Evercore Pan Asset

The last G20 meeting did not save the world. The last time one did so, it entailed nationalising or supporting large banks. This approach delayed the adjustments and burdened states with huge debts that today are proving difficult to handle. This G20 was more realistic. The world has run out of money to fix the big black holes in some banks and state budgets.

The G20 showed up three fault lines. The emerging market power houses did not accept the script that had been prepared by their French host. They said “No” or probably not to putting large sums of their hard earned money into a fund to buttress weak Euro area states. They asked why richer Euroland could not pay its own bills and make its own internal loans to Italy and Spain. The US did not seem much keener on the idea of helping bail out distressed Euro area countries either.  The assembled powers did agree to increase the fire power of the IMF, but delayed sorting out the amounts until 2012. They seem in no rush to give the IMF the huge resources it would need to be lender of last resort to Euroland.

Within the European membership there was a further brace of disputes. On the eve of the summit Greece was called in by France and Germany and told it should not proceed with a referendum. Greece just had to accept the proposed austerity and loans programme. The Greek PM accepted these terms, and promptly lost his job.  Italy was required to submit her budgets to quarterly surveillance by the IMF, in a snub to her Prime Minister who is clearly no longer trusted.  Meanwhile France and Germany remain at loggerheads over the role of the European Central Bank. The French President would dearly love that bank to do what the Fed and Bank of England have been doing. He probably reckons that if the ECB printed a lot of Euros over the next six months and bought large quantities of problem state bonds with the money, it could see him through safely to his election. Frau Merkel reminds him that Germany does not agree with money printing or bond buying on a large scale. Germany has unhappy memories of rapid inflation and has written strict policy into the Treaty and founding statutes of the ECB.

The result of all this is continuing chaos. Greece has formed a government of national unity, but it is likely to be just a caretaker regime. Pressure is mounting for Italy to replace her elected Prime Minister with someone else. The Italian and Spanish bond markets are forcing those countries to pay more to borrow. There is open talk of Italy being forced into an EU/IMF package. The sums involved would be large indeed. Germany is reluctant to become the guarantor of yet more soft loans to countries which spend too much.

None of this is good news for European investment. There would be a serious rally in shares and some bonds if German doubts about the ECB creating money and buying weak bonds were overcome. Without a more active Central Bank the situation is likely to deteriorate faster. With a more active Central Bank it kicks the can down the road for a bit longer, but it does not solve the underlying problems. Europe is not competitive enough and is living beyond its means. These basic troubles have to be confronted sometime. Borrowing a bit more and changing a few governments makes little difference.

 As published in Investment Week