to hold their own governments debt which increased their need for bailouts. In turn, that hits depositor and investor confidence which damage the banks even more creating a death spiral requiring direct central government intervention. As you may have guessed, the three countries with the banking sector most exposed to their own governments debt are Italy, Spain and Portugal.

With the ECB scaling back its bond purchases and the rising incidence of inflation yields have been rising. More importantly, spreads have been widening reflecting growing risk between member states.

Markets have so far placed a low delta on a Le Pen victory in France. Markets are being naïve. The French electoral system is designed to keep the door firmly shut against extremist parties but with the other candidates carrying baggage of their own her defeat is far from certain. Italy’s election meanwhile could result in a government under the influence of the Five Star Movement of the Northern League, both of which are committed to leaving the EU. Markets would not wait for an EU referendum result in these countries. Merely scheduling one will result in financial chaos. Meanwhile another Greek crisis similar to 2015 looks baked in when they run out of money in July.

Investors are hardened to serial crisis in these countries but are broadly complacent in their thinking that after a lot of fuss there will be another bailout and normal business will resume. Italy’s banks still hold 276bn in bad loans and the countries debt to GDP ratio stands at 134%. With 12% of the country’s bank assets being held in national debt there is a financial death spiral just waiting to be triggered. A small issue here is that Italy is the third biggest economy in the Euro block. That won’t be an easy fix.

Portugal meanwhile is back where it started with debt as high as it was in 2010. The 78bn Euro bailout there did not reverse economic trends. It did though, save the banks, for now.

The ever sensible and cautious Germans have been trying for years to neutralise this threat, first with a proposal to limit the amount of domestic sovereign debt that a bank could own. Germany failed. The second German proposal was adopted. That was to require that bank bond holders take a draw down, to zero if necessary, before government money could be used to bail out. Unfortunately, when Banca Monti Dei Paschi ran onto the rocks in December the rules were bent out of shape by using out of date stress tests and reimbursing debtholders saying they had been misled. That prevented a political fuss in Italy but has left the potential financial death spiral in place.

Other ideas, mostly based on the ‘bad bank,’ approach have circulated in recent years and include creating two classes of bonds, pooled together from the Eurozone countries, and divided into ‘safe,’ and lets call it ‘less safe.’ Loosely, that would be Germany plus one or two other countries and the rest. Unfortunately, the Germans are not big fans of either of these plans or any of their derivatives. The Germans in fact have been playing a quite crafty and streetwise game and who could blame them. German banks have pulled back their lending to non-German companies in the Eurozone over the past few years. Their appetite for shared risk is diminishing and the banks preference for keeping their money inside their national borders reflects this.

Germany itself has its own handcart of problems. Germany will of course work hard to keep the Eurozone together but it is not without its critics from both within and from outside. Germany is under constant criticism for having the largest trade surplus in the world, something that has not gone unnoticed by the Trump administration. It is ironic that Germany is the most powerful member of the very institutions that were imposed upon it in post war Europe. Indeed, the Euro was created years later in part to tie a reunified Germany to France and losing the Mark was the price paid for reunification. The trade off for Southern Europe in being unable to devalue was access to Northern European borrowing rates which allowed much needed structural reforms to be put firmly on the back burner.

Monetary union with fiscal union blocked potential wealth distributing mechanisms and acceptance of risk sharing required Southern Europe to gift their fiscal policies to Brussels. The Eurozone crisis and subsequent austerity measures have created fertile ground for growing resentment which has fanned the flames of populist movements which are gaining traction across the Eurozone. The refugee crisis and local political scandals have poured kerosene on an already politically volatile state. Growing recent civil unrest in France, (not much reported in the UK), and less violent demonstrations in Germany, reflect the heightened political volatility.

