A Crash in Saudi Arabia, Arrogant Eurocrats and a Look at the Markets Part 1

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 |  Includes: AFK, DRR, ERO, EU, EUO, FFD, FRN, FXE, GAF, GULF, MES, PMNA, ULE, URR
by: Acting Man

Saudi Arabia's Stock Market Plunges

Stock market traders in Saudi Arabia got a bit of a wake-up call yesterday. Their stock market evidently sees something it doesn't like. Why the market is all of a sudden more worried than it was previously about the challenge to the established political order in the Arab world is a bit of a mystery, but presumably traders have thus far deluded themselves into thinking that Saudi Arabia would be immune to unrest. Something has evidently changed their mind. It seems to us that this event deserves the moniker warning sign. The selling has been extremely heavy for three days now. Since this market is largely driven by local investors, we should probably attach some significance to this recent plunge. Someone has begun to sell three days ago and has spooked the herd. It's a good bet that the someone who started the selling is better informed than the rest of us.

Note in this context the following information about the current oil policy of Saudi Arabia from Marketwatch. While the article references anonymous sources, which stands in the way of fact-checking, there is one paragraph that caught our eye:

"The main threat is ... Saudi instability when the current king dies. We know he is very ill but obviously there is no indication of how critical that condition is. But it is acknowledged that the next transition will present a much bigger threat to internal stability ... Vested interest groups have been waiting for this transition to push their agenda. Saudi experienced considerable regional instability up to 10 years ago but bought it off with higher oil-based spending. Today the problem is as bad, if not worse. There have been only a few of the promised reforms ... Resentment towards the wealth gap with the royals is very high ... Even if/when the instability in other countries, such as Libya, settles, the Saudi succession threat is now firmly on the table. What happens in Bahrain could be very key. That alone will keep the oil market nervous for this year."

The very ill king could in fact be the key to the sudden crash in Saudi Arabia's stock market. With political instability across the entire region, a fight for succession in Saudi Arabia wouldn't be very conducive to stability at this particular point in time. The fact that spreading some of the oil wealth around has not been effective in lowering the level of resentment vis-a-vis the royals sounds very credible to us. So does the assertion that what happens in Bahrain will be very important. Bahrain is ruled by a monarchy as well and should it lose power, the Saudi masses could be galvanized.

Saudi Arabia is the world's second biggest oil producer after Russia and as a result the monarchy has enormous financial resources at its disposal. This certainly helps with buying off numerous special interest groups. Also, as we mentioned in passing previously, the royals have a deal with the powerful and highly conservative religious establishment that helps keep them in power. Essentially the country is a mixture between a monarchy and theocracy. The strict religiously inspired laws may on the one hand sit well with the deeply religious population, but on the other hand they also make for a very repressive environment that may sit less well with the youth – large numbers of which are unemployed. Also, the extravagance of the many Saudi princes (over 10,000 royals are about, all well-endowed with stipends) may not go down all that well with the rest of the Saudis , regardless of what deals the royals have made with the mullahs. All in all, it remains a potentially explosive situation.

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Saudi Arabia's Al-Tadawul All-share Index goes somewhat belatedly into free-fall.

In the meantime, Muammar Qaddafy continues to give utterly bizarre interviews (if anything, they have become even more so ... "I don't lead Libya, I have no power" ... "The people of Libya love me!"), while more and more of Libya falls to opposition forces. Evidently the man has lost whatever connection to reality he may once have possessed. The Pentagon has meanwhile assembled naval forces off Libyan waters – possibly to enforce a no-fly zone.

While all eyes are on Libya, Egypt has once again decided not to reopen its stock market – the reopening of the stock exchange has been been postponed repeatedly, so this is almost business as usual by now.

"The Egyptian Exchange, shuttered for over a month, was to resume trading on Tuesday. But in an overnight statement, exchange officials said the market would reopen instead on March 6 to 'allow investors to profit from the government's support to guarantee stability in the bourse.'

"The decision reflected the strong undercurrent of unease in the Arab world's most populous nation where the market's benchmark stock index had shed almost 17 percent in two consecutive trading sessions before it closed at the end of the business day on Jan. 27."

Keep the market closed to 'allow investors to profit from the government's support to guarantee stability in the bourse'? Good luck with that one.

As a final note on the Middle East, we continue to recommend keeping an eye on Iran. The regime is evidently worried, and given Iran's importance as an oil exporter, any unrest in that country would arguably have an even bigger effect on the oil market than Libya's recent disintegration.

Ireland and the Arrogant Eurocracy

Via Dr. Jim Walker of the excellent research firm Asianomics, we have been made aware of some of the things various eurocrats have had to say about the Irish election. Some of these quotes are remarkable for their unbridled and quite unwarranted arrogance.

"As Irish voters headed for the polling booths on Friday, the European Commission bluntly declared that the terms of the EU-IMF bailout "must be applied" whatever the will of Ireland's people or regardless of any change of government.

"It's an agreement between the EU and the Republic of Ireland, it's not an agreement between an institution and a particular government," said a Brussels spokesman.

A European diplomat, from a large eurozone country, told The Sunday Telegraph that "the more the Irish make a big deal about renegotiation in public, the more attitudes will harden."

