We live in a time when many possible futures are jostling each other, each striving to be born. The two sharply contrasting possible fates for Europe, united or fragmented like a dropped plate, are one case in point. China growing or China failing and dragging Asia and the West down with it, represents another.
After dragging their heels for weeks and getting into a total standoff over whether or not the European Central Bank (ECB) should or should not be asked to print money to bail out the eurozone, European politicians were given a sharp reminder that the future (ie the markets) may not wait for them to resolve their differences at their own glacial pace.
The OECD has always taken the grand view, casting its eye, as it does, over the economic shape of things for all of its member countries. It’s latest Economic Outlook could hardly avoid shining a spotlight on the euro mess and the OECD pulled no punches in articulating its alarm at what it saw.
“…confidence has dropped sharply as scepticism has grown that euro area policy makers can deal effectively with the key challenges they face. Serious downside risks remain in the euro area, linked to the possibility of a sovereign default and its cross-border effects on creditors, and loss of confidence in sovereign debt markets and the monetary union itself…
…the implications of a major negative event in the euro area will depend on the channels at work and their virulence. The results could range from relatively benign to highly devastating outcomes.”
The OECD has called for “rapid, credible and substantial increases in the capacity of the European Financial Stability Fund (EFSF) together with greater use of the ECB balance sheet” – which means it is giving a direct prod to the German Chancellor Angela Merkel to stop playing to her voters.
I spoke with a number of high yield fund managers over the last few days for a forthcoming European High Yield article for IPE, and they are unanimous in pointing out that the corporate treasurers and finance directors they deal with are already formulating paper plans for dealing with a break up of the euro zone. OK, no one is spending much money on these plans yet, but the possibility is now seen as real enough by industry for it to be only sensible for major corporations to start working through the implications for them.
The fund manager view? A break up of the eurozone would lead to a return to much smaller, domestic capital markets and much more constrained fund raising opportunities for bond issuance, with everyone looking to local market funding and borders being real barriers to capital flows once again. And this is after things settle down and the shock of such a cataclysmic transition wears off.
Quite where corporate funding would come from in the months immediately following such a shock to the system remains to be seen. More than likely there would be no funding available anywhere unless local governments did some extraordinary bail outs by printing cash for companies, a remote possibility indeed since governments would have their hands full (and their coffers empty) simply dealing with a hugely messy transition to local currencies once again. Investors holding euro debt would be dancing on pins while some group of decision makers somewhere resolved the issue of just what currency they would be getting back when their bonds matured.Politicians were thrown a real break by the markets in the week beginning Monday 28 November, with the markets suddenly reversing a long running series of losses. The catalyst on this occasion was an announcement by six major central banks that they would act together to provide liquidity to the global banking system by cutting the interbank lending rate from 100 basis points over base rate to just 50 points. The move was designed to ease strains in the financial markets and was extremely well received by the markets. This, of course, is exactly the kind of positive action that the OECD is calling for. If Europe’s politicians could only follow suite, a positive outcome for the eurozone is still very much on the cards…
Further reading on the EU sovereign debt crisis
- Nothing but Painful Choices Ahead as the Global Debt Supercycle Ends, by John Mauldin
- No Quick Fix for the Eurozone, by Joseph Trevisani
- The Tragedy of the Euro, by Philipp Bagus
- Euroland: An Intractable and Never-ending Crisis?, by Morningstar
Tags: central banks , China , economic recovery , EU , European Central Bank , European Monetary Union , eurozone , eurozone sovereign debt crisis , financial crisis , OECD , regulation , sovereign debt