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