Speaking of a “wink and a nod,” the Swiss National Bank stunned many market participants last month by deciding it would no longer peg the franc to the euro as it had done for years. It had promised to continue this peg not that long prior to stopping it, but they had signed no contract, of course. The initial 30% move higher for the franc wiped out some market participants and bruised others who had relied on the words of the central bankers.
We suspect that the Swiss had become a bit concerned about having to continue to accumulate euros at a fast clip because risks of holding that currency have once again become more difficult to ignore. Also, the people of Switzerland voted last year on an initiative to require their central bank to hold more gold. While it did not pass, maybe such a display of enough dissatisfaction with monetary chicanery to create the referendum in the first place caused some rethinking about priorities. We don’t really know. However, the reason does not matter to those who sustained losses. They lost because they based investment decisions on an informal agreement, a sort of promise, not relative valuations.
In addition, last month the electorate in Greece voted in new leadership that was much less wedded to maintaining the status quo regarding that nation’s membership in the EU. After years of depressionary economic conditions brought about by the bankers’ demands that Greeks pay the price to forestall the inevitable collapse of the euro, the people voted to try something new.
Who can blame them?
Unable to devalue a local currency because they are part of the EU, the writing has been on the wall for a long time. Further debt write-downs near $100 billion are likely as is the return to the drachma at some point. In spite of the ECB assuring us things are “fixed,” markets are dealing with the same credit issues that first became apparent about five years ago and at some point volatility will likely rise meaningfully again as the story unfolds. Holders of Greek securities are feeling that pain. Though this problem may be left to be dealt with at a later date, it looks like another “wink and a nod” gone bad. Obviously, Spain and Italy may be not be too far behind Greece in looking to restructure debt, so European leadership is setting precedent in current negotiations, making it enormously challenging to say the least.
Everything that has been done so far has not improved the balance sheets that needed repaired in Europe, it has only provided liquidity so that the big global banks can “extend and pretend,” i.e. change loan terms to avoid taking losses. Europe’s recently divulged QE program appears massive in size, but the limited risk-sharing of potential losses from holding sovereign debt at the ECB-level makes us think that this scheme may be even less effective than QE efforts elsewhere. The Germans do not want to underwrite more of the risk of holding Spanish and Italian debt let alone Greek. It indicates that this EU is not the unified body that its leadership tries to project. We also wonder whether the ECB will actually be able to find enough bonds to buy to meet its target.
The dotted line is not signed here either.
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