On joining the board of a FTSE 50 company a decade ago, I recall a wizened old director had a favourite phrase, ‘People prefer the certainty of misery to the misery of uncertainty.’
He would wheel this phrase out whenever we had to make difficult decisions particularly in relation to job losses and restructuring. At the time, I thought it a little trite and convenient but actually, over the years, I have come to agree with it’s underlying meaning.
It’s undoubtedly true in relation to capital markets and it’s a truth that governments should minded to when considering the next steps in the Greek and wider Euro crisis.
I predicted in this blog a couple of months ago, that the lack of political support for austerity measures would probably spell the end of the latest rescue plan and ultimately Greece’s exit from the Euro. Whilst it gives no pleasure to see that materialising as Greeks decide to return to the polls today, thoughts do turn to what should happen next.
Most of the public political comment centres around the difficulties that will be encountered by the contraction of the European market and whilst it is true that this will be a big issue, it pails into insignificance compared to the issue that politicians don’t want to talk about - which is the contagion risk of defaulting debt in the range of 500 billion to 1 trillion Euros that will be suffered by other European (and worldwide) banks, businesses and ultimately European governments.
It’s time those governments grasped the nettle, remembered that, ‘People prefer the certainty of misery to the misery of uncertainty’ and took some action that reflects the truth of this very difficult situation. They should agree that each of the 17 Euro countries move to their own shadow Euro (Greek Euro, Italian Euro, French Euro etc.). On a quarterly (or monthly) basis, each of these shadow Euro’s should have it’s exchange rate to the German Euro, decided and guaranteed by the ECB, with an explicit guarantee that the resources of all sovereign nations will be used to maintain this pegged value. The starting point would have the Greek Euro at say, 60% value, the Italian Euro at 95% value, the Spanish Euro at 90% value and pretty much all others at or close to 100% value. Each time the ECB had to make it’s calls on the exchange peg, it could make a judgement on whether the fiscal and monetary measures of each nation were working sufficiently to edge it closer to 100% parity or further away from the German Euro.
Over time, each individual currency can be managed to its correct position and a natural selection will take place as to which currencies remain, in what will look more like a Florin for those nations with the will for political as well as financial integration. Those that diverge, rather than converge, could then hive off into their own currency at the right rate, in a managed way, at the right time.
This would give two things, one the capital markets the way to price the risks and over what time periods, two, the surety that the eventual break up will be managed in an orderly, non-cataclysmic way.
Of course, as all banks are forced to re-value the assets and mark to market bond and CDS exposures, it will create an immense amount of misery but as we know, people prefer…..