What is the endgame?

Looking at the past and commenting is al­ways far easier than trying to look forward and forecasting some potential outcome. It has never been easier, or more difficult for that matter, than it is today.

Attempting to forecast the end-game for this financial crisis is very difficult- Karl Micallef

If we look at some of the European sovereign yield spreads over the past 10 years it is immediately clear that this is made up of two periods. The initial period between 2001 and 2006 saw European sovereign yields of German, Spanish, Portuguese, Greek and Italian paper moving exactly in line. At the time, the market made no distinction whether it was holding any of the sovereign paper so long as it was Government paper – with some very minor adjustments for credit quality.

This started to change, slowly but consistently, post 2006/7 when the market started to analyse the financial ability of governments to honour their interest and capital obligations. Yield spreads widened slowly and started moving in opposite directions. These spreads were initially widening almost unobserved – remaining below the radar. During 2008, the market was focused on the financial crisis that had crippled the market which was rooted at the consumer level. The consumer had hit a brick credit wall and the first entities to suffer were the banks. While the regulators and the market players were fire fighting, the widening of sovereign yield spreads continued its trend.

By 2009, the financial crisis referred to earlier was addressed and some very important lessons were learnt. Consumers seemed to have learnt that credit cards and mortgages had to be paid for by themselves! This really came as a surprise to me thinking that such a fact was obvious – it seems I was very wrong and more often than not even the most basic of personal financial planning needs to be spelled out.

Less than 12 months later, in 2010 the market seemed to take note of the European sovereign yield spreads at the time. That same sovereign yield scenario the market had looked at before dealing with the 2008 crisis looked very different in 2010. The German sovereign yield was initially flat while the Spanish, Portuguese, Greek, Irish and Italian yields started decoupling from each other and more importantly decoupling from the German yield curve. Today this is very clear and obvious and is a result of a financial crisis at a sovereign level. There seems to be a second lesson to be learnt – even governments need to learn that they too must pay their own debts!

The current situation at hand is clear – unfortunately the solution is also clear but the medicine needed is just too drastic to take with a glass of water and instead politicians are hoping to use the drip system to apply the necessary medicine.

In the meantime there are also some sideline issues being voiced. We have seen protestors outside Wall Street venting their anger towards the financial markets – in my opinion their efforts are being directed at the wrong place. The markets are only reacting to financial facts brought upon the respective countries by their respective governments which were elected by majority vote by their respective electorates!

This brings us to a second issue – the point of a democratic political system. I will not be using this space to build an argument which favours or opposes the current political systems in place in the so called developed nations. However, the current crisis within Europe and the US is a clear indication that internal domestic affairs have been irresponsibly managed for a very long period of time. Something has to change in the way politicians are chosen and elected to run a country in a responsible and skilful manner.

Attempting to forecast the endgame for this financial crisis is very difficult – the difference this time round is that politicians have to listen to what the markets are telling them and this will hopefully lead to a solution that makes financial sense. Don’t hold your breath in anticipation of the magic wand that solves the problems of this world. One does not exist. The only option is the whip!

Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Any opinions that may be expressed here above should not be interpreted as investment advice, nor should they be considered as an offer to sell or buy an investment. The company and/or the author may hold positions in any securities that might have been mentioned in this report. The value of investments may fall as well as rise and past performance is no guarantee of future performance.

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Mr Micallef is an executive director at Curmi and Partners Ltd.