Blain's Morning Porridge - Nov 21st 2017. Europe is like a 4D game of Jenga, and Germany is a ve
Blain’s Morning Porridge – November 21st 2017
“It’s a helluva start, it could be made into a monster if we all pull together as a team..”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment advice…
Europe is an enormous 4 dimensional game of Jenga.
At the moment there are far too many blocks in play. Some of them are likely to leave the edifice teetering but standing. The question is: will any cause it to tumble?
Top of the wobbly blocks list is Merkel – what happens next in Germany? The CDU’s disastrous shift left has opened the door for the extreme right, and has fractured her own support. Merkel’s survivability is questionable. In her wake, all efforts to rejig Europe via closer union and monetary/fiscal harmonisation via banking union are absolutely on hold while the German constitutional crisis (yep, for that is what it is) plays out.
Markets don’t seem particularly worried – they have become blasé about political risk and look to the upside of Germany’s apparent rosy and robust financial strength. What’s not to like about Germany? What can possibly go wrong – it regards the current Merkel issue as a short-medium term minor concern. Get over it.
On a purely German basis they might be right. The critical thing for Europe is who follows Mutti?
Only the German president can call an election, but Merkel’s threats to push another vote rather than continue coalition talks looks like bluster – sounds like she’s trying to scare the opposition parties into a deal rather than go through the uncertainty of second election. If it comes to a second vote, it’s another miscalculation.
The question being asked yesterday was “who replaces her?” She’s been inordinately successful ensuring all upcoming potential political rivals were snuffed out, but one name I heard from two good sources is Jens Spahn. If you’ve never heard about him (and since he’s a German politician you probably haven’t), this lays out where he’s coming from: https://www.nytimes.com/2017/11/03/opinion/merkel-spahn-christian-democrats.html
Clearly I have no right to speculate on what happens in German politics when UK politics is such a mess. However, I am indebted to my colleague Steve Previs for pointing out the similarities between the UK and Germany.
Spot the difference and who said what: “No deal is better than a bad deal” and “No coalition is better than a bad coalition”.
Of course, Brexit is the second wobbly Jenga block. May is looking likely to up her divorce offer – which will further destabilise her own position but might force recalcitrant Europeans to notice. I doubt it. They are currently looking to the East.. not the West. Ahead of tomorrow’s UK budget, there is some interesting stuff in the papers about how European budget spending will have to be slashed post-Brexit. The pain will be felt across the European soft-underbelly!
But the wobbliest Jenga Block might remain the European financial system – and I don’t mean moving the EBA to Paris. (Good luck to them. After all, the French government would never ever be overly cosy with banks… would it..? (US readers…. mild suggestion of sarcasm alert.))
The latest wizard wheeze from the ECB is a real sweetie… according to a discussion paper published by the ECB last week on revision the Union’s crisis management framework; if a bank looks wobbly, then: “covered deposits and claims under investor compensation” should be replaced by “discretionary exemptions”.
Crashing minor chords…
The issue of German liability for the new European deposit insurance scheme (EDIS) was one of the issues that caused the coalition talks to fail: no Germans politician wants associated with policies that would mean paying the liabilities of Italian banks!
It might be even more confusing. Has the ECB just turned the basis of finance on its topsy-turvy head - again? If you’ve been buying covered bonds issued by undercapitalised, over-NPL’d European banks – then worry. By putting “covered deposits” in the firing line, covered bonds lose secured status and look subject to the same bail-in **** and all the other uncertainty the ECB leaves in its wake. Pfanbriefe anyone? Suckers!
And getting rid of depositor credit insurance? What a marvellous idea. It certainly fits with the European dream.. You know the one: how Europe would work much better if there just weren’t any pesky complaining citizens to worry about. Why not just Europeanise the whole European banking sector, take everyone’s money and give it to French farmers and Brussels Eurocrats?
It would be much simpler…
Of course it’s all about the Germans refusing to bail out feckless foreign types.. (Of course it is.. everything in Europe is about the Germans..) It’s a carrot and stick approach to solving the Italian bank conundrum – if they reduce NPLs, then the ECB will graciously bail depositors via the EDIS. Otherwise, the Germans aren’t going to give them access.
The ECB knows best…
(Which is to do what the Germans tell it to do…)
Bill Blain