It seems we’re not much closer to a concrete resolution of Ireland’s debt problems. No aid has been accepted by the country as yet.
However, some sort of bail-out does look inevitable. A crack squad of fixers from Europe and the International Monetary Fund (IMF) are heading to Ireland for ‘talks’.
The desired fudge – for Ireland – is a deal that can be painted as a bail-out for the banks, rather than for the state.
Obviously, the reason the state is in this mess, is because the government rather foolhardily committed to stand behind the banks back in 2008. But this is politics. The Irish government needs to consider how losing control over its economic policies would play with the voters.
What makes this situation difficult is that they’re not the only ones who need to fret about what the voters think.
Eurozone history is repeating itself
If there’s any humour to be found in the whole grim European situation, it’s in watching recent eurozone history repeat itself almost word-for-word.
Bloomberg puts it well in its report on yesterday’s talks. “Finance chiefs from the 16-country euro region lauded Ireland’s budget cuts, echoing the rhetorical support offered in the early stages of Greece’s debt trauma before a rescue became necessary.”
We’ve got the same attitude towards markets and ‘speculators’ being rolled out too. Luxembourg Prime Minister Jean-Claude Juncker said that Europe’s governments would be able to “safeguard the stability of the eurozone.” He added: “Markets have to understand this decision in a proper way.”
What does that mean? Well, eurozone politicians have a habit of trying to gag voters. I don’t say this as a hardened euro-sceptic. When every country in Europe has to agree to any treaty changes, the last thing you can be bothered with is the hassle of getting all those voters to rubber stamp it too.
So understandably, they would like to gag investors too. “Stop driving up bond yields and drawing attention to the fact that these countries are bust,” is what Juncker really wants to say.
You can’t blame European politicians for thinking like this. They are used to fudge and compromise. Everyone at the table has to be able to walk away with their national pride intact, even if the underlying situation hasn’t actually changed much.
Why the eurozone’s problems are far greater than Ireland
Markets are harder to negotiate with in this way. Until they see some money on the table, investors won’t stop nagging away at suspect countries. And now that Germany has raised the threat that there will be no more blank cheques for bondholders after 2013, investors want to know exactly what that means.
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That’s why this situation is about far more than just Ireland. Jitters in one part of the market have a nasty habit of spreading. Greece has already criticised Germany for making life harder for the weaker countries. And Portugal and Spain have both been urging Ireland to accept help. That’s because they know that they are next in line for a kicking if something isn’t done soon.
As Carsten Brzeski at ING Group puts it, “the problem isn’t Ireland per se, but the fact that Germany and France have pushed for a treaty change with the option of a state default. The contagion effect will remain as long as there’s no certainty about what’s going to happen beyond 2013.”
None of this bodes well for markets in general. It’s hard to quantify just how bad a eurozone crisis could get. And that’s the sort of thing that puts investors off taking risk.
Beware – fund managers have been bullish
There’s another reason to be especially wary. Until yesterday at least, investors have been very bullish. James Mackintosh makes a few interesting points on sentiment in the FT’s Short View column this morning.
The latest monthly survey of fund managers from Bank of America Merrill Lynch suggests they are almost fully invested. Just 3.5% of the average manager’s portfolio is now in cash. “Cash has been this low only five times since 2000; on four of those, equities lost money in the next month.” And last week’s survey by the American Association of Individual Investors shows that private investors are at their most bullish since the subprime crisis.
Such extremes of sentiment are generally good indicators of approaching turning points. With China tightening monetary policy as well as the European mess, there are plenty of excuses for a correction. If you’re up for a spot of contrarian betting, then now’s probably a good time to be long the dollar (as my colleague Dominic Frisby has pointed out recently: The dollar still looks ripe for a rally). If you’re interested in taking a punt on currencies – and you understand the risks involved – you can find out more about spread betting on our comparison table.
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