Funny how one word can change the world. By his utterance of the word "template" yesterday, Mr. Dijsselbloem put European private investors on notice. Post-Cyprus, risk can and will be re-syndicated by the public sector going forward.
But while the reactions and retractions all make for great financial media entertainment, I am afraid they miss the bigger message from Cyprus.
Here is how I framed things to my clients last Friday, March 22, before the final "bailout" was announced:
The Impossible Dream
No matter what the specific outcome from Cyprus over the weekend, Europe has now completely lost its ability to manage its debt crisis. I don't say that to be shrill or to be overly dramatic. In fact, nothing would make me happier than to be completely wrong about this. Unfortunately, too many heretofore "impossibilities" have become realities this week.
As things stand now, all European creditor classes (both sovereign and private sector) are at risk of being bailed in and/or subordinated by "rescue funds." Markets and financial institutions can and will be closed for extended periods of time. Capital controls can and will be enacted. Sovereign exits from the EU can happen. The strong will require the punishment of the weak because it is now politically necessary.
I could go on, but I think you get the picture. For depositors and creditors it no longer pays to wait. In fact, the reverse is now true. First out wins.
But please appreciate that that my conclusion comes before any consideration for the specific underlying conditions of a particular European country.
Please consider what "first out wins" means for Italy, where today there is no effective government. Or Spain, where regional secession is already on the table, voters perceive the national government to be corrupt, and youth unemployment is at record levels. Or how about Greece?
Then, of course, there is the whole process of loss re-syndication which was fully exposed this week. If the crisis resolution process to date in Europe could have been already described as "on the fly," Plans A, B, and C added "work in process," "arbitrary," and "capricious" to the list. Thanks to falling social mood, rule of law has been overwhelmed by emotion and self-interest.
(See: European Loss Re-Syndication: ECB, EU, IMF All Playing the Game
This week's events in Cyprus have shined the spotlight on co-investment risk, and as one who has repeatedly written about the battle between "faced" and "faceless" creditors (and shareholders) repeatedly over the past five years, I cannot emphasize enough how much this week has reshaped the resolution process. Policymakers react to social mood, they don't change it.
(See: The Faced Versus the Faceless
and When Policymakers Become Extreme Reactionists
Taken all together, Cyprus must be the last sovereign crisis in Europe, because the next one cannot be contained. Any whiff of trouble will unleash a "first out wins" stampede with little European policymakers can do about it – if at that point they even choose to act.
The natural consequences of weak social mood have taken hold in Europe. What was a triumphant "us, everywhere, forever" celebration of regional unity 14 years ago has rapidly eroded into clear "me, here, now" self-interested, tribal behaviors across consumers, corporations, financial institutions, and sovereign nations. EU policymakers have become men and women without a region.
Now I can already hear, "But if the markets fall hard, German policymakers will have to respond." I agree. German policymakers will react, but I would be very careful to assume that their actions will benefit global investors. At this stage in the crisis, I would not be at all surprised to see a very nationalistic response from German policymakers aimed at isolating that country from European contagion risk and focused on German consumer and business interests. Germany will do what is right for Germany, not necessarily what is best for the EU or non-German investors.
Long-time readers know my thoughts on lifeguard fatigue
. Based on what I have read from northern European policymakers this week, more than fatigue has now set in. At a minimum, the north will require concessions before putting national taxpayer funds at risk for the benefit of non-residents. More likely, the lifeguards will leave the beach altogether. We saw that in 2008 here in the US and I believe we are about to see the same phenomenon in Europe.
Falling mood leads to self-interest. It is really that simple. And everywhere I look this week – Berlin, Nicosia, Brussels, Amsterdam, Moscow – it is everyone for him- or herself.
After this week, first out wins.
Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world." -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation
Position in SH, GLD, JPM
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