Political and economic structural tensions in Europe will continue to rise across the Continent in the coming months. They may well be contained and then abate. Protectionist rhetoric from Washington however complicates matters somewhat and are anathema to Germany’s export led economy. How the global economy, which has been designed and built around the free movement of people, goods and services reacts to fundamental changes driven by Washington remains an open question. Certainly, a much stronger dollar would be deflationary and wipe out the glimpses of inflation we are now seeing and that has a world of implications starting with Emerging markets and the $9tr of foreign dollar denominated loans which are ticking away.

With, for the moment, inflation at the gates and with bond yields rising in France and the periphery, the increased cost of debt repayments will do nothing to stabilise matters. Equities meanwhile have been skipping along without a care in the world. They may be about to stumble. For what it is worth, I firmly believe that the whole rotten construct is closer than most believe to coming completely unglued. Let’s hope that the financial boffins at the Bank of England are earning their money and are stress testing the banking and clearing system to destruction. It won’t be so very long before risk managers across the City are once again obsessed with counter party risk.

As a quiet postscript, those investment banks such as HSBC and Morgan Stanley who are making noises about moving some staff to Frankfurt and Paris, good luck. You are going to very much need it.

Why We're Leaving Europe

 A Choir Called Dave

A Choir Called Dave

William Hague threw his hat in the ring today supporting retention of our membership of the EU. As the referendum debate warms up over the holiday, before getting into full swing in 2016, I hate to disappoint Mr Hague and his fellow EU enthusiasts but he, and they, are wrong. Here's why.

I had the deep joy of popping over to South Harting the other day to listen to Mrs Flashbang and her chums in 'A Choir Called Dave,' for their Christmas concert. I sat next to an old boy and this is how the conversation went,

'Are you from the village?'

'No,' I said, 'I'm from just outside Compton, (two miles away),'

'Oh,' he said, 'It's different over the hill.'

It's a lot more different in France mate I thought. Hague and Co have their hands full if they think this lot are going to sit down and quietly give an inch after being taken for a mile for the last thirty five years.

Au contraire Mr Junker

has the average Frenchman ever had it so good?

So, Jean-Claude Junker, the European Commission President, has been slamming David Cameron in response to the jaw dropping incredulity with which No 10 greeted the latest bill from Brussels, "please pay £1.7bn by Christmas."

So Mr Juncker, as I understand it, we the British have landed this whopper because we have a growth rate higher than have others in the EU. 

I'm a simple man so in simple terms, let me get this right. I get to pay more tax to subsidise a French 35 hour working week and the rest of the nonsense that they've conjured up in the dying days of their 200 year old experiment in raging socialism.

Sure, while I'm getting my sad, tired body out of bed at 5am every morning my average French opposite number is probably just drifting home from seeing one of his mistresses and that's his god given right as a man and a Frenchman. Just don't ask me to pay for it because here's a reality check.... we're not going to and if you push the point we'll remove our northern Presbyterian troublesome selves and our dull work ethic out of the whole rotten farce.

 

 

Flight MH 17 row continues to escalate

  The Defence Ministers of Norway, Sweden, Netherlands and Germany and their Russian opposite number, Sergei Shoigu

The Defence Ministers of Norway, Sweden, Netherlands and Germany and their Russian opposite number, Sergei Shoigu

The Flight MH 17 row continues to escalate; why is it so difficult for someone to get on a plane and go and talk to Putin? The traditional mediator at such times, Germany, has excused and absented themselves from the process. Mrs Merkel must swing into gear, far from protecting Germany's interests she will achieve the opposite in sacrificing the long term good for short term industrial interests.

My view from the beginning of the Ukrainian crisis is that I wouldn’t trust either side as far as I could throw them and propaganda and misinformation continues to stream from both sides. The EU are absolutely culpable in precipitating the crisis in making impossible demands while making unfulfillable promises. Like it or not, EU meddling resulted in the overthrow of an elected government and having lit the fuse the EU stood back, turned and ran away. Now we have nigh on 300 innocents dead, and many thousands more in Ukraine itself and the European economy under threat of being destabilised.

