This week, we are experiencing the first notes of yet another crisis in Europe since it all began in 2010. This time is in Cyprus, a small island that only generates 0.4% of the total GDP of the Euro zone.
I have the feeling that, like on other occasions, the ending result will not generate chaos. In spite of the risk of ignoring the interest of the common citizen by blocking the access to his savings and changing the order of importance, that should penalize the bond holders of the Senior Bonds from Cypriot banks, the possibility of affecting the other countries is probably lower than in similar episodes suffered by these countries since the beginning of the crisis.
The American banks, as well as the European ones, can boast of a better financial health today than they could a couple of years ago. Another point to take into consideration now is that the famous phrase “Whatever it Takes”, expressed by Draghi and the security network provided to Italy or Spain by the Outright Monetary Transactions (OMT), reduce tremendously the possibility of a financial collapse of today’s financial system.
However, what is really generating more attention is that the effect of the political noise over the performance of risky assets has been decreasing over the last months. A good example of this point can be found in the behavior of the equity markets after digesting uncomfortable results for stockowners from an electoral process.
The smart reader must have noticed that the period (in days) and the effect of the correction in prices as a consequence of an unfavorable election result for the shareholders has been decreasing over time. As an example, the EuroStoxx needed only one month to recover from the scare in Italy, whereas the acceptance of Hollande’s victory in France took almost a year and it was slow and difficult to digest.
It's the Economy, Stupid!
Therefore, what is the change in perception among investors and portfolio managers about the political risk? I consider that there are two main factors:
- On one hand, the global improvement in economic growth sustained by the creativity of the main Central Banks, which have put into practice aggressive programs of monetary expansion to guarantee a shorter period of convalescence. The results start to be seen now in the USA where the American citizen is increasing his level of consumption, the housing prices are recovering and the market is creating new jobs now. It can also be seen in China, where the credit is flowing again and, in a shy way in Europe, where it can be seen through indicators like the ZEW Indicator of Economic Sentiment
- Despite this improved economic scenario, the level of debt of the public and private sectors in the developed countries is still too high and the economic recovery is still minimal. The margin of maneuver by the politicians, without taking into consideration their economic agenda, is very limited for the moment. This guarantees a certain level of continuity and reduces the uncertainty…. and the market cannot put up with uncertainty.
We hope that the economy will continue helping us, because, if we have to trust the politicians,…….