Saturday, 16 July 2011

Sunlight Fades From EU Summer, Hairy Bankers To Holiday In Caves

Well, that's it folks. It's mid-July, and we can all head for the beach, the hills or the village boules court, secure in the knowledge that only 8 banks failed European Stress Tests with a total shortfall of €2.5bn.

Everything will be here when we get back.


I mean, it's not like Italy's predicament is putting any strain on the zerozone, or the US is in the process of bursting it's 'debt ceiling' and teetering on the edge of a downgrade by those ever-reliable ratings agencies, is it?

And even if the bigger picture does take a turn for the worse, surely the hacks will finally stop hacking celebrity voice mails and warn us?


If we're lucky there might be some hand-wringing and dithering over uncertainty about what's to be done; before a staccato burst of post-Lehman style, over-the-weekend bail-outs, bail-ins sales and mergers involving banks, insurers, pension funds and even whole countries. Greece will become an EU-protectorate - no sovereignty, but a great place to go sailing.

But what's really so uncertain?

When a borrower - be it a country, a bank or anyone else - is insolvent, there's a stark choice for lenders to make. That choice is not between a higher and lower rate of interest or return on your principal. It's about how much of your principal you are prepared to lose. All, or some? A 'haircut' you must have. Like the one Nicholas Brady arranged for lenders to Latin America in the '80s. Louis Gargour of LNG Capital (with whom I found myself chatting about Brady Bonds and short-selling on Thursday night) explains this nicely in the clip below.

In Europe we lack leadership. We lack decisiveness in the face of uncertainty. And, without either, there's little official appetite for sunlight - for hard facts. Officials who are supposed to be 'in charge' placate each other with 'stress tests' and other PR puffery. In effect, they would rather live in the dark and let their hair grow, than lead the way to the barber.

I presume they will holiday in caves.

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