We are in a period of great political uncertainty. The Greek election is a wake-up call for all the established elites and their sycophants who drink high-priced alcohol to celebrate every new IPO and record high made in global equity indices. The recent victory of Syriza is a call to arms by citizens that have grown tired of broken promises and inept leadership. Fringe parties achieving electoral success in a very short period of time is a critical sign of electorates moving away from the establishment as record-high unemployment has continued for several years and the continued pain of austerity has rendered the European middle class a group without hope. The leaders of Syriza have promised the Greek people that they would throw off the burden of massive debt payments while being enslaved to a policy of FISCAL CONTRACTION.
Prime Minister Tsipras and Finance Minister Varoufakis are not the tools of Brussels as were the previous Greek politicos. Remember, in 2011 Prime Minister Papandreou had promised the citizens of Greece a referendum vote on the bail-out package but when the Eurocrats and other European leaders voiced their displeasure for fear of a contagion of referenda, Papandreou was forced to rescind the direct vote offer. It was Brussels’ involvement in Greek politics that allowed for the emergence of political parties of the radical left and right.
The Brussels elite also forced the resignation of Prime Minister Berlusconi and parachuted in Italian/Brussels technocrat, Mario Monti, to install the austerity budget demanded for any bail-out of Italian finances. Monti was never elected but was named by Italian President Napolitano (a week after he was named by the President to be a Senator For Life). The desire of Brussels to control the outcomes of political events provides the fringe to politic against the established elites, especially as the ECB and Brussels-imposed austerity programs have failed to yield any economic success. Tsipras and Varoufakis have a strong hand to play as they strive to provide relief to a nation in economic depression.
The Greeks are playing a game of brinkmanship and the European elites are losing as electorates become more disenchanted with the policy failures of the established parties. If the Brussels elites continue to disenfranchise the electorates of the individual nation-states, violence as a political act will surely arise. The ECB Governing Council acted today to drive uncertainty into the Greek financial system, but, as usual, the punishment was hedged because the ELA is still open to Greek banks. Tsipras and Varoufakis are not for turning. The trains are set in motion as in August 1914. Does Europe have any leaders capable of bringing sanity to this madness? As the Rolling Stones said, “War Children, it’s just a shot away, shot away.” Political disenfranchisement will ultimately lead to an assassination of some political figure. It always has and it always will. It’s those disaffected citizens in search of revenge. And the equities rally on….
***Something to watch for the markets tomorrow: If there’s news that the ECB is challenging the collateral basis of Greek sovereign debt then the new soft peg of the Eur/Chf (recently leaked to the Swiss press) of 1.05-1.10 will be tested at the 1.05 level. Also, watch to see if the Italian bonds (BTPs) come under pressure as fallout from the ECB‘s decision may affect the “lower grade” credit. These are just some possible clues as to the impact of the decision.
***Open letter to Arthur. (In response to your point about China devaluing the yuan.) Many people are thinking that the Chinese government will devalue the currency in an effort to combat the appreciation of the YUAN against all currencies but the U.S. dollar. I have looked at the yen/yuan charts and am aware that the yuan has reached very strong levels against the Japanese. This gives analysts a sense that the Chinese will be forced to respond. In December 1993, the Chinese yuan was at 19.3 Yen to a YUAN. On January 1, 1994 the Chinese devalued the currency by 50 percent, 5.8 yuan/dollar to 8.7 yuan to the dollar, and, of course, the YUAN devalued against all major currencies. And, January 1 was also the beginning of NAFTA. Coincidence? Hardly! By April 1995 the YUAN dropped to 10 yuan to the yen.
In 1998 when the YEN was weakening against all major currencies, the YEN/YUAN rate was back up to 17.49 YEN to YUAN. The Chinese were disturbed by the YEN‘s weakness and just prior to President Clinton trekking to Beijing, the U.S. intervened in the currency markets to BUY YEN, which surprised Japan and many other market participants.(Note: President Clinton did not stop in Tokyo, further infuriating the Japanese). Ralph Atkins reinforced this brief history lesson in a January 23 article in the Financial Times titled, “Why ECB Action Makes Peace Less Likely In Global Currency Wars.” In the insight piece, Atkins writes: “When the Asian financial crisis struck a decade later, Robert Rubin, then US Treasury secretary, agreed action to strengthen the Yen, despite arguing a strong dollar was in the US interest. Then-as now-the fear was of a weak yen triggering retaliation by other Asian countries,notably China.”
I know that following this logic would mean that the Chinese will seek to weaken the YUAN, but this time it is truly different. The Chinese were just beginning its development and was copying the Japanese mercantilist model. The U.S. was wiling to placate Beijing as U.S. corporations were seeking inroads into the Chinese markets, thus making the Clinton White House a willing accomplice for Chinese policy. Now it is a different China and I will side with Professor Michael Pettis. If China is going to reorient its economy toward more domestic consumption then it would behoove it to keep its currency strong, enriching its domestic consumers.
If you believe China will devalue the YUAN, it is best to be short global equity markets for a YUAN devaluation will export price deflation all over the world. The Chinese are cognizant that global growth is weak and thus a competitive devaluation will be met by severe political backlash, especially from Europe. It is a good time for China to reorient towards domestic consumption and soak up that huge amount of excess manufacturing capacity. It is in the shadow of Pettis that no devaluation take place. Again, politics is trumping economics.
Tags: ECB, EU, EUR/CHF, Europe, Greece, technocrats, YEN/YUAN
February 5, 2015 at 2:18 am |
great, thanks!
February 5, 2015 at 11:32 am |
Yra- Do you think that the Greeks may think their best move is to leave the EU and repudiate their debt?
February 5, 2015 at 12:27 pm |
Shocked –no that would be the nuclear option but certainly doable for the cost will be greater for the others.Spain and Italy should not be criticizing the greeks as they have been doing
February 5, 2015 at 12:55 pm |
Yra- but the EC seems to be backing Greece into a corner.
If they leave the EU, I think the new leaders would be seen as heroes at home, so maybe not that hard for them to do.
If Greece continues to struggle under the debt load, “peasants with pitchforks” will soon be at the gates.
February 5, 2015 at 2:57 pm |
Shocked–you are dead right but it is not in anybody’s interest at this time for that—the world has not the growth for the stomach of a crisis of solvency risk in the European peripherals