Meanwhile, the rest of the world has accepted at face value the assertion that rebels downed the civilian aircraft. That may transpire to be fact but should be left to clinical investigation. Russia’s Defence Ministry is challenging the allegations and has produced evidence suggesting a Ukrainian fighter jet had tracked the airline despite early assertions from the Ukrainians that no fast jets were in the air. The Russians have also challenged the Americans to produce the satellite imagery they say they have showing that the missile was launched by the rebels. There are many more conflicting assertions and pieces of supposed evidence out there, such as the report of a Spanish air traffic controller working in Ukraine who said the Boeing was under escort by two Ukrainian fighters, and I know not which may or may not be accurate. I would simply encourage a healthy scepticism of the output of both sides. We’ll get the truth, eventually.

As an aside, I'm no fan of John Pilger and am diametrically opposed to just about everything he stands and has stood for but its a funny old world. So warped and pliable have political principals become in our modern world and so diluted has the integrity of journalism become that I find myself in almost absolute agreement with his thoughts on the Ukraine in this pretty searching and articulate piece from his blog. Worth a read.

One further point. Much has been made of lack of respect for the dead. If looting has taken place its unforgiveable but amongst the swaggering gangsters it is also clear that many local volunteers, firemen, miners and the like, have collected bodies and body parts. That is a traumatic experience. My old company was at Lockerbie, (after I had left them), and did just that job. The legacy of social problems and PTSD among those men lingers on and in fact I attended a funeral just two weeks ago, the cause of which may well stretch back down the years to Lockerbie. People who haven’t been handed a plastic bag and been asked or told to “go and collect” shouldn’t be so quick off the mark to criticise. It’s not a nice thing to have to do.

Man Up France FFS

 

Enquiring minds might find this table from SocGen of passing interest,

 

The standout lines are that the French and Belgiums earn more per hour than do German workers, which is a straight turnaround from 2000 when the Germans made more per hour. 

That of course suggests that the Germans suffered relatively poor wage gains but stayed competitive with low unemployment and strong exports.

Everyone else saw wages go up, and competitiveness reduce and now they're looking for German handouts.

 Except the UK where earnings per hour have fallen dramatically since 2008 which is demonstrative of the British taking their medicine.

Onlookers should remember, many things have gone very wrong in the UK but to our credit we started to face up to problems immediately after the crisis. There is a ton of unfinished work in the UK but at the time, the French swept most of their bad news under the carpet and hoisted a sign that said, "no problems here (especially in their banks), nothing to see, move along now." 

Guess what.... your problem, grow up, stop whinging and deal with it.

 

Frederick Forsyth's open letter to the German Chancellor

 

I'm a bit late with this but it's good to have it on the blog, both for those who may have missed it and as a matter of record.

Frederick Forsyth, author of some thundering good reads and Express colunmist, has penned an open letter to the German Chancellor, Angela Merkel. Couldn't have put it better myself; this should be a mandatory read for Cleggites and their ilk.

"Dear Madame Chancellor, 

PERMIT me to begin this letter with a brief description of my knowledge of, and affection for, your country.

I first came to Germany as a boy student aged 13 in 1952, two years before you were born. After three extended vacations with German families who spoke no English I found at the age of 16 and to my pleasure that I could pass for German among Germans.

In my 20s I was posted as a foreign correspondent to East Germany in 1963, when you would have been a schoolgirl just north of East Berlin where I lived.

I know Germany, Frau Merkel, from the alleys of Hamburg to the spires of Dresden, from the Rhine to the Oder, from the bleak Baltic coast to the snows of the Bavarian Alps. I say this only to show you that I am neither ignoramus nor enemy.

I also had occasion in those years to visit the many thousands of my countrymen who held the line of the Elbe against 50,000 Soviet main battle tanks and thus kept Germany free to recover, modernise and prosper at no defence cost to herself.

And from inside the Cold War I saw our decades of effort to defeat the Soviet empire and set your East Germany free.

