In an open market price is driven by just one factor, and that is sentiment. Mathematicians can use computers to come up with wonderful models, but at the end of the day it is what people are prepared to buy and sell for that really matters. The two extremes of sentiment are fear and greed and there are times when each of these gets a grip of the market. And right now it is fear.
As I have written before the Euro is a disaster. It was founded in good faith and with very strict rules to ensure that governments acted properly and safely. These rules were promptly broken by France without them being punished for their transgression. This opened the floodgates so the rules might as well have not been there. Add to this that some countries (like Greece) just made up their economic figures to look good and to hide a far nastier truth and you have the makings of a disaster.
The Euro allowed governments to borrow money far easier than if they had their own, sovereign, currency. It also kept interest rates on that borrowing down to very cheap levels for dodgy countries, which encouraged them to borrow spend even more. And spend they did, living the good life on other people’s money with no plans to ever pay it back.
So now we have the train wreck of whole countries going bust whilst the politicians do their Nero impressions and play their fiddles. Greece, Portugal, Ireland, Spain, Italy, (the original PIIGS) plus the bonus member that is Belgium. The markets have woken up to the fact that money lent to them is not safe so theses countries are having trouble borrowing any. And of course they still need to borrow like crazy because they are still spending far more than they earn. In some of these countries paying income tax is seen as being optional, an option that many can’t be bothered with.
The biggest problem, as ever, has been socialist governments who think it is the state’s job to spend other people’s money. They think that the more they spend the better the job they are doing. And actually earning the money to pay for things is someone else’s problem. We had this disease in the UK with Gordon Brown but thankfully the people here booted him out and now we have a chancellor that is trusted by the markets. You can see that we would be joining the PIIGS pretty quickly if Ed Balls’s ludicrous plans were implemented.
What we are seeing is the beginnings of the biggest financial disaster since the great depression. Or even worse. Some people try to play down huge market movements as “corrections”. They are far more than that. Because the politicians continue to only do enough to prop up Greece from falling over the edge we seem to be in a surreal world where everything happens in slow motion. So the markets have been very slow to react to the reality that is staring them in the face.
Justice seems to be happening in that France created this problem many years ago by breaking the rules of the Euro club. Now it is the French banks that are massively exposed in Greece and in Italy. They are probably all going to end up owned by the Chinese! That’s if the Chinese are feeling generous, because they are the only nation on planet earth with the financial muscle to rescue the situation.
Right now any country that defaults should be kicked straight out of the Euro, it is only the threat of this punishment that will prevent contagion. Then Greece needs a package imposed on them that is affordable and realistic. This will involve banks and countries taking a very severe haircut, but it will be vastly cheaper than letting the whole castle of cards come tumbling down. But the chances of sensible, decisive action like this happening currently look close to zero.
And all the financial multi millionaires sunning themselves on the beaches of Barbuda, Anguilla and St Barts must be flattening the batteries of their Blackberries pretty quickly and many will be scrambling in the queue for first class tickets back to London. They will be a lot poorer by the time they get here unless they have gone short like crazy, which is hardly likely from a tropical beach.