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Selasa, 20 September 2011 | 03.01 | 0 Comments

The euro: protect yourself from a big explosion and a terrible mess

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20 September, 2011
  • The euro: protect yourself from a big explosion and a terrible mess
  • Recommended article: Why the search for income will only get tougher
  • Yesterday’s close: FTSE 100 down 2% at 5,259... Gold down 1.83% to $1,778.68/oz... £/$ - 1.5705
From John Stepek, across the river from the City

Dear Golden Jann,

John Stepek Markets around the world had a bad start to the week.

The FTSE 100 slid 2% to below 5,300. The S&P 500 shed 1%. Copper hit a ten-month low. Both oil and gold closed lower.

What’s all this about? There are plenty of things to fret over. In commodities markets particularly, traders are worried about whether or not China can manage a ‘soft’ landing.

But the biggest problem – surprise, surprise – is still the eurozone. Investors are starting to grasp that this story isn’t going to have a happy ending.

So what does that mean for your investments?


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Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. MoneyWeek Ltd. Customer Services: 0207 633 3780.

US politicians just don’t understand Europe

Europe’s woes just keep growing. As if Greece wasn’t enough, this morning credit rating agency Standard & Poor’s downgraded Italy’s credit rating by a notch. It can’t have been unexpected, but it hardly put a spring in the step of Asian investors.

The idea of Greece leaving the euro is, by some estimates, too awful to contemplate (as my colleague Merryn Somerset Webb discusses here: Why the cost of letting Greece go is just too high).

But the notion of Europe clubbing together to underwrite the debts of a nation that shows no real sign of being able to change its ways is also pretty far-fetched. For that to be palatable to Germany and other northern European countries, you’d basically need German tax collectors to impose their rules on Greek citizens. Which would in turn require a massive step towards a federal Europe.

What’s wrong with that idea? The Americans certainly seem to like it. “There must be a reduction in the financial autonomy of member states if the common currency is to survive”, proclaims former US Treasury Secretary Lawrence Summers in the Financial Times.

In the process, he sums up why US politicians just don’t get it when it comes to Europe. Because Greece isn’t California. And Germany isn’t Texas.

What do I mean? Texans and Californians are all Americans when push comes to shove. Germans and Greeks are Europeans in name only. That warm patriotic glow extends only to their national borders, not to the west coast of Portugal.

As Gideon Rachman notes in this morning’s FT, this is the fundamental problem with the euro. People put their national identity ahead of any notion of a European identity. Which is perfectly understandable, not to mention blindingly obvious.

So when national interests conflict with European interests (ie when Germans are told they need to act as open-ended guarantor for the Greeks), there’s no contest.

There is no sneaky way to prevent a Greek default

However, where Rachman really hits the nail on the head is when he describes the European political process. “I have always believed that steps towards deeper European unity work best when they are technical-sounding, hard to understand, and not subject to the approval of voters.”

In other words, any route out of this crisis has to be a sneaky one. Trouble is, Europe has reached the point where there are no sneaky options left. A eurozone-wide bond would need approval and a new treaty. Meanwhile, any attempt by the European Central Bank to print money and embark on an open-ended buying spree of Greek, Spanish and Portuguese bonds is bound to come up against resistance from Germany.

I know it’s old-fashioned to talk about ‘moral hazard’, but this is yet another situation that sums up why it’s such an important factor to consider when you’re trying to get a handle on the big picture in economics.

Europe’s politicians have never really had to make the case for a united Europe. Because if the electorate disagreed with them, they pushed it through anyway. So they always took the easy way out of any uncomfortable situations.

But now there is no easy way out. Say they’d fought their corner honestly in the first place. Say they had actually persuaded voters of the benefits of euro membership. Their citizens would now feel that they had some responsibility for this situation, and might be more inclined to back steps to hold the whole project together.

As it is, trying to make the case for a united Europe at a time when the euro seems more like a millstone than something to defend, is almost impossible.

Sure, Greece leaving the euro might be unthinkable. Up until summer 2007, a run on a British bank was unthinkable – but it happened. Up until September 2008, the idea that the global financial system might disintegrate overnight was unthinkable – but it happened.

Greece has enough money to last until mid-October. And it may well get the next tranche of bail-out funding that it needs. But in the long run, it can’t repay its debts. And no one else wants to pay for them. What do you get when an unstoppable force meets an immovable object? I suspect the answer is: a big explosion and a terrible mess.

So what does this mean for you?

The good news is that some European stocks are looking very cheap as a result of all this. An implosion in the euro of course, would mean they get even cheaper. But Paul Hill has looked at a few promising candidates for the next issue of MoneyWeek magazine (out on Friday – if you’re not already a subscriber you can claim your first three issues free here).

The dollar is doing well out of all this. We talk about how to profit from currency upheaval and the return of the dollar in particular in the current issue of MoneyWeek. And if you want to try your hand at currency trading – bearing in mind that it’s a risky business - check out our free MoneyWeek Trader email.

Got a comment on this article? Leave a comment on the MoneyWeek website, here.

Until tomorrow,

John Stepek

Editor, MoneyWeek

Our recommended article for today...

Why the search for income will only get tougher
- An army of retiring baby boomers is scouring the globe for the income they need to maintain their living standards. That could mean income-producing products getting a lot more expensive in the future, says Merryn Somerset Webb: Why the search for income will only get tougher.

And for yesterday’s market update, see below...


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Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. MoneyWeek Ltd. Customer Services: 0207 633 3780

Market update

Click here for the latest stock market news and charts.

The FTSE 100 saw share prices back on the slide yesterday as investors turned their attention back to Greece's debt worries. The index closed down 2% at 5,259.

Banks were again among the worst performers. Lloyds fell 6.7%, Barclays lost 6.6% and RBS was 5.7% lower.

Miners were also under fire as metals prices dipped. Antofagasta was the day's biggest faller, down 8.2%. Kazakhmys fell 7.1% and Xstrata lost 6.8%.

Highest climber of the day was Randgold Resources, which rose 1.6%.

In Europe yesterday, the Paris CAC 40 fell 91 points to 2,940, but the German Xetra Dax was 158 points higher at 5,415.

In the US, the Dow Jones Industrial Average fell 0.9% to 11,401, the S&P 500 lost 1% to 1,204, and the Nasdaq Composite was 0.4% lower at 2,612.

Overnight in Japan, the Nikkei 225 fell 1.6% to 8,721, and the broader Topix index was 1.7% lower at 755. In China, the Shanghai Composite and the CSI 300 each rose 0.4% to 2,447 and 2,689 respectively.

Brent spot was trading at $111.53 early today, and in New York, crude oil was at $86.43. Spot gold was trading at $1,791 an ounce, silver was at $39.77 and platinum was at $1,776.

In the forex markets this morning, sterling was trading against the US dollar at 1.5712 and against the euro at 1.1476. The dollar was trading at 0.7304 against the euro and 76.55 against the Japanese yen.

And in the UK, bookmaker William Hill has confirmed it is in talks to buy Aim-listed mobile phone gaming company Probability. It said there is no certainty that it would make an offer, but if it did, it would be in cash. Probability is valued at £13m.

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