the Power hour
SE: To what’s going on in the eurozone, when you talk to lenders it’s almost so large that they can’t do anything in their day-to-day business to adjust for the possibility of let’s say Italy defaulting or leaving the euro because the ramifications are too wide ranging. We’re quite well placed but the UK still can’t insulate against a big event in the eurozone at all. It will have devastating effects particularly a country leaving the eurozone because there is no clear legal measure to deal with that and it’s an issue that only the eurozone can sort out. TW: If you’re looking at scenarios just not that many months ago, you had the US
downturn, the euro crisis continuing type scenario and we had the gradual muddle through central scenario and unfortunately that central one is shrinking in its probability. The eurozone crisis continuing has gone from 20% ongoing to really serious and it’s looking like we’ll muddle through for a little while but we’re going to end up with a euro break-up by the looks of it and that seems to be where we’re heading. RT: Well there are two solutions aren’t there? Full fiscal union is one, the other is the European Central Bank which is the one organisation that absolutely has unlimited firepower in euro. They can step in and monetise most of this debt, which the Germans hate as an idea. They’re fearful of inflation of the 1920s however it doesn’t necessarily follow that printing large amounts of money leads to inflation. GS: Since when has the ECB done anything particularly radical? RT: It depends how high the stakes are but the choices are that or a chaotic break-up of the eurozone which would be disastrous. SE: Isn’t this to a certain extent a negotiation that is taking place from Germany to Italy, Spain and even France? If they do it too early, the other guys aren’t taking the pain so what they’re effectively saying is that you’ve got to take the pain, pass the austerity measures through your parliaments and at that stage once you’ve cut back your individual debt, then we’ll shore up Europe. FE: That’s a very fair assessment. The longer they go on for, the higher the bond yields go and the more that affects the lenders’ level of debt and confidence just gets worse. So they need to throw tons and tons of money “shock and awe” to make it so that people feel they can’t lose money. TW: I don’t share that view. Time and time
again governors of central banks individually and collectively think they can shore up currencies to protect interest rates and you can’t. What we’ve become used to in this country and Europe is a level of transparency but you’re disclosing to the market which way around everyone is and what the ECB may or may not do and how the central banks will try and protect it. What traders love is the volatility and uncertainty and they love knowing which way round people are and they will continue to drive that market down. I don’t think even the ECB can withstand the market. It’s just vast. RT: The ECB ultimately can monetise the whole of Italy’s debt if they wanted to. They can buy every bond in the market every day for as long as they like, they can monetise the whole debt. Implications further down the line such as inflation very much depends on how much you’ve printed and that’s why the ECB is very hard line and is why they haven’t indulged in any quantitative easing at all so far. SE: My understanding is that quantitative easing has added 2% on our inflation rate. RT: Well relative to where it might be but if you believe the Bank of England then inflation should be heading down. The big angle on inflation is wages. GS: That’s one of the biggest problems we’ve got that’s why we’re sitting around this table talking about this market, the massive squeeze on the household sector and wondering how demand has evaporated. GS: I was very confident until I saw what we would have to muddle through. Our central forecast has been lower than most this year and next year GDP growth of about 1.2% or 1.3% next year. With these sorts of discussions then all bets are off. If we’re talking about these types of scenarios we’re talking about house price falls of 10% or more. n
Catch-up with the news @mortgagechat mortgage introducer DECEMBER 2011 41
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