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Optimists say EU has a trump card

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by Peter Switzer

Let’s face it, most us are flying blind when it comes to Europe and so whether the EU can come up with a master rescue plan is simply a gamble.

There are some smart players who think the eurozone will break up and Spain and Italy will need rescuing but they are both too big to fail and too big to be saved! Then there are other smarties, like yours truly, who believe in the muddle-through thesis but the EU, the ECB and the IMF, I argue, have to come up with some shock and awe to KO those pushing government bond yields for the likes of Italy, Spain and France up.

Overnight the Dow sold down both because of some negative news out of Europe, but nothing significant — just the usual — and also the technical level of 1225 on the S&P 500 index was broken. This kind of thing takes markets down.

But amid this gloom, there’s hope for a boom, eventually.

Boubouras’ view

George Boubouras, head of investment strategy at UBS was recently at Harvard studying and one of his fellow students was the new PM of Greece, Lucas Papademos! And he literally left Boston to take up the new gig in Athens.

Boubouras says he’s a genuine hotshot technocrat, a graduate of MIT and has qualifications as long as Michael Jordan’s arm! He’s buoyed by the fact that democracy is taking a backseat in Greece and Italy and technocrat governments are now in charge. He thinks this will lead to both economic policy and debt management positives for these two countries.

Boubouras says the power to get things done, without the fun and games of politics raises the chances of some progress happening in the EU’s troubled economies.

“I believe the game changer has begun,” says Boubouras, “but it is a big game of chess.”

He says the ECB has a “silver bullet” and they haven’t unloaded it but he thinks they will. He thinks they have to follow Bernanke’s lead in 2008 and unleash an unlimited bond-buying program until they create bond yields that governments can afford.

This would be a massive butt-kicking exercise for the bond vigilantes, much like the Swiss central bank did recently when the Swiss franc was being bidded up by speculators.

It’s like what Julia Gillard said to Tony Abbott at the beginning of their battles in Canberra. “Bring it on, bring it on,” she teased.

Tackle the bond vigilantes

Boubouras says the failure of MF Global has also made things worse because there are forced sellers of bonds but the main point is that now that the governments of Italy and Greece can deliver what the likes of the ECB and the IMF would want, the big guns can be brought out to tackle these bond vigilantes.

Boubouras also says the ECB needs to cut interest rates again and he expects that to happen.

Clearly, there’s only one thing you can say after taking all of what Boubouras has revealed on board — by George, I hope he’s right!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, November 18, 2011

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