I was therefore disappointed last Friday to see you take the part of a small and vindictive Frenchman in what can only be seen as a targeted attack on the land of my fathers.

We both know that every country has at least one aspect of its society or economy that is so crucial, so vital that it simply cannot be conceded.

For Germany it is surely your automotive sector, your car industry.

Any foreign-sourced measure to target German cars and render them unsaleable would have to be opposed to vetopoint by a German chancellor.

For France it is the agricultural sector. For more than 50 years members of the EU have been taxed under the terms of the Common Agricultural Policy in order to subsidise France’s agriculture. Indeed, the CAP has been the cornerstone of every EU budget since the first day.

Attack it and France fights back.

For us the crucial corner of our economy is the financial services industry. Although parts of it exist all over the country it is concentrated in that part of London known even internationally as “the City”.

It is not just a few greedy bankers; we both have those but the City is far more. It is indeed a vast banking agglomeration of more banks than anywhere else in the world.

But that is the tip of the iceberg. Also in the City is the world’s greatest concentration of insurance companies.

Add to that the brokers; traders in stocks and shares worldwide, second only, and then maybe not, to Wall Street. But it is not just stocks.

The City is also home to the “exchanges” of gold and precious metals, diamonds, base metals, commodities, futures, derivatives, coffee, cocoa… the list goes on and on.

And it does not yet touch upon shipping, aviation, fuels, energy, textiles… enough. Suffice to say the City is the biggest and busiest marketplace in the world.

It makes the Paris Bourse look like a parish council set against the United Nations and even dwarfs your Frankfurt many times.

That, surely, is the point of what happened in Brussels. The French wish to wreck it and you seem to have agreed. Its contribution to the British economy is not simply useful nor even merely valuable.

It is absolutely crucial. The financial services industry contributes 10 per cent of our Gross Domestic Product and 17.5 per cent of our taxation revenue.

A direct and targeted attack on the City is an attack on my country. But that, although devised in Paris, is what you have chosen to support.

You seem to have decided that Britain is once again Germany’s enemy, a situation that has not existed since 1945.

I deeply regret this but the choice was yours and entirely yours. The Transaction Tax or Tobin Tax you reserve the right to impose would not even generate money for Brussels.

It would simply lead to massive emigration from London to other havens. Long ago it was necessary to live in a city to trade in it.

In the days when deals can flash across the world in a nanosecond all a major brokerage needs is a suite of rooms, computers, telephones and the talent of the young people barking offers and agreements down the phone.

Such a suite of rooms could be in Berne, Thun, Zurich or even Singapore. Under your Tobin Tax tens of thousands would leave London.

This would not help Brussels, it would simply help destroy the British economy.

Your conference did not even save the euro. Permit me a few home truths about it. The euro is a Franco-German construct.

It was a German chancellor (Kohl) who ordered a German banker (Karl Otto Pohl) to get together with a French civil servant (Delors) on the orders of a French president (Mitterrand) and create a common currency.

Which they did. IT was a flawed construct. Like a ship with a twisted hull it might float in calm water but if it ever hit a force eight it would probably founder.

Even then it might have worked for it was launched with a manual of rules, the Growth And Stability Pact. If the terms of that book of rules had been complied with the Good Ship Euro might have survived.

But compliance was entrusted to the European Central Bank which catastrophically failed to insist on that compliance.

Rules governing the growing of cucumbers are more zealously enforced. This was a European Bank in a German city under a French president and it failed in its primary, even its sole, duty.

This had everything to do with France and Germany and nothing whatever to do with Britain.

Yet in Brussels last week the EU pack seemed intent only on venting its spleen on the country that wisely refused to abolish its pound.

You did not even address yourselves to saving the euro but only to seeking a way to ensure it might work in some future time.

But the euro will not be saved. It is crumbling now. And since you have now turned against my country, from this side of the Channel, Madame Chancellor, one can only say of the euro: YOU MADE IT, YOU MEND IT."

