Evercore Pan Asset

As we expected, the Finance Ministers and Treasuries did what it takes to avoid an immediate rolling crisis of sovereign debt within the Euro area. Indeed, learning from past crises, the authorities did more than it takes to ensure market support. They announced €750 billion of facilities and guarantees, enough money to see Greece, Portugal and Spain through the next couple of years if they are denied access to public markets at sensible interest rates.

This has been a most important period in the evolution of the Euro. To run a successful single currency there needs to be a central government for the currency area that controls overall levels of public borrowing. Euroland was meant to have this through the system rules, requiring states to keep to 60% debt to GDP or lower, and to limit annual borrowing to 3% of GDP. Unfortunately the EU authorities either lacked the will or the means to enforce these strict but sensible conditions. Even before the recession hit, several EU countries were over the limits. The recession, with its big impact on revenues and spending levels, ensured many overran. The markets decided that in cases like Ireland and Greece the excess borrowing was unacceptable, and forced action on the national authorities.

In responding to the crisis Euroland now has mechanisms to bring spendthrift states to heel. If they wish to borrow from the EU and international facilities they will have to submit their budgets to a new collective discipline, with the EU authorities requiring cuts and better figures.

The crisis has also led to changes in the operation of the European Central Bank. It has always had the power to accept sovereign bonds from member states as assets or collateral. Now it has expressly stated that it might buy member state government bonds if needed. It at last has the range of market intervention powers that have been much used by the Fed and the Bank of England during the crisis, to seek to augment money supply and ensure cheap finance for government activities.

The main winners from the crisis are those who want a more integrated Euro area. The main losers are the electors and political parties in member states who value independence. Mrs Merkel has found that the price of her part in the Greek rescue is to lose her majority in the Upper House, as electors have not been impressed by the sight of German taxes going to help out Greece. Now the ECB has new operating rules, there will be more scope for inflationary policies that would suit the high debtor Euroland countries. Germany will doubtless be watching the use of these powers like a hawk, as she will not approve of seeking to get the weaker countries out of the mess by inflating their way out of their obligations.

We held to our balanced portfolios through the mini crisis, as we expected a favourable if temporary resolution. Meanwhile, back in Britain, the electors have chosen a hung Parliament. We expect a Conservative/Liberal Democrat agreement to emerge from long talks. However, the resulting government will be very constrained by what it can do, based as it is on two partners who disagree about much.

We continue to think the UK is risky owing to the political position and the very high public deficit. We say continue to avoid UK government bonds. Large UK companies mainly operating abroad are immune to the worst of the problems and are still quite good value as the UK market offers you some compensation in yield for the obvious political and financial complexities. BP has its own problems which have also affected the index, and these will not be under control until the well is capped or tamed.