BMO Financial Group (BMO)
August 24, 2011 11:00 am ET
Matthieu Debost - Managing Director and Head of European Sales
Paul Taylor -
Sherry Cooper - Chief Economist of BMO Financial Group, Executive Vice-President of BMO Financial Group and Global Economic Strategist - BMO Financial Group
Peter Scott -
Unknown Analyst -
Good morning, ladies and gentlemen. Welcome to the BMO economic and market outlook panel on Europe conference call. I would now like to turn the meeting over to Mr. Peter Scott, Corporate Communications. Please go ahead, Mr. Scott.
Thank you, operator. And good day, everyone. In the tumult that has characterized the world economy over the past several months, much of the attention has focused on Europe. Whether it's austerity in Greece, growth worries in Germany or the future of the Euro, observers and investors are looking for views on how Europe's troubles are affecting the world economy and what new issues might be over the horizon.
Today, we are joined by 3 BMO experts who'll provide their views and outlooks for Europe's economy and markets. Today's discussion features Dr. Sherry Cooper, Chief Economist at BMO Financial Group. Dr. Cooper is a former economist at the Federal Reserve Board. She is also the 2010 recipient of the Lawrence Klein award for U.S. forecasting accuracy, beating out a panel of 50 economists, predicting the 4-year period from 2006 to 2009. Dr. Cooper is joining us today from Toronto.
Also on the call today is Paul Taylor, Chief Investment Officer at BMO Harris Private Banking. A 25-year veteran of the investment industry, Mr. Taylor leads the investment research and portfolio management team at BMO Harris Private Banking. He also heads the investment policy committee, which is responsible for the overall investment strategy of the firm. Mr. Taylor joins us from Chicago.
Finally, our call will feature Matthieu Debost, the Head of Equities for BMO Capital Markets in Europe. Mr. Debost leads the BMO Capital markets team at its Paris office, offering institutional equity sales and trading services for European clients. Previously, he oversaw Canadian equity sales in Europe for a major European bank and worked for 18 years at that bank's office and predecessor firm Bunting Warburg, in Toronto. Mr. Debost is joining us today from Paris.
Dr. Cooper, Mr. Taylor and Mr. Debost will each give a short presentation, after which we will open the call to questions. The operator will provide instructions on how to ask the question at that time. Please be advised that while this call will be conducted in English, media participants are welcome to ask questions of Mr. Debost in French. In the event of such a question, Mr. Debost will reply in French and then quickly summarize the exchange in English for the benefit of other members of the audience.
Leading off our discussion today is BMO's Chief Economist, Dr. Sherry Cooper. Sherry?
Thank you very much, Peter. Well, welcome, ladies and gentlemen, to our call. Of course, this is a subject that has received much attention for more than a year now and, of course, since the very beginning of the introduction of the Euro back in 1999.
Just a very brief historical comment. The introduction of the Euro has been remarkably successful even with the current sovereign crisis. I think it's safe to say, it's fair to say, that this has been a remarkably successful introduction. The Euro is a relatively strong currency, as well, it's the second reserve currency after the United States in the world. And I can also say that without a doubt, for a number of countries, the Euro introduction has been tremendously beneficial. We've also seen countries benefit with enormous current account surpluses just as some of the more troubled countries have huge and growing current account deficits.
Having said that, however, more than a year ago, the problems associated with Greece in particular came to light. Remember, Greece was not allowed in the initial group in the European monetary union because of its huge debt and deficit problems. And was only allowed in, in fact, as we have found out subsequently by, shall we say, cooking their books. So the fact that Greece became a basket case and indeed, is insolvent and unable to meet its requirements, its fiscal requirements, is not a surprise.
What has happened most recently, however, is we have seen a global economic slowdown and most importantly, Germany, long the European growth leader, posted growth in the second quarter at a mere 0.5% annual rate, which was much weaker than expected. And combine this with the fact that France posted no growth at all, the U.K., which, of course, is not in the monetary union, had grew at less than 1%. And with that, you can see very, very weak growth North America and a slower growth pace in Asia.
So as a result of this, we've seen commodity prices declining. I do believe, however, that the major selloff in the stock markets were reflective not just of the slowdown in the global economy, but also by the continuing problems in the European Union and most specifically in the recent past the continuing problems in Greece, where it became painfully evident that Greece would need another bailout and the contagion of these concerns to Spain and Italy, and then even to France as there were rumors of the possibility that France would be downgraded. Rumors, which subsequently were denied.
