Opinion

James Saft

Europe opens drug front in war on reality

October 11, 2011

James Saft is a Reuters columnist. The opinions expressed are his own.

It was perhaps inevitable — at some point Europe’s war on reality would flower, if that is the right word, into a war on drugs.

Funny too, because usually people who want to escape reality take drugs, rather than blaming drug-taking in others for reality’s nettlesome shortcomings.

Carlo Giovanardi, who is undersecretary in Silvio Berlusconi’s government in charge of family policy and drug prevention, is now blaming stock market “volatility” (by which I am guessing he means falls) on cocaine-taking among share traders on the Milan stock exchange. Giovanardi said that the government would look into the possibility of drug testing for traders, perhaps with the help of the Milan Bourse and the country’s market regulator.

Yes, that’s it. Drug-snorting (or should that be stock-shorting) traders are destabilizing financial markets. Perhaps these same traders are, addled by the white powder, buying credit protection against the possibility of an Italian default. Some of them may even be withdrawing their money from funds that make short-term loans to Italian banks. You know how crazy and unpredictable addicts are.

It’s not the fact that Italy’s debt rating has been downgraded, or that its banks are stuffed to the gills with Italian sovereign bonds. No, it’s not concerns about Italian competitiveness, and its inability to depreciate its currency. Instead, it’s just drug abuse.

You have to wonder exactly what drug Italian traders were taking during the good years, when nobody behaved as if a euro zone crisis was even possible, much less a risk to be worried about. Perhaps back then they were all snorting a hypnotic drug or an elephant tranquilizer. This too is a case for Undersecretary Giovanardi.

Besides being funny, this farce is instructive; it tells us that European officialdom still thinks it can resolve what are essentially problems of debt and political structure by denying and shifting the blame. This ought to make investors naturally jumpy and prone to flee.

DENY, BLAME AND PLAY FOR TIME

From almost the beginning of the crisis European officials have mostly followed three tactics; deny, blame and play for time. First the problem didn’t really exist, then it only was a small problem and only in Greece, a tiny country we shouldn’t really worry much about.

Allied to this denial was a desire to make the appearance of turmoil in financial markets the result not of underlying structural issues, but of malign speculators manipulating things for their own selfish aims.

And lest you think this kind of magical thinking is just an Italian thing, remember that both Greece and Spain were reported in 2010 to have set their intelligence services on the case of tracking down the people who were driving down the price of their debt. (By the way, if they have a list, please release it because these sellers were clearly prescient).

Of course scapegoating is not a southern European disease. If France loses its AAA rating, I fully expect French President Nicolas Sarkozy to blame speculators for making Norman cows run dry, or some equivalent nonsense.

If you think this stuff is working, just look at the recent run of events. Belgium, France, Italy and Spain introduced outright bans on short-selling financial stocks in early August, since when bank stocks have performed terribly. Greece already had a ban on short selling of its banks, which does not appear to have had the desired effect. Even the most stable banks reportedly can’t get interbank funding for much more than a week, which somewhat suggests that short sellers are not the problem.

A recently released preliminary study into the impact of short selling by economists at the New York Federal Reserve found that declines in stocks were neither driven nor amplified by short sellers. As for bans on short selling, the study finds that they don’t work, but do impose costs on all market participants by reducing trading liquidity.

Europe has a suite of interconnected problems. Too much debt is at the core, but a structure of monetary union without fiscal union means that, perhaps fatally, the players have an incentive to do mutually destructive things. Add to this a central bank, the ECB, which cannot use the printing press as a last resort and you have a set-up which positively invites short sellers.

The good and bad news is that this cannot go on for too much longer. German Chancellor Angela Merkel and Sarkozy’s detail-free pledge to do “all that is necessary” will soon be tested, and those doing the testing will be stone cold sober.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

Comments
2 comments so far | RSS Comments RSS

===”European officialdom” -> “Italian officialdom”.===

Anyone living in Europe knows the difference. Italian politics is a soap-opera.

===European officials have mostly followed three tactics; deny, blame and play for time===

The problem is clearly bigger than you have recognised, Mr. Saft; since American officials are doing the same thing. When are American politicians going to deal with their structural issues, e.g., not bringing in enough tax revenue?

Your last few paragraphs are excellent and very honest. The printing press is probably the key short-term difference between the Federal “Reserve” and the ECB.

Posted by matthewslyman | Report as abusive
 

Going into Europe, Mr. Saft, is not as easy as it looks. One should make at least some distinctions like Berlusconi (a very distubed man and an Italian, which is really a lot put together), Sarkozy (an odd little man, a politician and a Frenchman, which is a lot put together) and Merkel (etc.), surrounded by underlings like Barroso, Trichet and assorted others, who are permanently hamstrung and made powerless by the word ‘sovereignty’, and one understands that short sellers make an easier target by far. That this might be an assault on anyones intelligence is not something Italian politicians usually worry about.

Posted by Lambick | Report as abusive
 

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