Steen's Chronicle: Social tension is now the elephant in the room
We have been surprised how little impact the strikes on the streets of Greece, Portugal and Spain have had on policymakers. But this is finally changing: Eurogroup considers direct transfers to Greece.
Policy makers are finally realising that social tension can overtake much needed reforms and financing needs by virtue of rallying the voters. Note that the groups of people demonstrating across Europe are no longer just unions or public employees. This is now a national issue for many countries. One generation of youth has already been lost, with all the negative consequences expected for productivity, innovation and pure outlook on life.
We have reached the "saturation" point which I mentioned in last Friday's Macro update. Everything has a shelf life. The last date of sale is close for QE, lack of voter mobility, acceptance of extend-and-pretend, lack of accountability for politicians and social acceptance that austerity and easy monetary policy will change fundamentals.
What comes next is one of two things:
Radicalisation - Fascism & Communism?
IF - the policy makers ignore this call for 'change', then the voters will be radicalised, moving to the extreme left and right politically. We are considering having a Outrageous Prediction for 2013 that include a serious move back to Communism in Eastern Europe and towards more autocratic states in Southern Europe. The voters in Greece is already embracing Golden Dawn and in Italy the next Prime Minister could be a comedian from the Five Star Movement (Yes, I know - that's probably at least the second comedian... :-) but watch Beppe Grillo, which is that political comedian's name.
In times of crisis people go to extremes - and this is now a full blown crisis, as we have a banking, economic, political and social crisis in place. It's can't get much worse actually, which is probably a good thing. I am writing an editorial on the benefits of a crisis called: "Why We Need a Crisis" which I will publish tomorrow.
Social tension as policy input - could mean major losses
If policymakers do address the need for change, it will unleash major financial implications. Do not forget that by doing anything to reduce the social tension, governments will need to take losses on guarantees and loans given to Greece et al.
This will not go down well in Germany, where a 50% hair-cut on Greece will end up as a bill totaling 17,5 Bln. EUR - or exactly enough to keep the German government from balancing its budget in 2014! Try that one on for fun Ms. Merkel!
Furthermore, if one or two countries gets relief - in terms of extension of time schedule to do reforms, as well as nominally lower rates - the IMF, ECB and governments of Europe will need to take serious losses into and onto their individual countries fiscal budgets. A few countries will also have an additional cost from having to go to the market and raise capital at rates in excess of what the subsidized rates for Greece et al.
Taking losses would be a major step for Europe. We have socialised the debt and its burden. Now we need to democratise the loss to save what's left of Europe and probably also to stop the political moves to the extremes.
Unemployment and social tension could be the new major priorities for policy input, but taking action will come at a major cost to taxpayers and in particular the prudent Northern European countries. Is it time for change now? I doubt it, but this is a step in the right direction, and it proves, once again, that to create a mandate for change you need to see a serious crisis.
We have been playing the short-side of SPX and risk assets, but have now neutralised the positions respecting our old range....
But it's important to keep an eye on several things, including the fact we have broken 200-MA on the downside. Similar chart breaks have yielded further downside of 5% before, and of course, there is the ever-present fiscal cliff in the US.
The short-term support comes from easing of pressure on Spain and Greece, option expiry tomorrow in both commodities & equity futures and, for now, a slightly better tone and understanding in the US for the need for compromise.
This morning trades are included here