In addition, we've seen as of the end of last week, not only a whopping 43% plunge in the Eurozone stocks, but as well, we've seen a tremendous decline in the stock prices for European banks as many of these European banks have enormous holdings of not just Greek debt, but in fact, the debt of many of the 17 members of the European Union.
There was very little comfort taken in the press meeting that Chancellor Merkel and President Sarkozi held about, well, early last week. The key problem here is one that's been recognized for a very long time, which is the fundamental flaw, in my view, in the construction of the Eurozone, which is the absence of a coordination mechanism for fiscal policy, similar to what does exist for monetary policy.
Most, I think, would agree that the time has come to revise the architecture of the Eurozone toward deeper fiscal integration by creating a single authority that can issue Eurobonds and coordinate fiscal policy. Way back with the Maastricht agreement, this issue was very fully recognized. The problem was that European countries were not compliant with the Maastricht requirements and ironically, Germany and France were the first of the noncompliant group, although as I say, Greece was not being forthcoming.
Nevertheless, it is clear that more has to be done to coordinate to create a deeper integration of Eurozone fiscal policies. Unfortunately, both Merkel and Sarkozy have firmly refused to bow to the pressures to reinforce the European bailout fund, the EFSF, or to consider commonly issued Eurozone bonds. They have stated that neutralizing the debt while the 17 members pursued divergent, fiscal and economic policies made no sense. Although they did leave open the possibility, and I think it is read by the market, the real probability of a Eurobond market sometime in the future when fiscal policies were more coordinated. What they did propose was the development of a common governance body with authority to harmonize national fiscal policies, although the whole thing in this regard is very, very vague.
Clearly, countries with current account deficits would have to commit themselves to more restrictive fiscal policy. This unfortunately, of course, bears with it a significant slowing in the economy, throwing many of these countries into recession, which reduces the tax revenues and further exacerbates the budget deficit. Further declining government spending and increasing taxes or limiting wage increases is something that we have seen introduced in Greece, in Ireland, in Portugal, now in Spain, and very aggressively in Italy and increasingly in France.
Now, leaving this up to the individual countries, given that the leaders are elected individuals and political considerations are very, very important, has proven to be extremely difficult. In addition, in this scheme, countries with current account surpluses, which include Germany, most notably, Finland, Austria, Luxembourg and The Netherlands would have to strengthen their domestic demand through higher wages or benefits or via tax cuts, and we've certainly not seen that. In fact, Germany over the last decade has dramatically restructured its labor markets. We've seen wage rates increase very, very slowly. And Germany, therefore, has become a far more competitive economy, export driven, now able to compete better with Asia and North America.
Now in the medium term in common economic area, the countries are going to have to levy joint taxes and have significant common budgets. Now France and Germany have made a start in that they have agreed to work toward a common corporate tax rate of 26% and support all EU countries moving to that tax rate. Which has made Ireland irate, in that Ireland has benefited from a much lower corporate tax rate.
In addition, the Germans and French are calling for balanced budget requirements to be anchored in the constitutions of each of the Eurozones. Which of course, bears with it the problems I mentioned earlier of pro-cyclical fiscal policy. Meaning that when economies weaken, these countries would be forced to raise taxes and to cut government spending. The states and local governments in the United States are suffering from just such balanced budget amendments.
Where we stand right now, where do we stand right now? Eurozone government leaders agreed on July 21 to allow the EFSF to buy sovereign bonds directly in the secondary market, and earlier had decided to boost the fund's effective lending capacity to EUR 440 billion from the current level of EUR 250 billion. In an effort to alleviate investor concerns about the Eurozone debt crisis, both Merkel and Sarkozy last week urged the region's parliaments to approve the changes to the EFSF by late September. And just today in Germany, Merkel has -- it has been released in the media that Merkel is looking towards a date of September 23. There is little prospect, in my view, that all of the countries in the EU will be able to push this through Parliament by the end of September.
This is extremely complicated. There are 17 separate governments, and there are vested interests in each of these governments. There's no question that this could take more time. And whether the markets will calm down, and I'm hopeful that they will, allowing this to proceed in a timely but a more deliberate fashion remains a question. And so unfortunately, it's clear that this uncertainty will plague markets for an extended period.
