The three-pronged deal reached by European leaders in October aimed at preventing the euro zone debt crisis from spreading further did no more than “trick” markets into thinking a lasting solution had been found and has in fact made matters worse, Nomura’s Bob Janjuah said on Friday.
The October agreement — under which holders of Greek debt agreed to take a 50 percent loss on their holdings, banks will be forced to increase their reserves and the euro zone’s rescue fund will be beefed up - was “a confidence trick that has failed," the co-head of cross-asset allocation strategy at Nomura said. “And as a result it has made things a lot worse.”
All those European policymakers and sell-side commentators who said on 27-28 October "to great fanfare" that the solution was now finally in place and that it was now "all fixed" seem to have gone extremely quiet, Janjuah noted.
The only solution, in Janjuah’s view, is a “hard”, non-voluntary default in the euro zone.
“With the late October ‘deal’ now in tatters, and with subsequent developments in Italy, in Greece, and in the market pricing of French risk, the future for the euro zone now seems to be all about the ECB and outright monetization,” he said.
Monetization – when the ECB buys sovereign debt from highly-indebted governments with newly-printed euros – is no longer possible for Germany, which is adamant that full political and fiscal integration over the next decade is the only option, Janjuah said.
The European Central Bank's mandate specifically forbids it to monetize debt.
In Janujah's view, nothing substantive will happen over the short term.
“Even if Germany and the ECB somehow agree to unlimited monetization I believe it will do nothing to fix the insolvency and lack of growth in the euro zone. It will just result in a major destruction of the ECB’s balance sheet, he said.
At that point, he believes Germany and its northern partners would walk away.
Janjuah believes any conditional or finite monetization would actually be the worst idea, but probably the most likely compromise if Germany were ever to cede ground on this issue.
“Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetization,” Janjuah said.
"But, as in the immortal words of Messrs Jagger and Richards: 'You can’t always get want you want'".