Six months ago the world woke up to learn that the Syriza Party had been elected in Greece. It was a dream for some and a nightmare for the European ruling elite. Yes, there is a ruling elite that is very similar to what C. Wright Mills wrote about America in the 1950s. This is not conspiratorial but rather a sociological commentary and the ruling elite is not beholden to an electorate but operates with a sense of noblesse oblige. The Brussels eurocrats are in the image of Plato’s Philospher King, only there are too many Kings all believing themselves to be the most capable ruler. For two years I have written about that the European leaders feared REFERENDA more than anything for direct democracy was an affront to the wisdom of the self-anointed elite. The European project was too important to be left to the capricious voters.
In 1992, France held a referendum to approve the Maastricht Treaty, the main covenant of the present EURO, ECB and political structure of the EU. The French approved the treaty with a vote of 50.8% in favor, 49.2% opposed. President Francois Mitterand, one of France’s most popular leaders, stumped for the referendum. The razor-thin margin of victory scared the establishment and the idea of referendum on the structural policies of the EU contract were cast aside. The current Greek leaders appear to understand that the call to a national vote is the NUCLEAR OPTION that Brussels most fears. What will prevent the other countries in the EU from seeking the same approach in an effort to enhance their bargaining positions on issues of fiscal policy? IT IS NOT ECONOMIC CONTAGION BUT POLITICAL CONTAGION THAT STRIKES FEAR IN THE HEART OF ANGELA MERKEL. Again, would the good Burghers of Bavaria vote to provide monetary transfers to the European periphery in perpetuity?
As the prescient Bernard Connolly has argued for almost two decades, Europe will need annual wealth transfers from Germany in far greater amounts than were provided for in the 1919 Treaty of Versailles. (PLEASE GO AND BUY THE “ROTTEN HEART OF EUROPE.” The $10 is equivalent to one tick in the BUNDS for all you at home gamers. Every finance class and contemporary political science class should be reading this book. And every financial professional should be buying the book for their clients. It is the ultimate gift for the investment world.)
Results from Greek Prime Minister Tsipras’ late Friday decision to call a national referendum on any possible agreement with Greece’s creditors:
1. Global equity markets were sold, tried to rally but even the SPOOS closed on their lows, just above the 200-day moving average. The U.K. FTSE closed below its 200-day on Friday and continued its downward path today. The German DAX closed down almost 4% as did the Chinese stock index. If Greece had not infected the global equity markets with political uncertainty, the interest rate cut by the Chinese central bank would probably have put the equity markets in rally mode.
THE RULING ELITES, DAVOS GANG, are not really financially astute for the Greeks could have kicked the proverbial can down the road for a mere 7.5 billion euros. Today’s market response to the new uncertainty probably wiped 500 billion in value off global equity markets and raised borrowing costs for the less credit-worthy countries of peripheral Europe. Egomaniacs, like a membership in a quality credit card company, has a price to be paid.
2. European bond markets were the most volatile of places as the BUNDS were BID from the opening as Germany is deemed the most solid credit in Europe. Italian, Spanish and Portuguese 10-year yields were all higher by 25 basis points as the lower grade credits lost some sense of too big to fail, or, too big for Germany, and, of course, the IMF to insure. Mario Draghi has declared to do “whatever it takes” to preserve the euro and thus the EU project. Pushing Greece out of the EURO will test Draghi’s and Merkel’s ultimate commitment to do “whatever it takes.”
Today’s bond trading was not similar to July 2012 and here’s why: The 2/10 yield curves. In July 2012 the markets put pressure on the Spanish, Italian, Irish, Portuguese and Greek two-year notes, which drove the CURVES FLATTER, an across-the-board fear of solvency of the so-called PIIGS. Today, the 2/10 curves steepened as the selling pressure was on the long end of the curve. (The issue of European solvency is not at the forefront … YET.) If Greece leaves the euro and the EU entity, then the UNION is not indissolvable and the premise of zero risk premiums for all euro debt is called into question. Tack that onto the cost of arrogant intransigence.
3. The trade in foreign currencies was wild as the EURO opened very weak and spent the day rallying and actually closing 0.8% higher, or almost 3.0% off its overnight lows. The Swiss franc was initially weak as the Swiss National Bank (SNB) intervened in the early night trading to repel buyers of the FRANC searching for a haven. The SNB posted a sign on its platform, Beware of Rabid Dog, but as the pressure on the EURO subsided, the SNB backed off and allowed the franc to rally in concert with the euro, leaving the EUR/CHF cross at 1.04. My guess is that the ECB was in buying euros to prevent a massive downward move and thus heightening investors concerns about the durability of the EU. In a game of giant egos, Mario Draghi has been tasked to save the entire EU project and with it, the euro. Volatility will be served hot this summer.
Tags: Angela Merkel, Bunds, DAX, ECB, Equities, EU, EUR/CHF, Euro, Greece, Mario Draghi, Masstricht Treaty, SPS, Swiss Franc, Tsipras