My view is that at the end of the day, the Euro will remain. All the countries in the European Union, however, may not remain. There is, of course, the probability or possibility that countries like Greece would be exiting. I believe, however, that, that would be so disruptive and so inflationary for Greece that instead, other measures will be taken to more forcefully integrate the fiscal policies to create what ultimately will be a federation of European countries, commonly called the United States of Europe.
I'm going to stop with that and be happy to answer any questions later.
Thank you so much, Sherry. Now we will hear from the Chief Investment Officer at BMO Harris Private Banking, Paul Taylor. Paul?
Thanks, Peter. I think there are probably a few questions that would be relevant as it relates to the investor reaction to all that's going on. The first would be, should investors be concerned about what is happening in the U.S. and Euroland and why? And in that regard as it relates to the debates related to debts and deficits and where we are in the U.S. and Euroland, policy makers were, really, they had 3 objectives as they have gone through their deliberations, and they are as follows.
One is they were trying to assure -- and these are by the way, these are in a very particular order, order of priority. One is growth, is economic growth. They were trying to maintain some momentum in terms of the global economic recovery, and obviously the economic recovery in their own geographies. The second is that they were trying to hit manageable debt and deficit targets. And the third is they were trying to provide the markets with a sense of credibility in them as policymakers in lending at the right points as it relates to the future trajectory on both growth and debt and deficits targets.
So as it relates to those 3 objectives, the U.S., yes, lots of noise, but at the end of the day, I think they have established that they will continue to have a recovery. It may be much more modest as a result of the actions taken thus far or that will be addressed through the super committee deliberations in the fall. They've at least done some heavy lifting as it relates to the deficit over the course of the next 10 years and, hopefully, arrested the buildup of future debt as we go forward having fundamentally changed the situation too meaningfully.
The big issue in the U.S. is credibility, and that is are politicians really up to the task of dealing with issues given the complexity. But in the U.S., I would say, I think we're by the worst of it, there'll certainly be noise as we go forward. But much more concern in support of Sherry's comments about Euroland, and are we really coming together on these 3 objectives? Growth is very much a question in not just the peripheral European countries, but in core European countries, as Sherry indicated, in terms of recent Q2 data for both Germany and France; a little troubling.
The debt and deficit targets, there is no sense that we have tackled the fundamental issue, which is one of solvency. If one naively uses 100% debt to GDP, we have a number of geographies in the European Union, which are if not there, are close to there. And that would include at very least, that would include Belgium, certainly Italy, certainly Greece. And nothing that we have done thus far has fundamentally addressed the solvency issues as it relates to core Euroland.
And credibility, the political process if we thought it was challenging in the U.S., when we try to pull together the disparate views of 17 nations and with elections coming in core Euroland, this is very difficult. So Euroland is definitely something investors should be concerned about.
The second point is given recent volatility, what would our advice be to jittery investors? The first is, and of course we do manage money for individual retail clients at the end of the day, and I would certainly reiterate this and that is to remain objective. We have a lot of clients who believe that this is the time to go 100% to cash or others who look at it from the other side of things. It is -- there's lots of noise out there, but we would argue that one needs to step back and just objectively look at what's happening in one's own risk-return profile and make sure that their portfolio is pointed in the right direction in immediate longer term.
The second point is reduce risk profile. I think it does make sense at this point in time. At BMO Harris, we did between March and the beginning of July, we did Dow equities back in our portfolios generally in the neighborhood of about 6% to 8% across our client portfolios. And that really was to reflect the fact that we felt that we were going to be going through in Q3 of 2011 a period where there was the potential for some meaningful macro risks to dominate the scene from an investment perspective and to overwhelm the story that really for the previous 18 months that had dominated, which was that we had coming out of the great recession and the significant capital markets event, we did have a fairly meaningful global economic expansion that we felt, anyway, was the dominant theme. But Q3 clearly, it could be, it could mark a change of direction for markets. So we did reduce our risk profile, so we would suggest a somewhat lower equity rate.
The third would be to be opportunistic. So notwithstanding my previous point, is there always, where there's such significant volatility, there are always opportunities. So just using today's markets as a benchmark and using recent earnings expectations for 2011, for instance, for the domestic Canadian market using $900 in earnings as a target, the S&P/TSX trading at about 12 to 50, that would imply that the trailing earnings we get out at December and we traded the same levels and hit those earnings, we would be trading at about 13.6x and not particularly expensive. The S&P 500, if you take a conservative approach to earnings of $90 with the S&P 500 trading at 11 66, you get a 13x multiple.
