just in e-mail tray, and i quote
J,
Was great having dinner with you guys and pondering amongst others on the (sad) state of the world, ...
Just left the breakfast briefing with Jim Walker and I promised a short summary. One think I love about Jim is that his nice scottish accent makes even the most terrifying outlook sound charming;) THere was also a Stanchart economist talking to maintain glimmers of hope;)
The title of his slides gave a hint as to his views: "Euro: finished". I also liked the title of another slide: "Euro: a basket case, not a basket of currencies" or his answer to the question about his view on EUR/$: "parity in the near term, then... poooof". "Pooof" being the explosion of teh Euro as we now it and the formation of a new-Euro for a set of mostly northern-European countries around Germany, excluding France.
What people are missing he says, is that the heart of the problem is not in the periphery, but in France and Germany where banks have assets-to-equity rations of 50-to-1 and high exposure to sovereign debts (BNP's asset base is as large as the French GDP).
Also, a "managed" default on sovereign debt(s) is at best only half the answer. Ultimately, Portugal, Ireland, Greece, Italy, Spain (PIGIS) need to regain competitiveness. Two ways to get there: deflation of growth. JIm believes that a (necessarily long) deflationary adjustment (lower wages, lower asset values...) is not viable in a democratic regime (he cited the example of HK's deflationary experience 1998-2003). Now growth requires one or several of Government Spending, Consumption, Investments and Exports. Gvt spendings need to come down, consumption unlikely to go up when unemployment goes up, hard to see companies invest in such an environment. That leaves export which has been the traditional recovery route fueled by currency revaluations, a toll not available to individual EURO zone countries.
Jim showed a chart of what woudl be an "equilibrium" Euro/$ exchange rate for various countries: Ireland and Italy are actually pretty close, for Greece it would be 0.3, Portugal 0.5 and Germany 2.3....
On France, Jim stated that the unless entitlements can be reformed (unlikely if one thinks back on the uproar on increasing retirement age from 60-62), France will be the most indebted nation in a few years
A few more snippets:
don't buy into current rally!Potentially a short period of more calm weather with Euro-Summit, G20 meeting and not Greek debt maturing... (8b of great debt matruring at year end)On a positive note: Jim coming out with overweight view on HK market: PE's at very low levels and balance sheets very healthy (as are S&P 500 balance sheets)Expect a sharp correction in markets when a haircut on greek debt becomes official
Cheers, |
