Honey I'm home! The Eurozone crisis has returned with increased venom, shrouded by the events in Poland and whether Mick “Wallets” would make it! As luck would have it Mick did make Poznan via the Aer Lingus staff car park, Ireland lost 9-1 after 270 minutes of football and Greece stayed in the Euro - but only just.

Monday morning, markets rallied after the Greek election gave pro-European parties the nod, but by 8.45am, the party ended, the air was left out of the bouncy castle and someone unplugged the amplifiers. The crowd filtered home to gawk at Spanish borrowing costs rise beyond 7%. Spain is accelerating towards bailout, not helped by the decision to delay releasing the results of its audit of bank losses to September. The stench of political choreography fouling the air is driving confidence lower.

So where is it all going to end?  The G20 in Mexico is hinting that major steps are imminent but the language of its agreement to “support the intention to consider..blah blah blah” is nothing short of a classic Sir Humphrey political fudge that relies purely on the appearance of action - but takes none.

The unspoken risk is that the political blocks, playing chicken with each other, will accidentally manufacture a rupture. Nobody wants to go there because it leads to the balkanisation of Europe, exchange controls, banking nationalization and a global depression. It could also lead, ultimately, to war. You have to be realistic and assume that such extreme outcomes are highly unlikely.

That leaves three main scenarios.

Scenario One – Mega Bailout

There is a huge bailout for Spain, likely to be followed by Italy whose yields are rising just behind. That would mean a bailout of at least €1 trillion. Hard as it is to contemplate, Scenario One still doesn't solve the underlying issue of too much debt and economic stagnation. Conclusion; it would fail

Scenario Two - Muddle

There is another muddle through with a half-hearted attempt to create the illusion of solidarity but still save the Germans from heavy lifting. Included in the muddle is the notion of a long term common Eurobond which would carry debt in excess of 60% GDP and include a Eurozone banking guarantee and banking union. That would certainly help firewall sovereigns from bank losses but it still doesn't address the underlying issue. Conclusion; It would buy time but ultimately fail.

Scenario Three- Federalisation

Surpluses are smoothly moved to deficit areas throughout the Eurozone but this requires deep fiscal and banking union, depositor guarantees, budget control from the centre through a common Minister for Finance, financial transaction taxes and clear path to a United States of Europe with a common federal taxation system. Conclusion; Together with limited debt write offs it stops the crisis but neither European citizens or their national Governments are yet sufficiently informed, frightened and ready to leap together into a union that nobody really trusts because of the gaping democratic deficit at its imperial heart in Brussels.

Never waste a crisis. Europe is attempting to radically reinvent itself in the middle of one. Ironically it is only at the precipice we see the best from human invention, reform and evolution. The bad news is what happens if they screw it up.

So how do you protect yourself?

You can forget the politically correct brigade lining up in print and radio telling you that there are local safe havens. There are none. Ideally you should have a lifeboat ready. That means (a) having some money outside the Republic of Ireland and (b) outside of the banking system altogether which includes Germany and Switzerland.

That’s why I continue to favour a Luxembourg fund with zero entry and exit costs and a running cost of 1% pa that holds Inflation-Linked securities guaranteed 44% by the USA, 23% Britain with the remainder Sweden, Australia and Japan, limiting the European exposure to 17% comprised of France, Germany and Italy. Hedged to Euro, the fund, managed by Standard Life Edinburgh, continues to produce results. The minimum is €50k and the custodian is Bank of New York Mellon.

But, buying on the dips, I continue to recommend a modest and limited holding in the ultimate world reserve currency, gold, which will rally if, as expected, more quantitative easing is released from the Fed. Gold will respond strongly to expectations of further inflationary policies which are the mainstay of policymakers response to the deflationary threats of economic contraction. Gold also responds to higher oil prices and we suggest holding it in the form of certificates directly from the Perth Mint in Australia, removing counterparty risk and avoiding derivatives. The minimum is €7.5k

Taken together both these can provide a lifeboat  if the crisis metastasizes into something very nasty. If you’d like to learn more send an email through; www.eddiehobbs.com

Eddie

Al Capone’s advice on how to negotiate what you want under stressful conditions was ignored by the Government and the 60% of the electorate who listened to them and backed an already defunct fiscal treaty. No sooner was the Irish result in but German policymakers, far more fearful about the impact of a Euro blow out from Spain’s rapidly petrifying banking system, dismissed any restructuring of Irish debt. Kindness alone won’t do it, see, and neither will acting the poster boy for yesterday’s crisis.

Here’s what Lucinda won’t tell you. The Irish phase is over. The next phase of the Eurozone crisis involves Spain, Italy and potentially France. Ireland was merely an Hors D’oeuvre on the starter menu. That we offered ourselves up for the Euro in the opening phase is appreciated and remembered especially in Berlin. They’ll erect a cross someday, maybe even a few toasts in Brussels with the claret; three cheers for the Irish, remember all the French and German bondholders they saved, remember all the Treaties they recklessly put to referendums , remember 1745 at Fontenoy, hip hip hooray for the plucky Irish always ready to fill the breach!