There are certainly opportunities in the marketplace, and the question is where are they? And that's really the third question and that is are there safe havens and where are they to be found and what sectors are preferred? First, from an asset class biased perspective, to be honest, we're fairly neutral on the equities versus cash and bonds call. We were overweight equities as I mentioned, we did reduce equities back through Q2 2011. We're now at the point where we're pretty much neutral between equities and bonds and cash.
We're also relatively neutral on geographies with one exception, and that is we are generally underweight or avoiding Euroland more broadly from an exposures perspective. Even though from a -- looking at it from a valuation perspective, it might look less expensive than what I indicated before, as a relatively cheap North American market. It's hard to really have strong visibility around those earnings. And so at this point in time, we're a bit shy on Euroland as a geography.
Our bigger bet from our perspective is not at the broad asset class level or by geography, it's more by characteristics and by cap. We believe that the quality franchises, ones that will be here today, tomorrow, regardless of external environments, should be a focus. There, where we do have a moderately pro-defensive sector bias, and so that would be generally away from base and precious metals, generally away from energy, generally away from consumer discretionary and technology. And a little more of a bias on Consumer Staples, utilities, telecom, and those sort of pro-defensive sectors.
It's, in our view, it's a time to load up on yield, and that is definitely a theme that we're reflecting in our portfolios. And so that certainly is something that we believe that investors should be taking advantage of in the current environment. When 10-year using the domestic market as the bogey, when 10-year government Canada bonds traded at 2.35 yield, and when we can buy Canadian bank stocks very well capitalized with yields of 4.5%, once we know is that there'll be no increase on income on Canada's but we would hope that at some point, we'll see future dividend increases for the Canadian banks and, of course, the argument in favor of dividend income versus interest income. At the end of the day, we believe there are some good opportunities there.
The only last one is just the Euro as a currency. On the currency front, the one thing that we're focused on, this is more longer term, it's just more less focused on the Euro, but more focused on whenever you like to talk about currency, you have to talk about both sides of the trade. The other is, who you would be trading into. Our sense is the U.S. dollar. Yes, in the short term, it's the beneficiary of a flight from risk. But intermediate term, longer term, we're interested to see whether U.S. debt and deficit issues will cause the U.S. dollar to be under some pressure as we move forward.
I'll leave it there, and pass it back to you, Peter.
Thanks so much, Paul. Now we will hear from the Head of Equities in Europe for BMO Capital Markets, Matthieu Debost. Matthieu, please go ahead.
Good morning. Can you hear me?
Good morning. And as was just said, my name is Matthieu Debost. I head the equities team for BMO Capital Markets in Europe. In fact, BMO is the only of the large Canadian, 5 large Canadian banks who have a presence in Paris. So hopefully, we can give you a certain sense of what we see, what we hear from our clients on the ground here and on the continent.
I'd like to make 4 points and a conclusion. The 4 points are, first, a quick historical point. Secondly, address the misconceptions. Thirdly, look at some of the solutions which have been briefly mentioned by Sherry earlier. Fourthly, give you some flavor as to how Europeans are reacting to this crisis, and then going to a conclusion, if that's okay with you.
So first of all, a very quick historical background because it's very important to understand that the Euro was a historic deal between the Germans and the French when between President Mitterrand and Prime Minister Helmut Kohl of Germany in 1991 when the wall fell, and Germany wanted to reunite with East Germany and the French were -- not only the French but many countries were quite reluctant. So basically, the French accepted the unification of Germany in exchange for the German to accept the Euro. And this historic deal is so important to understand that it is unquestionably the foundation of the Euro union and, in my view, will continue to be in the future.
What's important to understand is this is not a crisis of the Euro. This is a crisis, this is a debt crisis within the Eurozone. And as Sherry mentioned earlier, the future of the Euro is not at stake. It's basically the rules of the Euro and the debt crisis within the Eurozone.
Secondly, I'd like just to talk about a couple of misconceptions out there. When you read the American press, the English press and the European press, quite often, you see a total different world. It's a little bit, when I read the Quebec press and the English press in Canada, I often wonder if we are in the same country, and sometimes, you see the same thing here.
