Forgive us our debts
Ancient Mesopotamia knew how to deal with bankers. Every time a new monarch ascended to the throne, he would order all outstanding debts to be forgiven: the slates on which loans were recorded were literally swept clean.
This was bad news for the people who advanced loans, but a relief to the common people, happy to pledge loyalty to their new monarch by way of return. The tradition began in Lagash, now in southern Iraq, in 2400 BC and lasted for generations.
Debt forgiveness even met the approval of the scribes who wrote the Bible. An early version of the Lord’s Prayer asked God: “To forgive our debts, as we have forgiven our debtors.” Jesus did his bit by overturning the tables of the money changers. Usury, or the charging for interest, became hugely unpopular.
There was later a change of thinking, as monarchs started to borrow to fight wars. The Lord’s Prayer started to ask God to forgive trespasses, rather than debts. Loans provided by bankers funded the industrial revolution. They have infiltrated every corner of modern society.
Far from wiping slates clean, after the latest lending spree, governments ruined their finances by propping the banks up. Austerity programmes are being attempted, without much enthusiasm.
Social unrest is building, but markets do not view muddling along as an option. Italy, for example, has geared up to pay its way in the world for generations. The country managed to stay solvent. But investors are no longer willing to trust to fate and Italy’s borrowing rates have just shot beyond a damaging 7%.
Boston Consulting Group has estimated that cross-border cuts of €6 trillion are needed for Europe to get a grip on its finances. The US will need fewer cuts, thanks to relative health of the corporate sector, but its politicians cannot agree how to achieve them.
To achieve the cutbacks BCG talks of slates being partially wiped clean, with the help of an unprecedented tax on private sector wealth. Germany is demanding austerity which would cripple peripheral European economies for decades.
One way or another, to hold the eurozone together, the European Central Bank will have no option to debase the currency, and hence the size of debts, by printing money. The Germans has been dead against the idea, but they should soon start revising their opinion as contagion makes it harder for them to raise loans. Plans for the issue of cross-border Eurobonds is the first step in this direction.
Even China may need to consider stepping in, through the good offices of the International Monetary Fund now that its economic growth is slowing, given Europe is the largest importer of its products.
But we are some way off a final solution, given that politicians will always persevere with easier options before doing the right thing.
Investors are facing a dilemma. Austerity tends to be good for bonds. Money printing tends to be good for equities. But too much austerity undermines bond covenants. Too much inflation wrecks corporate finances.
In their search for safe havens, investors have pushed up the price of sovereign bonds, higher-yielding blue chip stocks, prime property, gold and farmland. They have dabbled in Exchange-Traded Funds, distressed debt and managed futures. But their prices are high enough, in the absence of a grand political settlement, with nasty rumours circulating about the future of several European banks.
So indecision rules and investors are reducing their market exposure. In the US, cash deposits have hit their all-time high of $10 trillion (€7.48 trillion), according to MarketRates Insight. In Europe, deposits are a record €17 trillion, according to the ECB.
For now, cash – in dollars or sterling, rather than the euro – remains the safest haven. Given governments aren’t prepared to wipe their slate clean, investors are doing it for themselves.
