What a difference a week makes!
Apart from great weather and skiing conditions, relaxation and outdoors activities, there seems to have been some interesting market activities taking place during the last week. Anyway, lovely environment and would have preferred to stay there for a few weeks more, for sure. Well, schools calling, as well as all the other choires that go with it.
*The heat is on
Especially in the CEE area. It would seem the market sentiment has finally switched towards the CEE - Western European banking dilemma touted several times on this blog over the last few weeks. A lot has been written about it over the past week, upsetting the market in the process. It should be.
Devaluations, bank - sovereign defaults and social unrest looks set to unfold before long in the CEE and Baltic area. The Euro area and their banks, intertwined with the CEE as it is, is looking increasingly vulnerable to get hit by more than currency weakness.
Same goes for Sweden.
Helmets on, time to dig in.
*CEE and the Baltics local banking systems, foreign bank owners and their shrinking of balance sheets - liquidity is about to be reduced or cut off
Weve been on this subject before, for sure, but I suspect this topic will hold the key to further developments in Europe over the next few months.
The CEE and the Baltic situation is becoming more critical as the 400 Bn Usd of CEE hard currency loans to be rolled over this year along with growing current account deficits and liquidity and assetmarket constraints are increasingly weighing these economies down.
They all need massive hard currency injections - now! Who will provide it to them? Currently the Western European banks are basically the only source. However, unless governments intervene this pipeline will get cut off. Perhaps the IMF will be able to provide funds for a while still, but even if they get the extra funds amounting to a total of 500 BN Usd to be flushed out, it is still a game of liar´s poker, a pyramid scheme, a ponzi scheme in that it is all about make believe to try and gain the markets trust, calming it down in the process.
In the end, it will all be done on a come first - serve first basis. If youre late in the door, there wont be anything left. Unfortunately, I suspect the main financier of the IMF and the World Bank - the US- is not so keen on pumping out more funds. Neither are the much hoped for "white knights" Asia and the middle east. Time for the EU to prove its worth on a big scale.
Are they up for it? Are they ready for it? Is the ECB willing and ready for it?
Unfortunately the impression I am getting is no on all of the above.
However, once politicians realise what is about to happen, I believe they will come running with some sort of bailoutpackage. Looking at how the cooperation and the consensus results have worked so far, unfortunately there is an overwhelming risk of "too little, too late"
With the ECB so far blocking the most efficient rescueplans, we should all hope they stop looking in the rearview mirror so much and take in the view from the windshield instead.
*ECB holds the key - in the end they will have to unblock and go along with the politicians
What could be done to thwart the downward CEE/Baltic - Western bank spiral then?
-Allow the potential CEE and Baltic Euromembers in now - let them adopt the Euro without going through the ERMII routine. (The Maastrich criteria would also have to be fudged substantially - but then again, it already is and noone adheres to it anyway (apart from Finland). In fact - following the Maastricht criteria and the fact that most of Europe is facing deflation, it could actually have the perverse effect of forcing potential Euromembers into a state of deflation - just to adhere to the Maastrich criteria - just drop it!)
This would be an emergency measure and by far not anything that would solve the Euro and the Euro area dilemma, but at least provide the European financial system with some breathing space. This is after all an emergency situation!
- "Everybody" issues Eurobonds
Let the present and potential Euromembers raise funds via Eurobonds. This would too only be a temporary solution designed to provide breathing space but not solve any real issues. However, the alternative is certainly worse and would mean instant clear and present danger.
*Net,net, although today is a "soft" day so far, the environment is all but. I do expect an EU "rescue/bailout package" before long. Unfortunately, it might just be one in a row of buy the rumour - sell the fact events that we have seen so many of over the last 6 months.
With the Latvian government resigning last Friday, Ukraine on the verge of defaulting on their sovereign debt and Polish deputy Finance Minister Kotecki out on the wires stating Poland wants to join the ERMII in late May - early June, it seems the environment is heating up.
Fasten your seatbelts for a bumpy ride ahead.
*My position outlook;
-PLN basically fell out of bed last week and it might not be over yet.
I squared and am now looking to sell this currency again, wary of any initial market reactions to "EU bailout packages". Buy the rumour - sell the fact seems to still be the ruling market "bailout package" response.
-HUF, ditto there.
-RUB, still short. Dont expect any "packages" on that front near term. Rather a continued slide downwards.
-TRY, still short. Had a decent move lower last week up to 1.71 ish. Expect some consolidation from here but to continue before long. 1.78/1.80 in Usd/Try is my next target.
- NOK/SEK, broke higher towards my 1.30 target last week. Still long but have taken some profit in the 1.27/1.28 area. Will look to go longer on dips. Swedish Q4 GDP numbers on Friday. NOK must be one of the few "hard" currencies around.
- JPY, still short. Will monitor price action at 95.50 in Usd/Jpy.
-ZAR, Reached high 10.20;s in Usd/Zar last week. Back to 10.00 ish now. I was short ZAR but cut it and am square now. Will get back in on the next Usd/Zar rally. Q4 GDP numbers this week should be grim reading but a lot priced in. To be monitored.
- As the Baltic situation is heating up; short LVL on a forward basis.
- Short Eur/Usd still, Euroarea dilemma, the CEE and the western european banks and all that,,, you know the story.
-Short European banks with exposure towards the Baltics and the CEE area. Very difficult times ahead for the shareholders - "EU bailout or not".
- Dipping my toes in short Gold purely on an overstretched positioning basis
As always - good luck
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