The first point is on the German banking system. There is a view out there that Germany has a very strong position, and it absolutely does in many ways. But its banking system is actually the weakest, one of the weakest in the Eurozone. It was the most exposed to the U.S. subprime crisis, and it is today the most exposed to the PIGS debt, and it is also the most undercapitalized. So clearly, the Germans have a huge issue on their hand, particularly with Basel III coming, and it is something that most, maybe, commentators do not fully grasp.
The second point is that Euro, there's a feeling that the Euro is a weak currency. Sherry mentioned this earlier. In fact, it's completely the opposite. So far this year, the Euro has gone from $1.34 to $1.44. So you can see that it's actually appreciated this year. It's been extremely strong currency globally despite all of this debt crisis, which is pretty amazing. It shows you how much there is a debasement of currencies globally. And this is mainly because Mr. Trichet is perceived as much more hawkish than Mr. Bernanke. We have also higher rates in Europe, but it also reflects the fundamental weakness of the U.S. dollar.
The third point are the solutions. As you know, Europe is not a federation, it's not even a confederation. It's just a European Union. And there are 3 solutions right now that are being looked at. One is the European financial stability fund, excuse me for the acronym, but it's EFSF. Sherry mentioned it earlier. There's a challenge to approve it, but in the meantime, the European Central Bank is basically doing the job and will be replaced by this EFSF. So for now, it's maintained a certain degree of liquidity.
The second solution are the Euro bonds. Basically the mutualization of all the European countries debts and where, starting tomorrow, for example, European committee will issue its own debt through Eurobonds, replacing the French sovereign debt or the German sovereign debt. The problem is the European committee is not collecting direct taxes, and therefore, they're unable to borrow. And also, how can you have the rich helping out the poor if the rich cannot keep an eye on the poor. So we need rules, and this all takes time.
The third solution is a massive increase in the GST. There are some influential economists who are pushing for a onetime 2% increase in our GST, which here we call VAT from usually, depends on the country, but it's usually 18% to 20% right now. So you would add another 2%. That 2% alone would wipe out all the deficits overnight. So it's one of the solutions that's been looked at. Given the economic environment, it could be difficult to implement, but it's something that's been talked about.
The fourth point is just on local flavor. What, how investors, citizens, corporates are reacting? First of all, citizens. The citizens, first of all, are very attached to the Euro. They're very attached to the European community, but they don't like Brussels. So if they don't like the Barack O. scene in Brussels, they don't like the democratic deficit of Brussells, where we have a European Commission that is not elected. So that creates tensions, or mistrust, if you prefer, not to mention little things like unpasteurized cheese being forbidden by the European committee. Those kinds of things are very unpopular. But generally speaking, there is a consensus, politically, whether it's in Germany or in France to do whatever it takes to keep the Euro going. The only thing, of course, that everybody is looking for here is will it be an increase in taxes. That is a given. The question is, how much?
Investors, how do investors react? The first thing investors did in the last, particularly in July, and of course in early August, they sold equities right away. Because when they saw, when they heard about the potential recession, the default in the U.S. and all these potential risks, they lived through 2008, and they just don't want to lose money again. Been there, done that. So that's why you've seen European equity markets underperform massively, even the U.S. markets, very rapidly in late July, early August.
The corporates, on the other hand, have a different perspective. They're very healthy, usually, they're the large companies in Germany and France, have good positions, healthy balance sheets, and are benefiting, of course, from the global economy. So what they need, though, is they actually need a weaker Euro in a funny way. And they're all, for example, the maker of Airbus, EADS, has been pushing for years to have a weaker Euro because they're suffering from the strong Euro. So but it's just not happening yet. And so you have different perspective from different people.
So in conclusion, the feeling we get from our clients is that unlike in 2008 where governments, when investors, citizens have confidence that the governments were proactive and they were somewhat effective in confronting the global financial crisis after the Lehman crisis at the end of '08, this time, our feeling is that Europeans are little more skeptical at the ability of politicians to address the issues. And this lack of simple answer is really the fundamental background for this uncertainty and this volatility that we're seeing.
So the first thing we've seen is a massive flow into the Swiss franc, for example. I don't know if you've noticed, but if you look at the beginning of the year until now, the Swiss franc has had tremendous increase until the Swiss, basically, said enough is enough, about 2 weeks ago, and took a negative -- put a negative yield on their debt. You basically had to pay money to buy Swiss francs. So they stopped that. So then they went into gold, which had a huge rally until yesterday. So they're looking for places to park capital.
So this is, hopefully, gives you a little bit of a background of our local flavor. And I will stop now and open to questions. Thank you.
