Despite some signs of a respite for the Euro on currency markets today (Thursday) not everyone thinks its valuation should be rising. Also, people in the credit agency sector are beginning to take a more pessimistic long-term view of eurozone deficit debt.
During yesterday evening and today, The Slog tried to contact all its sources among currency and credit sector workers. Some of the views go beyond ‘sensational’ and towards acceptance that – whatever happens over one 24 or 36 hour period – things are going to get more dangerous for big lenders – who will either get poor value (or nothing) back.
“I’m impressed by the arguments that say ‘let the euro devalue'” said a senior corporate lending executive yesterday. “I think that’s the best chance of people getting their money back. Without that happening, Greece doesn’t have a prayer”. This is a variation on the views expressed by some Slog contacts yesterday that Greece should re-adopt the Drachma.
“The higher the euro gets, the tougher it’ll be for eurozone exports” said a credit manager based in Spain, “there’s a lot of discussion about it being better to get a lower value of repayment than none at all”.
The ‘none at all’ possibility is a broadening viewpoint in both sectors. A London-based currency dealer told us, “You have to remember these guys lied about their debts, and then the EU people lied about how bad things were, and now other member States are lying about their ability to avoid the same thing happening to them. It’s not what you’d call a climate of trust”.
Several contacts were happy (off the record) to express openly their view that Greece will default.
“Personally I have little doubt that the Greeks will wave a white flag sooner rather than later” said one, “and it concerns lenders that such an option will look too easy for others in a similar position”.
Another agreed with this, albeit with a different emphasis.
“It’s very much a question of timing” he suggested, “in that we could have maybe three eurozone members being rescued, and one goes under….but the sky doesn’t fall in, right? And the others think, what the hell, why should we bother?”
PIMCO insiders allege that such a likelihood was the major reason behind the company’s complete withdrawal from eurozone lending. The view was reaffirmed in Patricia Kuo’s piece for Bloomberg this morning, in which Citigroup’s strategist Matt King went on the record to state:
“You can’t put Greece in a vacuum. Other governments may sooner or later decide that the pain in reducing fiscal spending is just not worth it, especially when a lot of these bonds are held by foreigners”.
King has a valid point: pain avoidance and postponement is, after all, what got the EU’s big Latin players into this hole in the first place….with a little help here and there from Goldman Sachs.
“Nobody knows what the collateral is, or even where it is, any more” a source in Zurich pointed out. “There’s no serious property or national pride or other stuff to back it up. Would you honour a debt to Chinese creditors screwing up your domestic footwear market? What would Spain offer as security with half its property worthless? Do you think the Germans – and especially the British – are really going to drown to save a few drunks who fell in the sea?”
This was strong stuff – and equalled from a different angle by another outspoken Bear:
“The markets don’t reflect people’s private thoughts” she said, “I’ve seen too many false dawns and heard too many dumb explanations. The eurozone is a basket-case, countries are going to default and neither Brussels not Frankfurt is going to be able to take the elected guys with it”.
Above any other consideration, what these opinions suggest is that the EU has a mountain to climb in the coming months. It needs a complete reform of the eurozone fiscal system, and – to get that legally – a huge number of renegotiations and sheer acts of faith from 27 members. Already, Spain’s Manuel Barroso has set the wrong tone, sounding both too smug and suggesting that Brussels can whistle for its pre-agreed country budgets. The French haven’t been far behind in this regard.
Commonsense – and the feedback we got over the last thirty hours – tells The Slog there is no way the EU can get anywhere near instituting the changes required to make traders calm down for longer than a week, or even a couple of days. Reassurances will be overwhelmed by the acceleration of events: as we’ve said many times before, there is no such thing as a gradual panic.