Friday, 15 June 2012

Week in Review: …of Spailouts and Grexits

The FTSE 100 rose 1% over the week.  Most European countries, from the basket-case periphery to the safe-haven core (Germany and the United Kingdom) saw higher bond yields, indicating a rising cost of new borrowing.  The exception was Switzerland where it has been over a year since the bonds offered a positive yield and recently prices have soared.  Absurdly, investors would now pay 0.5% per annum to lend to the Swiss for 2 years.
Source: Datastream
This situation reflects investors’ bets that the Swiss cannot maintain their peg with the euro. Their confidence partly stems from the impending risk of a euro collapse.

Spailout?
Last week this came to a head and the familiar tale of a weekend meeting (or conference call) between finance ministers, followed by an equally familiar Monday rally - so unnerving for anyone who spent the weekend underweight equities. They need not have fretted long. 

An astonishing day saw a 5% swing from gain to loss in some southern European equity markets, as optimism about the Spanish deal evaporated.  Investors became concerned that, as feared, the Spanish bailout had achieved little more than pushing more debt on to the Spanish state and subordinating existing and potential future Spanish creditors.

Grexit?
For equity investors the rest of the week was spent climbing the wall of worry and looking forward, in morbid fascination, to the results of Greece’s second parliamentary elections of the summer. When the pre-election close-period polling ended the radical Syriza and establishment New Democracy were neck-and-neck.  

Both parties will have tried to spin the Spanish deal as an endorsement of their own position: to Syriza, Spain has been offered aid with few strings attached; for New Democracy, this is reward for already having instigated appropriate reforms. 

Meanwhile Cyprus, with its aptly named central bank head ‘Panicos Demetriades,’ seems set to be the fifth economy to seek aid from one of the European bailout funds, reviving the sensation of déjà vu all over again (and prompting the release of my policy panacea).

Plan AA
Against this background the great and the good gathered for the City of London’s Mansion House dinner and its customary speeches from the Chancellor of the Exchequer and the Governor of the Bank of England. Speculation was rife about a move to Plan B as the austerity based Plan A has been buffeted by the eurozone storm. Instead the Chancellor upgraded Plan A, bolstering it with some monetary support.

The Bank of England will now provide cash against a wider range of collateral for banks’ existing assets and will advance more funds against new loans the banking sector commit to making. Whether the take-up for these schemes will disappoint remains to be seen however as banks maintain that demand for credit, rather than supply of it, is what is holding back loan growth.


Guy Foster
Head of Portfolio Strategy

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