Thank you so much, Matthieu. And now we're pleased to open the conference line to questions. The operator will now provide you with instructions on how to ask your question.
Operator, please go ahead.
[Operator Instructions] The first question will be from Lloyd Urman [ph] at The Globe and Mail.
Unknown Analyst -
I guess this would be a question for our man in Paris. Just how big -- the one thing that I'm struck by and I wonder what your take on it is, is that the disconnect between some people perceive between the equity and the credit markets in Europe, or the credit market just seems to be pricing in considerably worse situation than the equity market. I mean, who's right? Or is it just somewhere in the middle, or is that even the way you see it?
I'm not sure that is correct. I think the equity markets actually have done worst in Europe than in most other places because of what you're precisely highlighting, which is the credit and the CDS market is particularly tough right now, the intra-bank market. And so I'm not sure I'm answering your question here, but I would agree with you that there is actually a strong correlation between equities, and particularly the bank stocks have been hit very hard in Europe as a result of this. Probably, I mean, as we're seeing the U.S. right now actually, like you can see Bank of America and other, or Morgan Stanley, the French banks have been hit really hard as well. It's the same with the German banks. So I think there is actually a strong correlation. I think what I'm -- maybe what you're referring to is the real economy has been a lot less affected so far because it's been really a debt crisis. It's really a banking crisis as opposed to a real economy crisis. Companies are strong. They're doing well, generally speaking. The consumer has been doing well until very recently. So the economies, and particularly the French and the German economies -- are more the German economy, of course, than the French -- but generally has been okay, until very, very recently. And then the question today is how much is this banking debt crisis going to affect the consumer and corporate spending over the next 3 to 6 months is what everybody is struggling with. And I think we're waiting for a budget, which in France, for example, or in Germany comes out in the fall because it's financial year end is December as opposed to March in Canada for budget. So we're going to have it in the next 2 months, we'll know what the bad news is in terms of taxes. And that's going to happen throughout the European community basically. I hope that answers your question.
Unknown Analyst -
Sure. And I'd have a follow-up if that's okay?
Unknown Analyst -
That'll be -- if we take back to 2008 issue, there was the confidence issue clearly for consumers and businesses but there was also a fundamental access to credit issue for consumers and businesses where otherwise creditworthy companies were shut out. Markets couldn't borrow economically. Is that all the case in Europe right now, are there any signs of that?
No, because I think there is a consensus that no European government will let a financial institution fail the way Lehman failed. It may go into some kind of a government bailout. But it will not let -- they will not let a financial institution, and they will not let a domino effect happen. That is, I think, that's pretty clear. So maybe it will happen, but there's a consensus that the lesson has been learned.
The next question will be from Giom Poulain Financiere Investissements.[ph]
Unknown Analyst -
This is Giom [ph]. I'm wondering what do you think about the impact of the new tax that is proposed by France and Germany on financial transaction? What would be, you think, the impact on Canadian and North American markets?
Let me just begin with that, and then the rest of you can jump in. I think that firstly, it's very unlikely that, that tax will go through. It is a proposal that's been brought forward before and not gone anywhere. The British members of the European Parliament have issued a scathing attack on financial transactions tax. It's sometimes called the Tobin tax. But Tobin envisions it as a tax on spot currency transactions only. But what Merkel and Sarkozy are referring to is a tax on stock bond and currency transactions. This would, it actually would generate relatively little revenue. Indeed, it could end up reducing revenues that come from capital gains taxation. If it were not imposed everywhere in the world, then it would lead to a dramatic decline in the volume of transactions in the markets in which it was imposed. And in the cases where we've seen this, for example, there was a financial transactions tax implemented in Sweden in the mid-1980s, it showed that it actually led to a decline in stock prices, higher government borrowing costs -- in other words, increasing interest rates for government -- and dramatically reduced volume of transactions, which, of course, limited the revenues from this source. And once the tax was eliminated, trading volumes returned, and stock prices began to increase again. So I see it as a nonstarter, and I do think that it would be -- the U.K. will not introduce it, and so it would drive just even more financial activity away from Continental Europe. Paul or Matthieu, if you have any other comments.
I mean, I would just support -- that I mean, it's just totally counterintuitive that at a point in time when you're almost starved for capital, that when you would want to attract capital that you would impose an impediment for capital too. I mean, at the end of the day, as an investor, if there are restrictions, be it in this case monetary for transactions in Euroland, I'll go elsewhere, and so it would be, just timing-wise, it would be totally counterintuitive. So I hope it doesn't see the light of day.
