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Dublin: 8 °C Tuesday 25 November, 2014

Column: Confused about what will happen to the euro? Everyone is.

Former trader Nick Leeson speaks to those working at the heart of financial markets and finds that uncertainty and confusion is thwarting a move forward.

Nick Leeson

CONFUSED? I DON’T think anyone could be criticised for being confused over the latest developments to halt the eurozone crisis. As fights broke out in the Italian parliament and the German Chancellor likened the problems to war, confusion is rife. I spent much of Thursday in the City of London, meeting up with friends who continue to work at the real heartbeat of the financial markets. They are clearly confused, so you have every right to be.

Banks need to be recapitalised so that they can assume more losses. In the normal course of business that should be counter intuitive but unfortunately that is the only way forward. Where will the extra funding come from? The most likely source will be you the tax payer but there are attempts to avoid this and source the needed funds elsewhere. The head of the Europe’s bailout has already gone cap in hand to China. China has a €2.45 trillion cash reserve and is seen as one of the very few countries as capable of shoring up the struggling euro.

Many will question the cost of such a solution. China has a history of human rights abuses that many find unpalatable. Joining a bailout though could help China establish itself as one of the elite governments that help manage the world economy. There is no guarantee that they will jump to our aid though: the Chinese have already been badly burned by losses in 2008 from investments made in the United States and may demand firm guarantees on not suffering a repeat.

Collectively, the markets appear to have viewed the recent developments and ECB led political spin as positive, although yesterday they were starting to reverse many of those initial gains.

The main topic of discussion on Thursday was the complete confusion surrounding the financial markets. There is so much uncertainty, nobody believes that a solution has been found, the precious metals markets are on a roller coaster ride, aggressively bouncing one day and falling through the floor the next yet Wall Street enjoyed one of its best ever monthly movements and the euro continues to trade towards the higher of its historical range. All the indicators are contradicting one another and adding to the confusion.

For the first time, markets experts are admitted that they don’t know where the markets are heading

These people all have strong opinions and are paid well for their expertise and their opinionated views on the direction of the markets. For many of them, for the first time ever, asked which direction that the market will take they are choosing to answer ‘I really don’t know’. These are experts with a significant accumulated wealth of experience. It is not the time to invest!

Shortly, focus will switch to the Group of 20 leaders’ summit in Cannes, France. The summit will focus on Europe’s efforts to contain its sovereign debt crisis and avoid a repeat of the financial shock that roiled markets after the Lehman Brothers collapse in 2008. Many in the markets believe that the decision to allow Lehman’s to fail was a colossal mistake and the ultimate cost is still racking up. Lehman Brothers had few or no retail customers and it was initially believed that the impact could be contained but the opposite has been proven true, Lehman’s were an intrinsic player in many different financial markets and counterpartys to many different instruments.

The G20 need to act quickly as rumours already abound about a number of different institutions, MF Global, one of the most successful broker dealers in recent history faces bankruptcy. Regulations require certain capital adequacy requirements are maintained, much as they are with a bank. With too much exposure to European debt, customers are leaving in droves. They have no other option to safeguard their monies. MF Global are selling their assets and are rumoured to be seeking chapter 11 bankruptcy protection. In banking terms, this would be considered as a run on the bank with deposits being removed aggressively.

Further afield, other members of the G20 are facing their own problems. Tokyo’s latest foray into currency markets followed weeks of warnings that its patience with the yen’s strength was wearing thin. Tokyo is keen to win G20 understanding that a strong yen is one challenge too many for an economy grappling with a nuclear crisis, a $250 billion rebuilding effort from a March earthquake and tsunami and ballooning public debt.

Japan would argue that the yen is sought by investors worried by the euro zone debt crisis and stuttering U.S. growth and the demand has nothing to do with the fragile health of the Japanese economy.

Problems and confusion are walking hand in hand right now. The ultimate solution still evades us and most recent developments suggest that the solution may now lie outside of the Euro zone in places that may not have previously been considered. This suggests that the degree of desperation is increasing. Problems in Ireland have been replaced by those in Greece, Portugal, Italy and potentially Spain but unfortunately the ultimate fate of all is intrinsically entwined. All focus now switches to the G20 meetings and the hope that a clearer path is found.

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