By pegging its currency to a fixed EUR/CHF rate in 2011, Switzerland became an adjunct member of the Eurozone. This was the case until last Thursday, when it suddenly decided to cut loose. With Switzerland, we now have an insight into some of the risks that might emerge should a strong nation i.e. a budget surplus nation (Germany) leave the Eurozone. What we also saw last week, was a major western central bank going back on its pledge; a pledge it had reiterated to hold only a week before. It should serve as a reminder to all investors that unconventional policies will not last forever and cannot be taken for granted. At the heart of the Greek crisis is “debt sustainability.” This means that if the cost to service the debt becomes higher than the primary budget surplus, Greece will never be able to reduce its debt and will head towards a sovereign default. Greece has received €252bn in bailout money since 2010. However, astoundingly, 90% of this amount has gone to service debt and interest payments to creditors, many of whom are in the core Eurozone countries. Only 10% of the bailout money has gone into public spending. The Eurozone economy has weakened considerably and due to political wrangling, the European Central Bank’s (ECB) response so far has been more words than actions. The ECB is behind the curve. Fortunately, as inflation expectations have worsened, the consensus on the Council has grown. Even Bundesbank President Jens Weidmann seems to have shifted his focus from opposing a Quantitative Easing (QE) program, to influencing its design and implementation. The ECB Governing Council meets this Thursday, and I expect the meeting to result in the Council announcing a QE program to purchase Euro sovereign bonds. European stocks could rally significantly post the QE announcement. An ECB QE is not priced into European stocks.
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