Yes, it reduces the competitiveness of the European forces in financial markets, which means fewer jobs and weakening economic activity.
Maybe if I can just answer as well, try to give you an answer. I think first of all, you asked specifically what it would do to the North American markets. Well, it would probably help volumes in North American markets over time if it were to happen. But I think first of all, it's a very popular tax for the average, if you ask the average French or German citizen whether we should tax financial transaction, I think 95% would say yes. So then it becomes, then you have to sit down and sit back and say, Well, is it a rational transaction? Where are the consequences? And really as Sherry and Paul just talked about, the issues are mainly that the banks would get hit the most, and they're the ones who need the most help. So it would actually create another problem for the banks. And secondly, some exchanges have already threatened that if they do pass this financial transaction tax, they'll move to Switzerland or some other jurisdiction and avoid the tax. So it's going to be very, very difficult, I think, to implement. But I have to say that it is a popular -- so there might be other ways to tax financial transactions in just a straight flat fee, but it is a popular one.
Popular as in populist.
It plays well for politicians, but it makes no sense from an economic or financial perspective.
Unknown Analyst -
Okay. So there is no chance or few chance that this tax would be implemented in Europe?
My own opinion here from Europe, is that they will talk about it a lot, but they will not implement it, it will be impossible.
Unknown Analyst -
That's Matthieu, right?
And there are no further questions at this time, Mr. Scott.
Thank you very much. I have a question, and it refers, Sherry, to what you were talking about earlier about the need for further integration. And Europe has a history of having great difficulty with achieving such integration. And if you have 17 governments, all of whom need to pass something and as you suggested, there is the great difficulty passing the one proposal by the end of September. What might be the implications if one or 2 or several countries choose to lever their power and not implement this closer integration? Do you expect that to happen? And if it were to happen, how serious would be the ramifications?
Well, my personal opinion is that the strongest countries in Europe have a very large vested interest in the continuation of the Euro, and that the other countries stand to benefit if they can get their financial houses in order and become part of a larger whole. It does, however, mean that the stronger countries are going to have to be willing to transfer or capital to the poorer countries, similar to the equalization payments that have happened in Canada, and as well in federal payments to regions within the United States. They are already doing this. Even before the crisis, they have money set up within the European union that does provide capital for infrastructure building and modernization. Indeed, even France is a recipient of some of this money. I do believe that the most of the members of the European Union are viewing themselves, at least the younger generation, as citizens of Europe now as much as they are citizens of Finland or Germany. And that was the whole point of the European Union in the first place. So I'm optimistic about the outlook. I don't believe that a Germany or a France or Netherlands will exit. And if we see the weaker country exit, I think it would be a temporary phenomenon, or a country like Greece would, in fact, just revert to going it alone and would certainly experience certainly much, much weaker currency, but an awful lot of inflation. Now there are those who believe the whole thing never made sense in the first place, and that the weaker countries should never have been let in. And there are some countries on the waiting list that had since thought twice about becoming members. Certainly, they're going to be a lot more picky about, and do the due diligence about letting new entrants into the European Union. But were they to develop this fiscal federation and a Eurobond market, it could well be a AAA bond market. It could well rival the U.S. Treasury market and its liquidity and debt in time. In time. And it could mean a much stronger combined federation than the individual parts are right now.
Great. Thank you so much, Sherry. Operator, are there any further questions?
We have a follow-up question from the line Giom Poulain [ph].
Unknown Analyst -
I have further question. I think that's Paul who said that government won't let the bank fail. So if so, do you think that the European Union will install like a TARP program for European banks? And if so, how much would be that program, and what would be the impact on the markets, especially bond and stock markets?
It was actually Matthieu who made the comment, but let me jump in and then I'll pass it over to him. Just to comment, I mean, the whole course of Basel III and through the discussion on identifying 28 banks globally that are considered systemically important is once you -- and as a matter of fact, they're looking at having those organizations, higher capital levels but also develop living wills, so to speak. By identifying them as systemically important an implicit guarantee presumably goes along with that. I think my own perspective is that through Basel III that there is absolutely a focus on the broader implications of a Systemically Important Financial Institution going under. And the regulators, policy makers both in Euroland and here in North America, very focused on the liquidity vacuum that emerged in 2008, 2009, and absolutely at all costs want to avoid a repeat of that. So I would, if you made the comment, I would reinforce that, that is the case, that regulators are going to be on the job to ensure that interbank lending rates don't show some signs of stress. We have seen a little bit of stress. We've also -- it was interesting that one European financial institution was looking for some financial support. So these are some of the creaks and groans in the system that I think investors are going to watch very closely. And as I said, the prudent course of action in light of that is to be a bit cautious, which is from our perspective, I think the right course of action, which is why we kind of dialed back our risk profile somewhat. But anyway, Matthieu?
