Greetings From Club Med
Guy Monson packed his swimming shorts, sunscreen and FT as he and a team from Sarasin took off to the Mediterranean to see what austerity means for the PIGS
POLICY DYNAMICS HAVE markedly improved in the past six months. As recently as last June, the consensus view on both sides of the Atlantic was that monetary policy alone could not be a panacea and fiscal policy needed to play a more constructive role in the recovery. Jean-Claude Trichet was raising rates in Europe to ward off inflationary risks, while in the US Ben Bernanke appeared to have put further monetary ‘initiatives’ on hold.
But as political wrangling over budgets and fears of a Greek default sent the financial system into a deep freeze, the world’s central bankers blinked and backtracked. Over the course of just a few months they have put into place aggressive liquidity measures which are not only substantial but also likely to remain in place for the foreseeable future.
The measures range from arrangements for dollar swaps between all the major central banks, unlimited funding for three-year money in Europe, asset purchases in Japan, further purchases of gilts in the UK, and a clear signal from the US Federal Reserve that short-term interest rates are unlikely to rise until 2014, even as longer-term rates remain underpinned by Operation Twist.
For central banks, policy risks have never been more asymmetric. Doing too little to prevent a second recession would send the already high debt burdens towards seriously unsustainable levels; far better to err on the side of easing policy too much, and improve growth prospects, than not do enough. Calibrating new and untested policy tools is difficult at the best of times. Again, better to err on the side of doing much more than is needed than deal with the effects of an aborted recovery.
Policy-makers will try to compensate for a weak recovery with aggressive liquidity commitments, hoping that they can improve growth momentum. If the Greenspan era was defined by central bankers taking away the punch bowl just as the party was starting, the Bernanke era is one of adding to the punch bowl to make sure the party gets under way. Punch-drunk valuations for risk-free assets are very much part of the cure for the economic malaise; the hope is that some of the liquidity spills over into the broader asset spectrum and eventually into the real economy to stimulate activity.
IN THE MEANTIME, to start to gauge the longer-term prospects for stability in the eurozone, and see for ourselves the actual risks of contagion, a team of us from Sarasin and Partners have travelled to Athens, Lisbon and Madrid. We have met academics, politicians from government and opposition, and in particular some of the key technocrats working alongside the Troika and the new government in Spain. Together they are implementing some of the most ambitious and politically challenging restructuring programmes in postwar Europe.
Wherever we were in Athens, the Troika seemed omnipresent; it drafted the hugely ambitious privatisation programme, set the timetable and identified the proceeds; almost every major policy initiative required its assent, leaving the impression of an economy under external ‘administrative control’. For a country that’s home to the oldest democratic traditions, the frustration and anger at the loss of domestic autonomy were evident. The political push-back, as well as the sheer magnitude of the austerity and restructuring burden on ordinary Greeks, prepared us as investors for much of the recent high drama in Brussels and Athens.
In Lisbon, the plans to transform radically the Portuguese economy across almost every field are astonishing, with a privatisation timetable that would make Mrs Thatcher blush; the scale, timing and pace of change, along with co-ordination with the Troika, were simply breathtaking.
In Madrid, at the finance ministry and debt management office, there was almost visible relief that the ECB had acted so boldly with its bank support programme; the new government surprised markets and the population with an immediate 6 per cent increase in income tax, coupled with ambitious changes in labour laws, budget controls, and harsh new disclosure and capital requirements for bank real estate holdings.
These trips showed us the depth of economic planning and energy that has gone into the restructuring, not just locally, but by some of the brightest minds in Europe and the world (via the IMF and others offering technical teams). As for so much of Europe, though, growth remains the challenge.
A hyperactive ECB alongside better coordinated global policy does make the world seem financially safer. Markets have reacted robustly, but while our thematic managers will be delighted to focus more on fundamentals than on politics, these European visits clearly report the scars left on profitability from the summer’s dramatic slowdown.
Guy Monson is CIO and managing partner of Sarasin & Partners