x Abu Dhabi, UAETuesday 23 January 2018

EU's monetary crisis guarantees that even winners will be losers

The Insider The euro bailout has already been the most expensive placebo in global economic history.

Rumour has it that the ghost of the First World War settlement at Versailles has been spotted in various capitals of late: Athens, Dublin and now Lisbon.

Only in whispers is its presence in Madrid mentioned and a solitary person undistracted by the daytime TV political shenanigans in Rome likewise claimed to have seen the albatross's visage.

Condemned to repeat the past having learnt little from it, the German and French governments are determined to punish fiscally loose euro members. Over three quarters of a trillion euro's worth of German and French bank loan exposure is at stake and that is the heart of this crisis. That the debtor nations cannot afford to pay seems not to have been factored into account.

Greece has debts of about 160 per cent of what it earns annually, but is expected to spend 9 per cent more than it earns this year at a time when its income is dropping.

Putting this in perspective, let's take a person earning Dh300,000 a year who has just taken out a 10-year mortgage on a property costing Dh480,000. If this person is overspending their income by nearly 10 per cent while their income is falling, the lending institution is going to either refuse to deal with them or will repossess the asset.

There are shoots of goodness in this crisis for Greece. In its desperation not to default, it is restructuring its economy with a view to flexibility, shining a light on its large black economy and ensuring all contribute fairly with regard to taxes.

It will still default on its debts, be it through a face-saving euro zone restructure or meltdown. The markets are currently pricing its bonds in the 13 per cent range, meaning all readers of The Insider get a far superior rate on a car loan.

Ireland has sadly decided on a fifth injection into its banking system.

This particular bailout has already been the most expensive placebo in global economic history: €70 billion (Dh368.7bn) in a country where GDP (in constant prices) was €166bn last year. Commentators believe that there is more to come, as do the markets, pricing bonds at an unsustainable 10 per cent.

The new government's promise to take a hard line with bondholders has been abandoned. Irish government policy has no clothes and is being dressed instead by the European Central Bank (ECB) from Frankfurt.

Portugal appears to have thrown in the towel, with its finance minister, Fernando Teixeira dos Santos, admitting the truth to the world from behind a press statement. Portugal's bond yields have overtaken Ireland's, speeding into double digits. As its young and unemployed professionals emigrate to the country's ex-colonies of Brazil and Angola, its government has collapsed and credit agencies have slashed its rating by multiples.

Leadership is lacking when most needed, not helped by a law that requires 60 days from the calling of an election to its holding; scheduled for June. A (normally) manageable bond redemption, will almost certainly be now underwritten by the ECB.

If the percentage trend in these bond yields were patient thermometer readings in a hospital, the treatment would quickly be changed before fatalities occurred. Instead, the ECB burst onto the scene and increased interest rates to counteract rising inflation among its core membership. Good for Germany and maybe a mercy killing of the PIIGS's (Portugal, Ireland, Italy, Greece, Spain) euro membership.

Keep in mind that every 1 per cent increase in interest rates means €91 extra a month on an average mortgage of €170,000. Portugal's GDP last year was €162bn, which would mean an extra €86m a month for each 1 per cent increase in the bond yield at a time of falling income and overspending. The last time I wrote, the rate was in the 6 per cent range and it has now almost doubled.

Attempts to cut deficits are being offset by the increased cost of borrowing and rising cost of social security nets for those falling into hard times as their economies crumble. This is treadmill economics and the meter is running out of credit.

What plagues Portugal and Greece is different to the property fever Ireland and Spain share, except Spain's is - in value terms - volcanic and thus beyond the deep pockets of even the German's.

Spain's GDP last year was €670bn and it ran a deficit of 9.1 per cent. The endgame to this drama should be played out here, fitting in the home of El Gordo (the big one), the largest lottery draw in the world. Intellectuals, economists and politicians have begun to be wheeled out in the media to say that Spain has no issues, similar to what their counterparts in Ireland and Portugal said before.

Such is the considered domino approach the markets are taking, Italy and Belgium have been for the best part ignored, but that is still to come.

As there is no justice in victor's justice, there is no recovery when creditors recover all their dues.

From a strictly local perspective, There is no reasonable economic case that has been made for a GCC common currency. Surely what is happening in the euro zone proves the case that without political union, any such scheme is destined for doom.

David Daly is the chief financial officer of the Sifico Group