It’s been another whiffy two weeks courtesy of the PIGS. Last year the ECB were the most hawkish of the central banks in terms of money printing, bailouts and rate cuts. That’s why their interest rates are still ludicrously high at 1%! This hawkishness meant there was always a remote chance that they were going to sit back and watch events unfold.
Fortunately, the fact that Europe’s banks and the ECB hold huge amounts of the PIGS’ debt meant that there was sufficient domestic incentive for them to step in when things started to unravel. Add to that a phone call from the G7 and a little chat with Obama and the result was an ECB capitulation and a trillion dollars being made available.
One of interesting things was how rapidly decisions were made once the situation started to deteriorate. A few phone calls and a weekend of chit chat and wham, $1,000,000,000,000 was put on the table. And when it was announced, it didn’t come as that much of a surprise. It’s amazing how easy and acceptable money printing has become. The announcement actually pushed the euro up to $1.31 – gone are the days when money printing was bad for a currency. Last week Mervyn King mentioned that he might be up for a bit more money printing and it hardly caused a stir.
The other thing that was interesting was that when the $1,000,000,000,000 was announced, it didn’t sound like that much. It would have sounded like a lot if it had been somebody’s pay rise, but as bailouts go, it didn’t feel that momentous. We’ve regularly heard much bigger numbers over the past few years, and in our minds, money is rapidly losing its value.
The last 2 paragraphs were a bit of a detour and only loosely connected to what I want to talk about - the reassuring similarities between Greece and the UK housing market – which conveniently support some of the points we’ve made in the past.
Greece is generally regarded as a basket case with debts so high that there is practically no chance that they can ever be repaid. It’s just not possible to have a big lunch, a bottle of wine and a nap and be able to pick enough olives to repay what they owe. When it became common knowledge that they retire at 53, it would have been nice to have chuckled smugly and said “An extra 14 years of work sounds much worse than it is. Enjoy your recession.” Fortunately for those wiley Greeks, they borrowed so much money that Europe and the rest of the world can’t say that. Instead they have been bailed out so that they (and a few other countries) don’t collapse the European and world economies. Sure, they are putting a few austerity measures in place, but they probably won’t be sufficient or last very long, so the end result is likely to be a restructuring of their debt and losses for the creditors.
BIGBLEU thinks Greece as a component of the Europe looks very similar to the UK housing market as a component of the UK economy.
The UK housing market is a basket case. By many traditional measures it’s way overvalued and homeowners are carrying massive amounts of debt. When it became common knowledge that there were buy-to-letters with multiple 100% mortgages and higher, it would have been nice to have chuckled smugly and said “You foolish, greedy arse. Enjoy the negative equity you’ll still be repaying when you’re a grandfather.” Fortunately for those wiley home owners and buy-to-letters, they borrowed so much money as a group that the rest of the UK can’t say that. Instead they have to be bailed out so that mortgage defaults don’t require further taxpayer bailouts of private banks, state owned banks, reverse the economic recovery and push us into a savage deflationary spiral.
To put it another way, as we said in our blog dated 7 Jan 2010, we think homeowners as a group are safe from house price falls because the housing market is “too big to fail”. The urgency with which Europe, the ECB and the rest of the world supported the Greek rescue demonstrates how scared the authorities are of the banks taking more losses. Indeed, the tightening of the credit markets last week shows how scared the banks themselves are of further losses - banks immediately stopped trusting each other, just like in the aftermath of Lehman Brothers. The UK Government and BoE will be just as keen to avoid the UK housing market triggering losses for banks.
The housing market has already been rescued, but the important point is that we think it will continue to be – with continued low base rates and mortgage rates, using printed money if necessary. In parallel, general inflation will be stimulated to lift prices and erode debt. Conveniently, as I said in the detour I made earlier, printing money is now acceptable and large numbers go largely unnoticed.
BIGBLEU mentioned in the last blog that RPIX currently stands at 4.8%, up from 4.2%. Until 2003, RPIX of 2.5% was the BoE’s inflation target. So ignoring all the CPI jiggery pokery, current inflation is nearly double the old target and a mortgage disappears at nearly 5% a year without the homeowner lifting a finger.
A litmus test of continued support (relative to everything else that needs support) will be the budget - in particular, the application of any changes to capital gains tax to the housing market. Given our views, we think the application will be a very light touch if anything at all.