Just your question on how the governments can make sure that there is no bank failure. If you recall in 2008, we did not have a bank failure in Europe. We had extreme situations. But governments, particularly in Germany but also in France, stepped in. The German government nationalized basically several -- the hype of Orion's bank, the local regional banks, which were extremely exposed to the subprime. Same thing with the Franco-Belgian bank Dexia, which is still 70% owned by the French government. So the first thing they'll do is, the central bank will help funding. But the second thing that, of course, the governments can do is just fund equity directly. So it has happened in 2008, and if it were, the need be it would happen again this time, in my view. Again, because of Lehman, lessons have been learned in Europe, and I think they will not let the European system fall with just one bank.
Unknown Analyst -
Okay. And what would be the impact on the markets?
Well, obviously, very negative. I mean, today, it's amazing, Giom [ph], if you look at some of the CDS of some of the European banks, it's very close to where Lehman was in 2008. So it's almost like the markets are expecting or are pricing some kind of failure or the possibility of a failure in the marketplace. But I think, clearly, I don't think it's going to happen. There'll be extreme tension. But if it happens, then game is over. Anything can happen. So that credit will get very expensive for those banks and they're paying for it. But funding will not stop.
Unknown Analyst -
Okay. So do you think that the July 2 event that gained stocks -- bank and in bank stocks have been favorably by that would dry? Or do you think that like Canadian stock, won't continue to be driven by the safe haven.
No, no. I think, Giom [ph], if you're asking specifically about Canadian equities, they are very popular with global investors. There's no question. Not only the Canadian banks but also some of the large Canadian companies. Enbridge, for example, is very well known in Europe. Just to name a few high-quality names of Canadian companies, which are well known over here. So there's definitely a safe haven aspect. Now whether the Canadian banks are exposed to Europe is, of course, they all are. And I think if there was, I think, a bank failure, everybody would get it. I'm sure the Canadians will get hit less, a lot less. But let's be very honest, everybody would be affected globally. There's no question about that
Unknown Analyst -
Okay. So if the crisis fails or dry or finish or it dies, what would be the impact on the margins?
What, I'm sorry? Your first part of the question?
Unknown Analyst -
If the crisis stops, if the debt crisis at this point stops. Because it seems that it's a matter of time when I heard all of your comments, it seems like in a few years, maybe everything will be a memory not like crisis will get to an end. So if it stops, what would be the impact for the Canadian and North American markets?
If I can just turn the question back to you, how long do you think it takes to reform the Constitution in Canada? 10 years, 20 years? The problem with Europe is because a lot of these reforms are Constitution based, they take a long time. What I think is important is that the French and the Germans, at least in appearance, are extremely aligned, and continue to be extremely totally in agreement. Of course, there are some issues. Of course, there are. But they are totally committed, and I think that is the most important thing. It will take time. There will be reform of constitutions. There will be budget controls. We're talking about installing a golden rule in the French Constitution where having a balanced budget is written in the Constitution, which would mean that if a government not does not respect the rule, you can go to the Supreme Court, the French Supreme Court, and basically cancel a loss. So Mr. Sarkozy is pushing for -- I mean this is, we're talking historic reforms, which have never happened before. Now whether it will go through is hard to know, but it is definitely being pushed very hard at the moment. I hope that answers your question.
And there are no further questions registered at this time, Mr. Scott.
Thank you so much, operator. That concludes our conference call today. I would like to thank Dr. Cooper, Mr. Taylor and Mr. Debost for providing us with their thoughts. And I'd like to thank all the participants who joined us today. If you would like to set up a follow-up interview with any of our presenters or any other BMO expert, please contact the BMO Corporate Communications main phone line in Toronto at (416) 867-3996. Thank you very much.
Thank you. The conference call has concluded. You may disconnect your telephone lines at this time, and we thank you very much for your participation.
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