Hope for the Best but Plan for the Worst
On Friday the 11th of the 11th, 93 years after Armistice Day Italian bond yields declined below 7%, the failsafe level. Hopes ride high that Mario Monti will head an interim technical Government that will drive through badly needed reforms and austerity, but Italian yields will need to fall to at least 5% before Euro leaders can breathe a sigh of relief that the Eurozone came within inches of rupture before being saved. This script however also requires a German u-turn at the precipice and the ECB ramping up quantitative easing thus creating an unlimited supply of Euros to fill the hole being left from bank runs going on throughout the continent as investors flee banks they perceive as exposed to losses, not just from Greece but from Italy and any other diseased banks in the inter-bank market. Think of the ECB as a fire fighter hosing down the conflagration with money before passing over the hose to the newest recruit the EFSF. That’s the script with the drama AND a happy ending.
But should you bet the house on a happy ending?
Here’s the bad script. Reality returns. Markets look more closely at Italy and see another country strangled by inflexible labour markets, restrictive agreements designed to protect cosseted sectors from competition, the common currency of union and professional power. They will also see a country where confidence in Government incompetence and inefficiency is so high that an estimated 16% of GDP is black market. Hard to blame the Italians when they see 945 Senators and Deputies averaging €140,000 per year being driven around in a top Italian car fleet estimated to cost €2billion per year and involving 30,000 vehicles across the ruling establishment. Will Italians differ from the Greeks and swallow austerity with a shrug and will Italian austerity avoid depressing economic growth by creating a negative feedback loop into the bond market?
It’s an open question. But the most immediate question is how many Eurozone banks are tottering on the brink of collapse and how many will be deemed to be non-systemic if their Governments simply can’t save them? That’s the fault line. As you read this there is a pan European flight to safety occurring. Will it overwhelm the ECB? If it does and Ireland loses her source of daily liquidity to the banks what happens?
The Irish Government in the event of a failure of the Eurozone itself would be forced to revert to a local currency and raise exchange controls to prevent capital flight. All deposits held by all banks operating in Ireland including those in foreign currency would be declared in punts. That elevates cash deposits as the most vulnerable asset on a balance sheet until this period of extreme risk passes.
Locked out of bond markets but desperate for cash to avoid facing the protected species within the Croke Park Agreement with 50% pay cuts and slashing social protection rates, would private pensions be nationalised? Would the Government also begin to eye cash in the banks and life offices as another possible reserve? Could asset appropriation, the nirvana of the hard left who believe that everyone should be equally miserable, becomes the de facto mode of an overwhelmed Irish Government? This is at the most extreme end of outcomes for sure, but it is still a risk nonetheless.
What can you do?
Well you can just ignore it all and be patriotic betting that sense will prevail, that politicians can be trusted with sound economic decisions. Or you can plan for the worst on the basis that anything else is a bonus. In response to clients and recognising that, until the dust settles, the bank sector is unsafe, we are assisting them in moving some money out of Euro and out of the jurisdiction in three different ways;
If you wish to use any of the above to put some cash outside the Euro simply email; email@example.com. Specify which and how much. If I can’t reach you someone else will from our network firm the Mount Street Group