“There is no exercise better for the heart than reaching down and lifting people up”

Funny old markets… unconvincing US numbers spark a major day rally, but almost no one seems to be paying any attention to the promised “Coordinated Global Growth Strategies” due from the Sydney G20 gab fest. On the other hand, legal delays to the Keystone oil pipeline, and the lack of warmth at the NAFTA meeting earlier this week, don’t suggest Obama’s much vaunted energy revolution is about to happen. The Chinese seem to be managing down the Yuan…. And yesterday’s European PMIs (except Germany) were less than exciting…

What next for growth? Frankly, there is not much for bond markets to worry about.. deflation remains the name of the game. So same old range trading, amplitude waves, and spread compression as everyone digs for yield and deep-seated worries about when the bubble might burst.

So, let’s go think about happier things… like the preview of the next European banking crisis currently being rehearsed in Austria. It’s almost as good as the new House of Cards on Netflix. The moral maze: how to pull the plug on a flatlined bank? 

Hypo Alpe Adria (HAA) is financial drama. The Austrian regional bank (roughly equivalent to a Landesbank, but without the astute financial controls (US Readers – sarcasm alert)) is teetering on the very brink of insolvency (which to be fair has been the case for the last few years). It’s even possible we’ll see Fitch downgrade Austria downgrade later today with the ongoing contingent liabilities of the government to Austrian banks cited as a reason.

            HAA has been in crisis for years. Finding a solution has become an industry in its own right. I read with some amusement that over Euro 240mm has been paid in consultancy fees to over 50 different advisory firms in the last 4 years. What were they thinking?

One proposed solution is to move the bad assets into a bad bank with the state bearing the costs, and significantly hiking Austria’s debt towards 80% of GDP – not so painful, but roughly analogous to the Irish “solution” a few years back.

Meanwhile, finance minister Spindelegger is hinting debt investors should share the pain – and rumours of a 50-60% tender offer are circulating. However, many investors hold the Euro 12 bln of HAA bonds guaranteed by the region of Carinthia on a deficiency basis. (That means you only get dosh from Carinthia if “every other avenue” has been exhausted.“)

Problems with the guarantee include Carinthia being an Austrian basket case without a sufficient tax base to even pay its teachers, let alone meet the guarantees. Austria will have to step in. Second, as one wag pointed out y’day, proving every avenue for recovery is exhausted is problematical – it took 22 years for investors to resolve debts from the insolvency of BCCI and there is no interest on unpaid amounts.

Another option being talked about is the Austrians going off to chase the bank’s brief former owner, Bayerische Landesbank of Germany. The Munich based Baylaba walked away in 2009 after realizing what an utter turkey it owned after it bought the bank in a bit of rush 2007. (That was an interesting time – I remember it well as I was then head of FIG DCM at bank bidding to win a capital raise for HAA.)…

A full scale spat between Austria and Germany? Just what the market needs. One suspects the Austrian government is conveniently forgetting the guarantees it gave the Germans 7 years ago. The Germans probably have a right to feel aggrieved, but it’s likely they will take a significant hit – hence the sell off in Baylaba paper y’day (Hint – Baylaba is big and .. well.. well supported. It aint going bust.)

On the other hand… they could have done better due diligence. (And I seem to remember questions being asked at the time as to why they were buying the bank..)

            What should investors do? It’s an interesting call. Do you sell into a distressed market – taking a loss now, but not losing any more sleep over the issue? Or do you hold on to bonds, hoping for a satisfactory resolution? The risk may be a 50% loss on a “coercive tender”, or you might hold out for the Carinthia guarantee – knowing it could take years, or that Austria might pay up quickly to resolve the whole embarrassing issue.

Unfortunately, I suspect this will prove messy. Bottom line – we’ve got buyers of the bonds. 


Meanwhile, watching BrekDrek on the box this morning there was a fascinating article about the failure of UK minimum wage legislation. Exactly as economists predicted the minimum wage did not become a support for the poorest in society, but has pretty much become THE WAGE for any semi-skilled employee. A vast percentage of London’s workforce are on the mimimum wage, which is barely a step about poverty. And, as any economist will tell you, folk on the poverty line aren’t consuming to drive economic recovery to raise real wages.

Of course, the fortunate classes will tell us folk on the minimum wage benefit from the “dignity of labour”, can work longer hours, get on their bikes, and make more money. Get real – that kind of talk is nonsense. Ask you kids what they make when they look for summer jobs. Rich societies succeed, poor economies fail. How do we make our society succeed?

It strikes me we financial types are terribly lucky people. It’s easy to join in the general revulsion for the denizens of “Benefits Street” and others less fortunate than ourselves. “Benefits claimant” and “Social Scum” are pretty much interchangeable expressions I hear in most dealing rooms. No one feels much pity for those caught in the “minimum wage” trap – instead we tell them to go get better jobs… what jobs?? The bulk of our working economy is now stuck in unrewarding Mac-jobs at the minimum wage.  

But, there but for the grace of God go most of us here in our financial towers. People do not choose poverty. It happens. A few unlucky breaks, bad luck in parentage, and wrong choices in terms of career, relationships or money and nearly anyone’s life can come crashing down.

Yet worthless social demagogues preach that poverty is not a tragic misfortune, but a crime of self-choice against the rest of society. That sick attitude pervades today’s culture – blaming the poor for their misery. Even though we have no idea what circumstances lead to poverty, we assume they are all lazy, contemptible benefit scroungers. Some might be, but not all. Not most.   

There is hope.

For the past couple of years I’ve been very impressed with the fortitude of a young lady who has turned her individual struggle with poverty into the most incredibly uplifting tale. I first heard her on Radio 4s food programme. Now she is a national figure worthy of admiration.

Jack Monroe’s struggle to bring up her child after losing her job, being betrayed by the broken promises of social security, and her subsequent success as a food blogger should be a source of enormous hope and pride to us all. She has exposed the inequities that are hidden by the culture of poverty shame our sick society has spawned. You may have seen her on TV advertising a supermarket’s range of bargain food. She only takes the living wage, and gives the rest to charities trying to alleviate poverty.

Yet, petty political ogres like the revolting Eggwina Currie or Richard Littlechick of the Daily Mail put her down as a fraud, liar, scumbag and a charlatan. Why? Because she is a tattooed single mother with the temerity to have lost her job? Because she is poor? They feel no remorse at exploiting their position to attack a lone woman trying to tell the truth about the unimaginable awfulness of poverty. Bully for them.

If you are interested in how Jack is changing social attitudes to poverty, read her “Austerity Bites” in the Guardian or her blog, “A Girl Called Jack”. Or go and get involved yourself in the fight against poverty. Don’t criticize. Do something about it.

Smart entrepreneurs know that less poverty, better education and more opportunities will be a result for everyone.

Here endeth my Friday Rant.. have a great weekend.

Bill Blain

c/o http://www.mintpartners.com