Tags: Europe | safe | politics | havoc

Politics on Both Sides of the Pond Can Provoke Real Havoc in the Markets

Tuesday, 05 Feb 2013 12:39 PM

By Hans Parisis

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Over the last couple of days, long-term investors have been reminded by the eurozone that it remains still very far away from its originally intended status of becoming one of the world’s most important, solid zones of stability (anchor).

Unfortunately, it apparently remains trapped in its systemic risky “twilight” zone. Keep in mind, stability in the eurozone is one of the main pillars that will continue to shape global prospects for years to come. There are undisputable signs of lurking instability that could be caused by social disruptions, let alone the election of one or even more “rejectionist” governments that could easily cause economic paralysis and therefore bring the eurozone crisis to a head, which in turn could potentially destabilize the global financial system in which confidence remains very fragile.

The political stories in Spain, Italy and also, albeit to a much lesser extent, Cyprus have suddenly come to the forefront, which surely won’t help finding real solutions for their respective dismal debt, growth and, last but not least, structural unemployment problems.

This "new" situation will certainly not solidify overall confidence in the eurozone that has to deal with 17 different sovereign governments, which all have their specific different political, economical, financial and cultural situations.

In Spain, we see the sudden eruption of an unprecedented crisis of national confidence caused by the recent revelations in several newspapers on highly placed politicians of the center-right government that might have been involved in a massive years-long slush-fund corruption scandal. Last Thursday, “El País,” which is the highest-circulation daily newspaper in Spain, published handwritten accounts that suggested (showed) Prime Minister Mariano Rajoy had received more than 25,000 euros per year between 1997 and 2008.

We all know that in any civilized country, everyone remains innocent until proven guilty. In the world of public opinion though, that is not the case.

In Italy, we see former Prime Minister Silvio Berlusconi’s political block for the national elections to be held Feb. 24 and 25 closing in (surprisingly?) by 5 percentage points to 27.8 percent on the leading (in the polls) political block at 32.8 percent. Yes, we’ll have to wait three more weeks to know the outcome of these elections, but what’s for sure is that whoever wins the election, stability in Italy is not in the cards in the foreseeable future. By the way, on Sunday, Berlusconi promised to cut taxes and the cost of government if his center-right party wins the forthcoming elections. No doubt this would not be welcomed at the European Union and eurozone headquarters.

In Cyprus, which is in extremely urgent need for a rescue operation/bailout from the eurozone, there are the troubling accusations by the German weekly “Der Spiegel” that the small island state in the Mediterranean Sea, as well as its banks, has been active in assisting rich Russians in illegal tax avoidance and money laundering schemes. It will be interesting to see how the eurozone will handle that hot potato.

Without the risk of overstatement, I can say the actual political troubles surely aren’t helping the eurozone. As if that wasn’t enough, policymakers in Germany and France, with their latest actions on ring-fencing the risks of their own banks, aren’t helping the eurozone banking mess either. In fact, eurozone banks are still “undercapitalized” by as much as up to 1 trillion euros and nothing substantial is planned for remedying this situation.

Germany and France are now putting unilateral national legislations in place that will oblige their banks of putting their proprietary trading operations into different legal entities, which will be something along the lines of what is known in the United States as the Glass-Steagall Act. No, none of the 15 other eurozone member states are doing that at this moment. We could say that the 17 wheels of the eurozone are turning far from synchronized and that won’t help stability down the road.

In the United States, President Barack Obama signed into law the No Budget, No Pay Act of 2013 this week, which is in fact nothing more than the suspension of the debt ceiling until May 19. Even if that is not so far in the future, before we are there we’ll first have to face the yes or no to budget sequestration, or automatic cuts, that could start on March 1 if policymakers can’t come to an agreement. If sequestration comes into force, it could shave as much as 0.6 percent off gross domestic product growth.

In my opinion, long-term investors would do well by paying particularly close attention to politics in the eurozone as well as in the United States for the time being. Keep in mind, politics on both sides of the Atlantic have full potential of provoking real havoc in the markets.

That said, in my opinion, it will probably become extremely challenging for trying to remain “safely” invested in the foreseeable future. Yes, long-term investors will have to take into account what has been safe in the past won’t necessarily be safe in the future.

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