Euro Hubris Pricked

The days of optimism and hubris about the Euro are long gone.

Wolfgang Schauble, Germany's finance minister has admitted that Eurozone finance ministers, who are meeting in Brussels, cannot agree on the terms of the European Financial Stability Facility (EFSF).

He went on to tell Handelsblatt that plans for the EFSF were too “intricate and complex” for investors to understand.

Based on my experience of finance and fraud, when someone says that something is too complex for people to understand it generally means that either:

1 They don't understand it themselves, or

2 They are committing fraud

The dithering and failure of Eurozone "leaders" to resolve the Euro crisis has destroyed confidence in the euro experiment. As such, multinationals around the the world are now making contingency plans for the breakup of the Eurozone.

Andrew Morgan, President of Diageo, is quoted in the FT:

“We’ve started thinking what [a break-up] might look like.


If you get some much bigger kind of ... change around the euro, then we are into a different situation altogether. With countries coming out of the euro, you’ve got massive devaluation that makes imported brands very, very expensive.”

The Eurozone has signed its own death warrant.

Busted Flushes

Eurozone finance ministers to meet in Brussels today to discuss ways to expand the European Financial Stability Facility (EFSF).

Given that it has been proven to be a busted flush, this meeting will be a remarkable waste of time.

Meanwhile, in the UK, George Osborne, will deliver his Autumn Statement.

This will be a "jam tomorrow" speech, in which he attempts to create the UK's mini version of the EFSF by using a £5BN cash injection from the government to leverage a further £20BN or so in finance from UK pension funds and the Chinese.

To give him credit, he may achieve more that the Eurozone has done with their busted flush!

The Farepak Debacle V

Regular readers may well recall that I have written several articles (some years ago) about the collapse of the Christmas savings company Farepak.

To add insult to injury of those who were robbed of their savings by its collapse, it now transpires that the cost of administering Farepak now stands at £8.2M in fees paid to BDO the administrator, lawyers and various others.

As for the 120,000 people who lost money (an average of £400 per person) the most they can expect to receive in compensation is £5.5M, most are still waiting, which equates to roughly £45 per head!

It is sad and ironic to see accountants and lawyers doing better than those who can least afford to lose money.

The Abyss

Starting the week as it will most surely go on, the OECD has given an urgent warning that Europe, and by definition the global economy, is standing on the edge of the abyss.

The OECD stated that the failure of EU leaders to stem the crisis could "massively escalate economic disruption" and end in "highly devastating outcomes".

"The euro area crisis represents the key risk to the world economy at present."

Needless to say, the Eurozone seems determined to dig its (and the global economy's) own grave, and continues to sow the seeds of confusion and despair.

Die Welt reports that Germany is considering issuing joint 'elite bonds' with five fellow AAA nations. That of course means the creation of a two speed Eurozone. Needless to say the German government has issued a hasty denial of the plan.

Which, given that France may well lose its AAA rating, is doubtless welcome news for the French (assuming that is, the Germans are being truthful in their denial).

Meanwhile in Washington, Barack Obama will today meet European Council president Herman Van Rompuy and European Commission president José Manuel Barroso at the annual EU-US summit.

Good luck with that then!

The EFSF - The Busted Flush

On Monday I wrote that the European Financial Stability Facility (EFSF) was a "busted flush".

Finally it seems that the reality of that has hit home to the Eurocrats, who are trying to sell this unwanted product from their bunkers in Brussels.

The Eurocrats have now admitted that "plans" to leverage a fund of Euro250BN to over Euro1BN will fail, and that less than half of that now looks likely (ie it will not be fit for purpose).

Unsurprisingly this failure is attributed to the fact that the markets simply don't believe anything that is coming out of the mouths of the Eurocrats or politicians in Europe.

Even if some money is raised for the fund (and that looks extremely unlikely), Eurocrats do not anticipate that it will be ready anytime before 2012.

In the meantime the markets will continue to deteriorate and the costs of borrowing soar.

Latvia, a Portent of the Future

Fitch has cut Portugal's credit rating to junk.

It has downgraded Portugal from BBB- (its lowest investment grade rating) to BB+ (the highest non-investment grade), with a negative outlook.

Meanwhile, in Latvia, people are queuing to take cash out of ATMs as stores now only accept cash.

Is Latvia a portent of the EU's future?

Dexia Deal Unravels

In mid October I wrote that the rescue "plan" for Dexia was unravelling.

Today (one month later) the media are awash with reports that Belgium is pressing France to pay more into an emergency facility for Dexia.

For why?

Because Belgium knows that if Dexia falls over, the collateral damage to France (wrt its exposure to Dexia) would be immense.

France is less than amused, because if it pays more into the rescue fund it's AAA rating will be undermined.

This "renegotiation" is of course going to send the whole deal "tits up".

As I noted in October:

THERE IS NO PLAN!

The Thomas Cook Affair

Today Thomas Cook announced the following:

"Thomas Cook Group plc announces that as a result of deterioration of trading in some areas of the business in the current quarter, and of its cash and liquidity position since its year end, the Company is in discussions with its principal lending banks with regard to its facilities during the seasonal low period of cash in the business.