Clegg The Ungrateful

 

Nick Clegg's Political Career Takes An Unexpected Turn

After a weekend of bluster Nick Clegg has failed to appear in the House of Commons this afternoon for the Prime Ministers statement on on the EU treaty. Aides say he didn't want to be a distraction. Poor lamb.

Like it or not Clegg is part of the government and should be there; the deputy prime minister can't cherry pick only the fluffy warm user-friendly announcements that he wants to be associated with. In fact, Clegg has done himself enormous damage this weekend. Flip flopping between different views doesn't sit well with voters who, like and agree with them or not, prefer men of conviction and loyalty. Clegg meanwhile is displaying all the characteristics of a political and moral coward and in effect is ensuring his own political end.

What he may have failed to appreciate is that if Cameron had gone along with the treaty, the subsequent referendum would have kicked the EU firmly into touch in the UK and the subsequent and inevitable general election would have signed off himself and the rest of his lie-down-and-cry party into deep oblivion for a generation. Cameron's act of defiance therefore was in fact in the Liberal's best political interests.

It is anyway a common talking point amongst Liberals that Clegg will get the heave at the next general election from the good people of Sheffield. He may find that the EU commissioner job he was pencilled in for is off the scorecard now and so should it be. 

The best thing that Clegg can do is to man up and stand firm for the government and for Britain. If it alienates his party members then so be it. His only alternative is immediate resignation. Any compromise between the two will leave his reputation and future in tatters and regardless of what some of his more naive colleagues and flapping BBC journo's may think, the same will be true of his party's electoral prospects.

 

UK Position on Europe Explained

 

I'm afraid we must roll back the pages of history to explain where we are and how we got here but don't worry; it won't take very long. We're travelling back all the way to the 24th March 1980 and deep into the golden age of British televison comedy to Episode 5 of "Yes Minister," entitled "The Writing on the Wall." (hat tip to Mish for the reminder).

Sir Humphrey: Minister, Britain has had the same foreign policy objective for at least the last five hundred years: to create a disunited Europe. In that cause we have fought with the Dutch against the Spanish, with the Germans against the French, with the French and Italians against the Germans, and with the French against the Germans and Italians. Divide and rule, you see. Why should we change now, when it's worked so well?

Hacker: That's all ancient history, surely?

Sir Humphrey: Yes, and current policy. We had to break the whole thing [the EEC] up, so we had to get inside. We tried to break it up from the outside, but that wouldn't work. Now that we're inside we can make a complete pig's breakfast of the whole thing: set the Germans against the French, the French against the Italians, the Italians against the Dutch. The Foreign Office is terribly pleased; it's just like old times.

Hacker: But surely we're all committed to the European ideal? 
Sir Humphrey: [chuckles] Really, Minister. 

Hacker: If not, why are we pushing for an increase in the membership?
Sir Humphrey: Well, for the same reason. It's just like the United Nations, in fact; the more members it has, the more arguments it can stir up, the more futile and impotent it becomes.

Hacker: What appalling cynicism.
Sir Humphrey: Yes... We call it diplomacy, Minister.

 

Why the US Won't Bail Out Europe.

 

Pelley: When kids at school ask you where you live, what do you tell 'em?

Austin Metzger: When they see the truck they ask me if I live in it, and when I hesitate they kinda realize. And they say they won't tell anybody.

Arielle Metzger: Yeah it's not really that much an embarrassment. I mean, it's only life. You do what you need to do, right?

A great deal has been written over the weekend about the possibility of the Fed bailing out Europe by buying European bonds or indeed with Europe being bailed by an enhanced IMF fund which necessarily would require a large degree of US funding.

Not only are we entering the final 12 months of the US presidential cycle but there more than sufficient domestic demands on the traditional generosity of Americans. A quick look at this video from the 60 Minutes programme from CBS and it will become clear that the US has screaming needs of it's own. Proof perhaps, that the American pioneering spirit is alive, but heartbreaking nonetheless.

Good luck kids; we all admire your stoicism.