It’s again become impossible to know whether to laugh or cry. One day the markets react with disappointment to ECB President Draghi’s vague statements (despite his declaring unequivocally that there is the possibility of buying up government treasuries on the primary market) – the next day markets are bursting with euphoria when the Spanish premier says he would consider accepting such aid from the ECB. Unsurprisingly this logic defying display is completely over the head of the man in the street.
In the meantime, of all the CEE countries, Poland is looking good. Bond yields are at record lows. The government recently issued ten year bonds at 4.7%. This is low compared with such countries like Italy and Spain which have to borrow from the markets at 6 and 7 %.
This is also not much higher than the current rate of inflation in Poland. In buying Polish bonds, investors take into account the likely inflation rate a few years from the date of purchase. Such optimism against a background of pretty dynamic prices bears witness to a high degree of optimism which leads to results such as the record level of the zloty to the euro (now around 4 euro – a level not seen since August of 2011). We still can’t tell if this is a passing phase or a stable trend. I would like it to be the latter but based on experience this is unlikely and as all passing phases, this too shall pass. I have enjoyed the comments coming from City of London financiers who are capable of singing the praises of the Polish economy (relatively low debt, economic growth, strong domestic demand, a stable and responsible government) while closing zloty positions, citing slower growth, problems in keeping the deficit in check, a large portfolio of Swiss franc debt and a growing number of foreign creditors holding Polish bonds. The market situation dictates the way events are interpreted. When the euro falls, it will bring the zloty down with it. We should view any mood swings with caution and not fall prey to euphoria. It’s fairy dust and the same goes for the reactions to ECB statements or the lack thereof.
In the markets one thing always holds true: the financial markets like liquidity and will nearly always react positively in the short term when there is extra cash available whatever its source. But according to another basic economic principle, monetary policy cannot create economic growth all by itself. The appropriate economic policy can neither support nor hamper economic growth, but will not create growth out of nothing. Mario Draghi is perfectly aware of this in appealing to governments to implement their planned reforms – liquidity will depend on this. But as usual no one is paying attention. The majority of politicians and market players are concerned with getting cash flowing here and now. This will probably soon happen – Draghi just needs a little time to agree the principles with his German colleagues. Then pre-announced moves can be put into action. Even if he does not manage to thrash out an agreement, he will not leave Spain and especially not Italy without in the lurch. The only thing is that this doesn’t solve the crucial problem of growth although undoubtedly most politicians will declare an end to the crisis as the ECB starts buying up Spanish and Italian bonds in bulk until …
… until market indicators worsen once again or until it is obvious that the market still doesn’t believe in the integrity of the euro zone and places France into the group of countries which have to be financed by the ECB. What then awaits is a repeat of the current discussion, with the risk that there will be much more at stake – this time the very raison d’etre of the common currency. The problems of France will automatically become the problems of Germany with all the consequences including partial loss of credibility and German bond yield increases. Now German bonds are considered to be the safest in the world. In the face of such a scenario, even Germany might opt for the collapse of the euro zone because it would just cost too much to prop it up. Unfortunately the next steps in the race against the clock to save the euro are increasingly costly and riskier by the day. We should repeat ad nauseam that the countries involved must beat the recession alone. This is possible – one only need look to the example of the Baltic countries, to Ireland, and surely soon to the UK. The advantage that these countries have is that they believe in one fundamental principle which is not the case in the countries of southern Europe – you have to go it alone and not count on anyone else.