The fact that today is GROUNDHOG DAY means that we have to keep discussing Greece again and again. The alarms sound over the demands of Syriza’s and its leader Alexis Tsipras and his efforts to craft a NEW DEAL for Greece in relation to its creditors. Any debt or interest rate relief Mr. Tsipras can attain from the TROIKA would allow his ruling party to declare victory and also provide a template for renegotiation of all previous austerity measures to which European debt plagued nations agreed. (I am not making a qualitative judgment about the Greek restructuring but just raising the issue of the great uncertainty it will cause in currency and bond markets.)
Last Thursday, Bank of England Governor Mark Carney laid out his ideas on how to help alleviate the problems facing the EU and a possible Greek Exit from the euro. The bottom line for Mr. Carney is that Europe needs a harmonized fiscal authority and a basic “transfer union” in which the more financially secure members would provide financial support for the debt burdened (a more robust political union). There is nothing new in Carney’s proposal but it takes on importance because of his dual role as BOE Governor and Chairman of the BIS Financial Stability Board, which operates under the auspices of the G20. Carney’s views are similar to what George Soros has been championing for several years: A single European Treasury with the ability to issue a EUROBOND rather than relying on each individual nation’s credit status.
Thomas Mayer, an influential voice in German banking and financial circles fired back at Governor Carney in Friday’s Financial Times with an opinion piece, “Carney Is Wrong About How To Solve Europe’s Problems.” Mayer’s challenge to Carney’s suggestion is to rehash the recent history of Greece’s fiscal malfeasance. (Merkel’s political response seen through the the enforcement of the original Maastricht Accord.) Chancellor Merkel attempted to prevent Greece from leaving the Euro in 2012 because of the potential issue of insolvency on other peripheral nations and the damage to the entire European financial system. Invoking the strictures of Maastricht has not worked because
“… countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transferring economic resources between eurozone members, which politicians have refused to allow through fiscal mechanisms they control. This is Germany’s worst nightmare.”
A voice from Germany’s power establishment openly admonishes a powerful central banker in a very public forum. The resolution of the Greek debt drama has awoken the spirits of past Presidents of the Bundesbank.If the traditional hard money crowd prevails the battle for European solvency will be an ongoing debate and provide great volatility for investors.
The battle for Europe’s financial heart is front and center. The main thrust has been and will be whether the good Bavarian Burghers are willing to finance the EU economy. Remember, they have never been asked directly about bankrolling the EU project. (It’s what another German financial heavyweight, Otmar Issing, referred to as “taxation without representation”.) Be prepared for a long period of continued volatility caused by EU politics over debt restructurings. Dutch Finance Minister Jeroen Dijsselbloem once proclaimed the Cyprus bank bail-in a template for future resolution of bankrupt EU financial institutions. One wonders if a Greek debt restructuring would become the template for the heavily indebted Spanish and Italian governments and their struggles against the strictures of fiscal austerity. There are so many KINKS in the entire European project.
***Tonight, at 9:30 p.m. CST, the Reserve Bank of Australia announces its interest rate decision. The bank is expected to leave the overnight rate at 2.5%. However, recent economic weakness and low capital expenditure in the mining sector may lead the RBA to cut rates by 25 basis points. If the RBA does cut rates, watch the Aussie/Kiwi cross for genuine market sentiment. If the Aussie strengthens versus the KIWI it will be a sign that the RBNZ is way behind the market and will have to initiate some proactive monetary policy.