I was talking to my friend Ollie who runs several investment funds in London.
He is bearish by nature and we regularly have discussions on the state of things, he sees clouds and I point out that behind the clouds is the sun.
Anyway, we were laughing yesterday at the fact that Financial shares of which I own a lot of Bank of America which I bought at around $6 (so not lost a fortune yet) had rallied by 10% in two days ostensibly on the comments of a European finance minister that they were actively investigating increasing bank capitalisation (i.e. free cash).
As Ollie said “isn’t this a bit like saying that a car manufacturer announces they are actively looking into making sure their vehicles have adequate brakes, isn’t this a given at the start!!”
However the above is not the real point of this blog.
The conversation then went onto a discussion over Germany and what it was doing, and what it ultimately will or will not do.
As I have written previously and as is being increasingly acknowledged in financial markets the European situation boils down to Germany, that’s it, they are the ball game.
It has been assumed by the vast majority that when push finally comes to shove, Germany will pony up the dosh necessary to sort it out.
However and there is no concrete evidence to suggest otherwise (although there are increasing rumours) what happens if they decide they won’t?
It is interesting (and this is not meant to be judgmental or accusatorial, just a discussion point) to think about what Germany is thinking.
On the one hand it may decide that it has a moral and financial obligation to save Europe. It may say, we owe Europe for past actions; we owe the community as the implicit European Treaty Agreement is an all for one and one for all, and we have in the past imperilled Europe, now we save it.
They may think none of the above but simply do a cost benefits analysis of what it will mean to them to not prevent a full blown crisis and decide that it’s in their best interests to prevent it.
However there is a third option, they take a long hard look at the problems facing Europe, they calculate the cost to them of bankrolling and guaranteeing the debts and they say ‘nein’.
Now it is a fact that Germany has been a major if not THE winner from the Euro’s creation. It is an export driven economy and its exports go in large part to other Euro nations. If the Deutschmark still existed it would have been higher and the Lira, Drachma, Peseta, Punt etc would have been lower – it therefore has benefited from far greater surpluses by selling goods to countries in Europe which are running deficits in the same currency, the same deficits that are now in part causing such anxieties in the sovereign debt markets.
So here’s the point:
- Germany has benefited from the Euro experiment up until now
- Germany is now staring at payback, quite literally, and it doesn’t know how big and for how long.
What does it do?
JP Morgan has provided their thoughts on what they think will happen focusing on the points below:
- German exports to EU states is over 50% so to destroy the Euro would be economic suicide
- To outwardly save Europe, i.e. through the creation of a Euro Bond (or other suggested solutions) would be political suicide and deeply unpopular with the German people
So, what is the solution?
They believe that what is happening is a classic stalling tactic. Giving Greece its money this time round buys time until Europe can dump them in December. Effectively throwing them out of the Euro and letting them return to the Drachma – why save a sinking ship that is in danger of bringing others down.
Whilst it has bought time the governments can shore up banks and prepare for the fall out. JP Morgan also feels that the Euro Bond (or other solution) will come in gradually through the back door so the German people are less aware of it. So as such careful military tactics will see the Euro saved, Greece dumped, some form of Euro Bond and German exports preserved.
This is only one view, the wider question remains does Germany leave Europe to sink or swim?
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.