When we voted for the treaty we played our last card. What remains is pure hope value that we can rewrite the contract we signed in 2009 during the extreme events and chaos to come this year and next.

But The Fiscal Compact Treaty was last year’s cure. It’s already failed, just look at the tanking Euro and the extraordinary German and US bond yields which are a measure of extreme risk aversion. The Treaty was never going to work anyway. The notion that every member of the Eurozone should simultaneously engage in cost cutting over many years in one Germanic act of self-discipline could only have been brewed up by civil servants and politicians desperate for compromise in the early hours of the morning and running out of hot coffee and croissants – but the Irish Government swallowed it cold anyway.

Take the latest kite flying; that all Eurozone debt above 60% of GDP might accumulate in a European Redemption Fund guaranteed by all and cleared down over 25 years by attacking the balance with surpluses. Looks good on paper, especially for us by halving the weight we are expected to carry, but is it just more nonsense from policymakers desperate to avoid the inevitability of proper fiscal union or chaotic rupture?

Unified by Garibaldi in 1861, Italy has exceeded 60% debt / GDP for 105 years of its existence as an independent country while Greece has gone burst seven times over the same period. The Italians, to achieve the 60% target would have to hit the brakes hard to deliver a primary surplus of 4% every year for 25 years. Since the 1960’s Italy briefly touched surpluses but only in the early 90’s. That means Italy has been running the show on deficit borrowing 90% of the time since  Brian Cowen and Bono were born!

Markets aren’t stupid. If as I suspect the June summit fails to deliver the goods, expect the crisis to return with mounting ferocity, maybe even enough to shake the mainstream Irish media off the teat of deluded establishment propaganda that things are going to get better. The truth is that the dominos are lining up horribly and, unless there is dramatic and radical change shortly, the Eurozone will rupture. Journalists should now be asking the Government for Ireland’s contingency plan because not having one is as reckless as the policies that caused the crisis. If Fine Gael and Labour wish to avoid the odious legacy enjoyed by Fianna Fail, they ought to start planning one fast.

- Eddie Hobbs

While the Boys in Green bring welcome distraction in Poland, the great global financial correction which began in earnest four years ago reachs a crescendo. If it were a Hollywood movie, about now, we'd see our first sight of the shark. The stuff is head wrecking but it's important to understand how to prepare as events we once thought the most unlikely, move from the extreme to the centre.

What's next up?
There's a race on between Cyprus and Spain for the next bailout, the former for the sovereign and the latter for its banks, either of which could happen before the Greek elections on June 17th which are likely to put Syriza in power, (the Greek equivalent of Sinn Fein) to be followed by nationalisation of their banks and unilateral default on their restructured debt. The result will be Greek exit and bank runs as cash leaves peripheral economies. International humanitarian aid may follow if Syriza, a 4% left wing fringe party until a few months ago, cannot match its rhetoric with competent crisis management.

What does it mean for you?
The global financial system will experience another major shock, accompanied by bank failures and nationalisation. Pension funds and investments will once again fall heavily and a new round of global summits will follow coordinated central bank interventions with fresh rounds of stimulus to prevent deflation and depression. A surge in inflation, which has been kept at bay by downward pressure from debt pay downs, tighter credit and lousy consumer confidence, will get closer as currencies are further debased. The alternative is a decade of economic stagnation in ageing Western economies.

What should you do?

• Do not exceed home regulator deposit guarantee levels for deposits regardless of bank credit rating.
• Buy some gold, at least equal to 10% of your Euros.
• Shift some cash out of Ireland and out of Euros
• Expect a tax surge on financial assets to finance debt write downs, eventually

The Fiscal Compact Treaty is past but will it make a blind bit of difference?
The short answer is no. The treaty is designed to deal with future Government debt-financed bubbles. The problem is the hangover from the last bubble which started in the 80's. This is the great misdiagnosis underneath the failing response from deluded policymakers who conclude that there is a fix. There simply is too much debt and not enough growth to finance it.

Why are the responses to the crisis, now in its fourth year, failing?
Because on the one hand the Germans think that you can cure morbid debt obesity by vigorously rationing calories and the Yanks who think you can do so by feeding the patient more hamburgers. Neither can work. The only workable solution is drastic weight reduction through surgery and then a stay healthy programme. In economic terms that means the end game will be major debt liposuction and gastric banding across many Western countries, both national and consumer debt. Ireland, despite our progress, is one of the most morbidly obese patients on the planet when private, corporate and national debt is added.

But why don't politicians say that and get on with it?
You know the answer. Politicians live in short electoral cycles and hate delivering bad news to voters who typically punish them with reduced market share. Everybody wants to hear good news so bad news is kept hidden until the crisis blows up again with escalating ferocity. The can is whimpering in anticipation of the next EU kicking at the end June Summit. Unless there is a clear path to fiscal union supported in the interim by a cross border banking guarantee, debt pooling and debt write downs, the Summit will come nowhere near to out-swimming what’s in the water.

- Eddie Hobbs