January 5, 2011
I rarely rob breakfasts in hotels; I don’t usually stuff my pockets with sandwiches culled from the breakfast buffet, but here in Davos, high up in the Swiss Alps, things are now so expensive that any saving counts. This was never a cheap place, but now after months of crises in the European debt markets, it is prohibitive.
The reason is simple: the Swiss franc has risen dramatically against the euro in the past year.
The Swiss franc is the canary in the coal mine of Europe finance. Every time there is a crisis anywhere in Europe, money flows into Switzerland. It is the ultimate save haven. Having worked for a Swiss bank, I remember seeing this first-hand. A wall of money swept through the bank’s coffers at the first sign of trouble.
However, according to friends who work here in the Swiss banking business, this time has been different. Today the deluge of European cash is reaching unprecedented proportions. They have never seen such sums before. They are all waiting for “the big one”. The big one is not Portugal or even Spain, for the Swiss bankers the big one to go will be Italy.
They look down the Alps and over the border to the south with a mixture of amusement and exasperation. Interestingly, the Swiss are more worried about what happens after Berlusconi goes. The view here is, whatever you think about the man himself, his weird coalition at least keeps Italy together. When he goes, the Swiss fear that Italy will implode financially.
And what that means is billions of Italian euro will leave Italy and flood over the border into Switzerland and the EU debt crisis that we have seen thus far in Ireland and Greece will be nothing more than a sideshow.
When seen from the Swiss perspective, the euro makes no sense. They realise that to the north, west and the east, Germany, France and Austria are strong, well-managed econ- omies where the people save more than they spend.
Last night, over a jar, the bankers told me that the flows of cash from Germany have been huge because the average well-to-do German is taking his savings out of the euro and putting them on deposit here in Switzerland. The fact that the Swiss banks normally offer no interest on deposits and still get huge inflows is indicative of the fragility at the heart of the euro.
They also explained that lots of money is coming from Ireland. These guys, who I worked with years ago, have never really seen any business from Ireland and certainly during the boom they looked on with a sense of trepidation because they had seen this before.
Now they are getting calls from Dublin on a daily basis.
They have concluded that this is because the banks and the Government can’t be trusted. These investment bankers — serious financial people — agree that the Irish taxpayer has no business bailing out the banks. At the table last night were two bondholders, men who invested in the Irish banks in the good times. They are now embarrassed because they were taken in by the Irish and European spin.
So here are the so-called mysterious “bondholders” and even they don’t expect to be paid. They made a mistake and they should bear the consequences.
In their eyes, there is now a direct link between the ongoing Irish government guarantees and the flow of money out of Ireland. However, their view is precisely the opposite view to that held by our Department of Finance and the Irish Central Bank.
The bankers here see a pattern which has been repeated in every financial crisis in the past. Initially, it is important to issue guarantees to stop the crisis, but these guarantees have to be credible and have to be limited both in terms of scope and timing.
The more time that goes by, the less credible they become.
The more any government bluffs and provides guarantees, the less those guarantees are worth and it gets to a stage where the guarantees are worthless because the State simply doesn’t have the money to back them up.
So, according to the Swiss bankers, the people — the savers in Ireland — who are supposed to be reassured by these guarantees are actually made more nervous by them!
The Irish therefore respond by doing precisely the opposite to what the politicians and bureaucrats want. In response to more bailouts and guarantees, they take their money out of the country, rather than keep it there. So the guarantees and, of course, the endless bailouts are causing the flight of capital rather than preventing it!
This is the logic of capitalism. When you pile more and more financial burdens on the population in order to bail out the banks and to guarantee banks, the chances of the population being able to pay all this back diminish. This increases the risk. As the risk increases, capital gets scared and leaves. There is a well-established pattern in this development.
First to leave is professional capital. This is the money in the stock market which goes. Then money leaves the bond market. The bond market shuts down. Then the big corporate deposits leave as financial directors of large companies decide that they are not being paid for the risk of holding assets in the crippled banking system. Ultimately, this fear permeates down the food chain and ultimately the ordinary depositors up sticks and head for the hills.
This column has made this point for more than two years now: the ultimate endgame arising from this government’s banking policy will be capital flight. The most damning indictment of this government’s competence is that at a time when Irish people have never saved — or wanted to save — more, we are seeing deposits leave our own banks. Last week, this column discussed the massive switch from spending to saving in Ireland and yet bank results show deposits leaving the system.
And some of that money is coming here to places like Davos. For the Swiss, Ireland is just a microcosm of what is happening all over Europe. For them the deal is very simple. The ECB has to convince German, French, Dutch and Austrian savers that their money is safe in the euro. To do this, the ECB has to convince the savers that it has a credible way of dealing with the banking and debt crises in Greece, Ireland, Spain, Portugal and the big one to come, Italy.
It has failed to do this in 2010. Will 2011 be any different? When seen from the altitude up here in the Alps, the answer seems to be definitely not.