Beauty is in the eye of the beholder…
De gustibus et coloribus etc. No big fuzz, it’s all about perception and if you wrap it up nicely, you get away with it, no matter the content of your message. In the case of art, this certainly applies with the good old adagium “value is what a damn fool will pay for it” and you will always find fools to sell the stuff to. At the “right” price, speaks for itself. Unfortunately in financial markets, if you have perception running against you, it can turn out bad. And in these days of financial stress, you pay cash and you pay dear. This was one of the main messages which was confirmed yesterday at a diplomatic gathering I was fortunate to assist. It concerned an informal meeting discussing the future of the eurozone and above all how we Europeans are handling the situation. And alas, also here we have perception running against us, confirmed by an Irish representative of ECOFIN and re-confirmed over he weekend in Mexico where G-20 ministers gathered : “While Europe took 2 years to make decisions on various fronts, we in 1995 (Tequila crisis) made decisions with the US and the IMF in 2 months to avoid catastrophe”, dixit Luis Tellez, CEO of the Mexican stock exchange.
On the other hand, perception can run against you in other ways. If you are unlucky and you have a predominantly Anglo-Saxon professional press running against you, you have a problem on your hand. And then come the numbers – on a selective basis – and the track record of reputation. Let’s start with the following simple straightforward graph which explains the fuzz at first sight :
The unfolding story ever since April 2010 is that certain eurozone economies are loaded with debt/ high deficits and can’t survive unless some huge structural reforms are made. The same holds for some anglo-saxon economies but for the time being never mind, remeber the eye of the beholder. And certain creative solutions – such as EFSF – won’t do the trick. So let’s play the weakest link and we Belgians experienced a similar “moment supreme” de stress late November. Belgium and certainly Italy made an attempt to calm things down by a first round of structural measures. The ECB LTRO operation rewarded these efforts and so we are of the hook for now. But still all eyes are focused on the big elephants in the room, which means in the case of EMU : Spain, and above all, Italy. If these countries are not ring-fenced one way or the other, the story ends, simply too big to save. Now you can find a lot of arguments advocating this theory, but I am still surprised about the fact that it’s not a complete story. If you would make the story complete, it would look something like this :
And if you look at the above picture, it becomes a different ball game in many ways (and if you would include financial sector leverage, we would have to adjust the y-axis for the sake of the UK). Remember that this crisis was triggered by private leverage and that the already very delicate equilibrium of public leverage was broken in 2008. But taking all kind of debts into consideration, it suddenly seems that Italy is not such a bad student after all. Take for instance the case of private sector leverage and household debt. We have an Anglo-Saxon phenomenon here of high leverage and in some cases an absence of bubble bursting in real estate (Canada-Australia). As for core-Europe, it’s also remarkable that the Netherlands in particular are quite vulnerable, confirmed some weeks ago by a study performed by the Dutch Central Bank. Now if the current exercise of deliverageing will take more than just a decade to normalize, accompanied wit periods of slow growth, this graph will pinpoint immediately where cleaning up of balance sheets will occur and hence the hurt will be felt. And when it comes to private consumers in the euro-zone, may be it won’t be in Italy for that matter. I made a simple exercise over the weekend by visiting Italian real estate websites, this under the motto that you can always dream about your retirement days and where to spend them. And leaving of course Tuscany aside – privileged for those who are willing to pay so-called “value” – the outcome was quite surprising to say the least.
For a truly good analysis of real debt and all its consequences on growth, I would like to refer to the following interesting link :