Unaccustomed as we are to discussing the American Psychological Association's 12-Steps to recovery, Credit Suisse have produced a clarifying reduced set that enables us to better judge the road being taken by the heterogeneous set of deaf-dumb-and-blind monkeys currently 'solving' the European addiction issues. The critical underpinning, that we have tirelessly brought to the public's attention, is a fear that the illustrious leadership of our world are not even grappling with the real issues. CS tries to answer the following deeper questions: Are we recognizing the cost that is coming to the core, multiplying as we wait? Are we building credibility and starting to stem this overwhelming tide, or are we pretending, taking the target of our addiction from whatever source we can find it (latest target: the IMF) in the interests of a brief respite?
Policymakers, led by Chancellor Merkel, have started to recognize the existence and nature of the problem. We are irresistibly reminded of the steps towards recovery from addiction; the addiction in question being the par pretense and curing debt with debt.
Chancellor Merkel said last week, “The summit won’t be the final point where we regain the confidence of others, but it will be a stepping stone, a marker on the road. All of the sins of omission and commission of the past cannot be undone by waving a magic wand.”
This reduced set of 'steps' is required for investors to be confident that leadership are moving forward positively as opposed to hiding their stash in a top cupboard for later - or addressing the wrong issues.
Steps 0 to 2 seem most critical for now with Credit Suisse pointing to the following for Step 1:
...an acid test for any discussions, and the reason we expect disappointment, is whether the proposals:
1) Seek to cure debt with debt / confuse the markets into seeing solvency created for free / maintain the bezzle / damage credibility; or
2) The opposite and provide a visible mechanism for bringing costs of the order of a large fraction of a trillion euro or more to the core.
And Step 2 - acceptance that the market can help - is also very evident from recent actions:
the [CDS] ban may have a narrow target of the mythical “evil New York hedge funds” but is essentially a paper tiger, in our view. Unfortunately, it shows a mind-set of confronting markets, as does the truly bizarre proposal to regulate ratings agencies’ opinions of sovereigns.
Commission consultation on “eurobonds” suggests a slow change in this mindset, but we submit that, unless markets are enrolled as allies, rather than marks to be fooled in an ever-accelerating game of financial three-card Monte, which is what many proposals remind us of, progress is impossible.
In conclusion, CS wonders
are we recognizing the cost that is coming to the core, multiplying as we wait? Are we building credibility and starting to stem this overwhelming tide, or are we pretending, doing the sovereign equivalent of lending our clients money to buy our shares, as has emerged this week in one corner of the banking system. (Why? What’s wrong with that? We took the shares as security…)
So we anticipate disappointment, but we have the first glimmerings of hope that the long road back is being recognized.
Unfortunately, we do not think the market thinks in these terms just yet, and may even be pleasantly surprised (or at least caught in shorts) by some sort of crazy EFSF bidding process. The addiction would be fed, but the rush would not last for long, and the eventual cure will be even harder.
But one day we will not be disappointed; bullets will be bitten, cold turkeys endured and the markets will be enrolled as allies in a financial reconstruction effort not seen for 60 years. We do not want to be in the way of that rally, but it does not seem likely that it will come next week.