While the Company currently remains in compliance with its financing covenants, it also intends to seek agreement from its lending banks to adjustments that will improve its resilience if trading conditions remain difficult.

As a result, the Company will delay its announcement of its full year results until these discussions are concluded.  The Company expects to report a headline operating profit for the year ended 30 September 2011 broadly in line with previous guidance."

Thomas Cook is now in the process of renegotiating the terms of its £1BN net debt burden for the second time in a month.

These discussions (with a syndicate of 17 banks) come a month after the company agreed a deal with lenders, that it hoped would end speculation over its future.

This announcement is more than a "tad ironic", given that on 29 September 2011 Thomas Cook in its Pre Close Trading Update stated:

"Overview
Many of our businesses have performed well this year, notably Northern Europe, Central Europe and our German airline. However, our overall performance has been impacted by our UK business and the disruption in the MENA region, particularly on our French business. Summer booking trends in our key markets have remained largely in line with expectations since we last reported.

• Underlying operating profit expected to be broadly in line with market expectations;
• Cashflow performance is strong;
• Variety of measures underway to strengthen the balance sheet;
• Actions underway to increase UK cost base flexibility as part of the overall UK business review.

Trading and cashflow performance
The Group delivered steady results for July and August, in line with our expectations, but September has been a more challenging month, particularly in our French business. However, we still expect to deliver a result broadly in line with market expectations.

Our focus on cashflow continues to deliver benefits, with a £78m improvement in free cash flow for the 11 months to 31 August 2011, driven by lower capex and cash exceptionals and good working capital management. As at the 28 September 2011, we had circa £830m headroom of available cash and committed bank facilities."

The company has lamely issued a string of profits warnings over the last 18 months, blaming everything from government cuts to the Arab Spring for unexpected hits to its revenues.

Unsurprisingly, the shares have fallen off a cliff from above 40p yesterday to around 14p at the time of writing.

It is clear that whatever arrangements Thomas Cook might (and that is not at all certain) be able to make wrt future funding, the fact that this announcement has caught everyone out by surprise has brought its continued existence into doubt:

1 Markets don't like being surprised.

2 Shareholders will quite rightly question the competence of the board.

3 Customers will avoid the company like the plague.

It seems that Thomas Cook has become the private sector's version of Greece!

The European Financial Clusterfuck

The European financial clusterfuck continues this week unabated.

Here are but a few headlines to start the week with:

- Moody's has issued a downgrade warning on France.

- Despite a landslide victory in Spain, for a party that will implement further austerity measures, markets are falling and Spanish bond yields are rising.

- Hungary has asked the EU and IMF for financial assistance, oddly enough they haven't put a figure on how much they actually want/need!

- The European Commission has sated that the "cure" for Europe's ills are Eurobonds. This has been publicly slapped down by Germany, which stated that Eurobonds were not a "cure" at all.

- The EU's Jean-Claude Juncker says if France were to lose its AAA rating so would the EFSF.

Wrt the latter point, so what?

The EFSF is a busted flush anyway, a downgrade in rating is completely irrelevant.

Oh, and if anyone is remotely interested, Belgium's politicians have yet again failed to form a government (Belgium has now been without a government for 526 days).


The week starts as it means to go on, badly!

Bring On The Superwaffe!

Problem sorted then David!

The German Juggernaut II

The German Juggernaut

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As the eye of the financial storm moves from Italy to Spain, it was fascinating to learn that the Irish budget was being circulated around the Bundestag for approval, before it was even seen by Irish members of parliament.

Coupled with the fact that both Greece and Italy are now, in effect, German financial protectorates (complete with German appointed Prime Ministers) and we have to wonder what form of "new" European political structure and governance model is being created.

Clearly David Cameron is concerned as well, because he is hot footing it to Berlin for talks with Chancellor Merkel.

Let us trust that something more tangible than a piece of paper will be forthcoming from that meeting!

Northern Rock Sold To Virgin

Taking a short respite from international news of doom and gloom (bond yields in Spain at 7%, Germany and France fall out over role of ECB etc) it has been announced that Virgin will buy Northern Rock plc (the non toxic part of Northern Rock) for around £750M now, with a possible further £280M over the next few years.

Northern Rock plc will be rebranded as Virgin Money, which has promised not to make anyone compulsorily redundant over the next 3 years.

Taxpayers have put around £1.4BN into Northern Rock plc. Hence the loss is between £400M to £650M.

The "bad bank" part of Northern Rock is estimated to contain losses of up to £21BN.

ECB Does a Canute

The markets remain unconvinced by the new unelected technocrat government of Italy, and as such the bond yields have risen close to 7%.

The ECB is currently "doing a Canute", and buying bonds in order to keep the yield down.

This of course is merely kicking the can down the road.

The Irony

It is ironic that the new leaders of Italy (Mario Monti) and Greece (Lucas Papademos), who are regarded by the Europhiles as the potential saviours of the Euro experiment, have not been elected to office.

Whilst the other "leaders" of the Eurozone may regard the lack of democratic process as a "necessary step", in order to save their beloved Euro, the people of Greece and Italy may not be so relaxed about it as and when the two new leaders attempt to push through their economic reforms.

Imposing "benign dictatorships" via appointed technocrats will backfire on the Eurozone, and will inevitably hasten its demise.