Readers – Europe is an inspiring story. After hundreds even thousands of years of conflict and development, and more recently a couple of serious wars, Europe has learnt to co-exist, collaborate and integrate unlike any other region in the world. It is an exceptionally diverse and culturally rich place, unlike any other large country or region, which might come close in size or mimic some of the structures of governance (Yes – I am hinting towards the United States). I, as many of us do, particularly enjoy travelling around Europe on a single Schengen Visa and using the same currency across borders, which are only ever noticeable because of the change of language on the highway signs, and the change of letters on the number plates. It serves as the model for many other emerging regional blocs, and I hope one day that the SAARC (South Asian Association for Regional Co-operation) can also become a similarly strong and unified bloc. Sovereign borders and barriers, which many of you know I am not a big fan of, finally seem to be breaking down.
But there is a problem. Europe is in crisis. Over accumulation of sovereign debt coupled with continued fiscal indiscipline across many Eurozone countries, threatens to tear apart years of progress. There’s a clear North South divide, the North being highly creative, innovative and productive, and the South being comparatively a bit lazy and lacking in new ideas. Greece is where this Black Swan was first spotted in early 2010. Over a year later, things keep going from bad to worse in Greece (S&P recently downgraded Greece’s sovereign debt rating to CCC, the worst rating for any sovereign in the world – S&P are the same folks who made a USD 2 trillion error in their projections of the US fiscal deficit), and the crisis has spread across to many other countries. Many months since it started, there is still no sign of resolution because the choices are so difficult and so complicated by a combination of economics and politics.
So what are the possible choices or outcomes? Please refer to Exhibit A.
The most likely outcome at the moment is a combination of Options I, III and IV. They are still very painful measures to take, and each stakeholder seems to be muddling through putting them in place. The Greeks have been striking and protesting on the streets against fiscal austerity. They tend to take any opportunity to not work, and to start a riot (A bit like myself – I have lived there for 4 years, and seem to have been influenced a little bit by the national psyche). Angela Merkel’s popularity is taking a serious hit in Germany after a series of proposed interventions through the summer. The Germans always have been highly principled and disciplined, and seem to be pushing Greece for greater self-discipline as well. The bankers are flexing their muscles, and have many sovereign states and the EU in their pockets, sighting another potential financial meltdown. Some might call this blackmail.
In other options, Option II seems to be virtually unthinkable at the moment, but nevertheless something that many academics, think tanks and independent experts have quite vocally advocated. The argument is that the benefit of a single currency far outweighs the cost of “centralized” governance, and loss of sovereign control. But most Greeks and even Germans do not seem to see it that way. As the Exhibit shows, Option I and Option V are the easiest, i.e. the one’s without any serious red lights (based on my subjective judgement of course), but they are still not easy options. Under Option V, Greece can leave, or be kicked out of the Eurozone, and monetize its debt. It would probably still require a combination of Options III and IV to cover its existing stock of Euro denominated debt. But the disintegration of the Euro is also unthinkable at the moment, so there is a big question mark as to whether this will ever happen.
It will be interesting to watch as this plays out. I predict that it will be a protracted exercise, and in the short-term we can expect to see a whole set of half measures, without any serious effort to address the issue once and for all. As is very obvious, this uncertainty doesn’t help anyone, especially the banks and markets which will remain on edge.
In other monetary news, the Kenyan Shilling hit 95 against the US dollar yesterday. When I arrived in Kenya exactly 3 months ago, it was trading at 83 (Please refer to Exhibit B). The Central Bank blames this on “speculators”. Also, according to the press, a few bankers have been seen to be bragging about manipulating the markets to make a quick buck. I think this is horse shit. A 15% devaluation of a currency over 3 months represents a serious inflexion point, something that is usually quite common for semi-stable emerging market currencies, once every two years or so. It has to be grounded in more fundamental macro, or even more specific monetary issues, which simmer up over time, making it hard to specifically pin point cause and effect. What do you think of the root cause, and the silly political rhetoric around it? It sucks for me though. Even though my dollars will be taking me further in Kenya, I will have to spend the afternoon doing the painful work of quantifying our Forex exposure at Juhudi Kilimo and finding ways to hedge it.
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