"It is not even take it or leave it. It's done. Ireland's only role in this now is to implement the programme agreed with the EU, IMF and European Central Bank. Irish voters are not a party in this process, whatever they have been told," said the diplomat.”

(Our emphasis)

Hello? Irish voters are "not a party in this process"? Irish voters – i.e. the tax cows that have been condemned to bail out their failed banks so that the highly leveraged German banking system can avoid a debt restructuring broadside – may well go from "revolution lite" as the WSJ calls the election outcome (since essentially, one conservative party was exchanged for another), to a "real revolution." As an aside, while the WSJ asserts that 'Ireland needs Merkel," we believe it is exactly the other way around (see further below as to why). Our understanding of 'democracy' is that voters are the ultimate arbiters of such things. There is no agreement that can not be amended or broken if voters feel they have been sold out by the government that signed it. As the Telegraph notes further:

"Dessie Shiels, an independent candidate in Donegal, said: "People have not been given the basic right of deciding whether or not they should have their taxes increased in order to repay bondholders who have lent to the banks."

David McWilliams, an economist and former official at the Ireland's Central Bank, has led calls for a popular vote under Article 27 of the Irish constitution, which requires on a matter of "such national importance that the will of the people ought to be ascertained."

"We have to re-negotiate everything," he said. "Obviously, the first way to do this is to make them aware that if they force us to pay everything, we will default and they will get nothing. So they had better get a little bit of something, than all of nothing. To make this financial pill easier to swallow, we must take the initiative politically. We can do this via a referendum.

"If the Irish people hold a referendum on the bank debts now, we can go to the EU with a mandate from the people which says No. This will allow our politicians to play hard-ball, because to do otherwise would be an anti-democratic endgame."

Declan Ganley, the Irish businessman who led the 2008 No vote to the Lisbon Treaty, said Ireland must "have the balls" to threaten debt default and withdrawal from the single currency.

"We have a hostage, it is called the euro," he said. "The euro is insolvent. The only question is whether Ireland should be sacrificed to keep the Ponzi scheme going. We have to have a Plan B to the misnamed bailout, which is to go back to the Irish Punt."

(our emphasis)

Got it in one, Mr, Ganley. Ireland is the party that has the leverage in this situation, not the EU. The decisive point is this: The euro is a kind of roach motel – it's easy (too easy) to get in, but it is very hard to get out.

Why is it so hard to get out? It isn't, as the outgoing Irish government asserted, the fact that government would find it hard to borrow money in the markets after a bank debt restructuring, or even after a restructuring of the government's own debt. Greece, which has been bankrupt for half of the past 180 years, is proof positive that it is fairly easy to find new suckers for government debt after a while.

No, at the root of the roach motel problem are the banks themselves. If the population suspects that an abandonment of the euro is imminent, worries that the national currency likely to succeed the euro will be devalued would provoke a flight from the banks – depositors would shift their deposits to other banks somewhere else in the euro area. Both Greece and Ireland have in fact been plagued by such a flight of depositors already, to varying extent. In fact, the biggest and quite obviously bankrupt Irish banks have bled deposits at an enormous rate lately. With the banks completely zombified, worries about a flight of depositors should be much reduced – since they have already largely fled.

The banking system is however also a big worry for the rest of the EU. Why was the Irish government forced to accept a bailout? What was so urgent? Why was it so important to especially avoid a restructuring of the senior debt of Ireland's banks? The answer is that an Irish debt restructuring imposing a big haircut on bondholders would hit banks elsewhere in the euro area (including the ECB, as it were). The way we see this, Irish voters will eventually prove the arrogant unnamed European diplomat from a big country wrong. They will eventually be a party to the proceedings. Negotiating a lower interest rate on borrowings from the EFSF, the currently enunciated goal of the new Irish government won't be enough. It won't do the trick because the burden will still be too large.

We would note here, as we have repeatedly done before, that it does no-one any good to pretend that losses don't exist or that the giant fiat money Ponzi scheme made up of unpayable government debt and de facto insolvent fractionally reserved banks can be forever kept going by heaping new debts atop the old ones. If we want genuine, sustainable economic growth to resume, the only way to achieve that is to bite the bullet. Acknowledge the losses and let them fall upon those who have invested unwisely. This is not merely a question of morality, as prominent Keynesians like Paul Krugman keep saying. It is a question that concerns the system of free market capitalism itself. Capitalism is not supposed to privatize profits and socialize losses. This is a perversion of the free market system that will ultimately serve to destroy it.

In addition, as the EU lurches toward the 'big accord' planned for late March – a.k.a. the Grand Bargain (Portugal may well fall into crisis before that date, as its bond yields remain stuck above the crucial 7% level and large debt rollovers are awaiting it in March) , there are evidently plans afoot to make other European nations more like Germany. Unfortunately this is not merely about fiscal rectitude as such. It is also about the desire of the German political class to impose Germany's high taxes on everyone. Ireland would do well to think twice about agreeing to such stipulations.

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Portugal's 10 year bond yield sits at 7.45%. Greece and Ireland both became EFSF wards when their yields crossed the 7% mark. And yes, this is a bullish (bearish for Portuguese debt) chart.

Continue to Part 2 >>