The Eurozone crisis

Part of the past occupation series: I decided not to go into the details of the each of the trips that I went on when researching the Eurozone crisis. It is still a very current debate (I am reminded of that each morning when reading the FT over breakfast) and I continue to have my opinions. I want to reserve this space for a more personal reflection. 

As 2009 drew to a close, the fund management industry appeared to look at credit risk seriously again. Before that, central banks had swamped markets with liquidity for nearly a whole year, a move that saw risky assets of all shapes and colours rally a big deal. I thought it made correlation more important than idiosyncratic risk and the life of a cherry picker like myself rather difficult. It didn’t matter if country A had a better story to tell than country B. The sovereign debt of both countries did very well – until Nakheel, a quasi-sovereign (or at least that’s what many investors thought) issuer from Dubai nearly defaulted on an Islamic bond .

Suddenly, buy-side analysts dug out their spreadsheets. They crunched the numbers and public debt profiles of sovereigns and quasi-sovereigns, and this time not only those of emerging markets. Unsurprisingly, Greece came under the radar very soon. The numbers had already looked bad before. But when a new PASOK government came to office in December and revealed that its predecessor had cooked the books, the numbers suddenly looked unsustainable, especially given the country’s lacklustre and structurally flawed economy.

The world was suddenly alarmed to what was and still is to unfold as the biggest crisis of the European Union since its inception. The problems seem intractable. They are worsened by the multiplicity of institutions at the national and European level and by a cacophony of viewpoints. Worryingly, we witness an inflammation of national sentiment and a generation-defining economic crisis. We have the mother of all crises lying at your doorstep.

Possibly also because of this all-encompassing nature of the crisis, I wasn’t entirely happy that my emerging market focus became diverted to cover also the “periphery” of the European Union. The benefit of analysing emerging markets from afar was that you are one of relatively few analysts covering a particular country. Making a call is going to make you subject to probing questions by your portfolio manager and other, rather accidental experts on the subjects (e.g. Indians or Chinese almost always having strong views on their countries).

Yet for the Eurozone crisis, you had experts sitting everywhere around you, questioning your investment recommendations and scenarios. This is good, of course, as only someone who is challenged will grow with the task. It is less good, however, when political beliefs and convictions are sold at face value and polemics enter the fray. With time you get used to it and certainly develop your debating skills along the way.

The polarised nature of the debate revealed another facet of my own work. Fund management is an industry where you make judgment calls. You develop a set of scenarios, pick the most probable one and sell it as your base case. Of course you need to be alert to all sorts of risks, but given your limited airtime with management, you need to make a call and market it aggressively. Caution and academic deliberations using too many conjunctions such as “however” or “albeit” will not win you much kudos. I thought the art consisted in not giving up your academic leanings while condensing your research into bite-sized slides.

The noise was also mind numbing, at least at first. Newspapers would be devoting their entire opinions pages to the crisis, investment banks would publish new research every day. Sovereign bond spreads would be volatile and move in large increments each day, amplifying good and bad news and vice versa. But looking back, it probably isn’t that much more difficult to cut through the noise in Europe than it is in emerging markets. It’s just that you have to put away the papers for a while, go to places yourself and think a little longer term than what is implied by the market or the timetable of EU summits.

The crisis thus meant that I would travel to these countries, joining what must have been one of the first, if not the first, investor trips to Greece after spreads started to spike, as well as organised tours to Portugal and Spain. Numerous trips to Brussels were made easy by the fact that it was just a 2-hour train ride away.

These trips added much-needed context to the debates I was having at home and in the office. In Brussels, I got taught that I should have been more sceptical and perhaps not so gullible that European leaders would pull together fast and redesign this behemoth institution as quickly as required. When travelling with and talking to American investors, I always thought they don’t understand the politics of the EU (i.e. the resolve to keep the political idea afloat at all cost) and thus have far too bleak a view of the future. Then again, I don’t think I understood the politics of the EU too well, either. That’s the benefit of hindsight.

In the countries themselves, I had to learn that many European governments had simply never developed a strong institutional capacity to implement reforms of the size needed. The distinction between emerging and developed markets is no longer a valid one. Put differently, you could analyse a developed country with the same toolkit people tended to look at an emerging market before and realise that the differences really aren’t that big. This artificial separation of countries, often driven by bond benchmarks and team structures, was beginning to crumble.

The trip to Greece was very memorable, although I only went for two days. It had a typical agenda of meetings with senior government officials, opposition figures, journalists as well as academics. A lot of the names would pop up in all sorts of coverage of the crisis thereafter, presumably because we saw the right kind of people. Perhaps also because Greece is a rather small country after all.

The atmosphere on the streets was probably still very close to normal judging by the pictures that emerged from Athens in 2011 as the country further descended into political and economic chaos. There was no heightened security in front of ministries and we as a group of suit-wearing foreigners did not think about our personal safety for one second. Yes, we saw some of the headline-grabbing images of deserted work floors at 4pm or taxi drivers refusing to hand out receipts.

This in itself perhaps wasn’t the reason that a lot of Greek government bonds were dumped in the weeks following our trip, but the PMs on the trip did not leave the country overly confident. I was part of a rather large group of about ten fund managers, amongst them probably representing a few trillion USD worth of total assets.

One of the meetings was with a local journalist. The poor man must have felt as if he was the culprit judging by the loud atmosphere and combative questioning. A PM from one of the world’s largest fund managers was also present that night although he didn’t attend the other meetings. He seemed to get private audiences with decision makers perhaps in the hope that he would publicly endorse the purchase of Greek debt. Needless to say, that didn’t happen.

In Spain and Portugal, a few US based investors joined on a trip I was on. Some of the guys had a typical hedge fund / distressed fund background. I remember one PM in particular (he was from Latin America). He treated the Portuguese and Spanish treasury staff like those of some high-yield / junk rated country he used to see frequently on his home turf: rude tone, frequent interruptions, teacher-like adding up of redemptions and interest payments, etc. – clearly the civil servants weren’t used to this at all and seemed rather intimidated. Incidentally, Portugal has been downgraded to junk status since.

Southern European treasury staff probably became more accustomed to this type of treatment afterwards. I have the suspicion that Greek and Portuguese officials would love to be grilled by such people instead of being shut out of the market completely and having to speak to Troika bureaucrats all the time.

In Spain and Portugal, I met with friends and former fellow students to go out at night but also to add some personal context to the crisis. I think statistics about youth unemployment and precarious employment terms become much more striking when you hear these stories first-hand. Thinking about this, listening to Fado music and walking the morbid streets of Lisbon somehow reminded me of the human dimension of this crisis – the comprehension of which lies beyond spreadsheets, Bloomberg terminals and debt redemption tables.

Lastly, a striking impression I have from the Belgian capital is a meeting in the Commission building: I believe to recall correctly that I had to pass two security doors, two lifts and at least four doors to arrive in my appointment’s office. This had to remind me of this film here.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>