From our first physics lessons, we are taught that “for every action, there is always an equal and opposite reaction”. Wise words from Newton that help shine a different light on the outcome of last Wednesday’s EU summit.
The final acceptance of a 50 per cent haircut for private investors holding Greek bonds was welcomed by the markets, with the EuroStoxx rallying over 6 per cent the next day. The relief that a deal had been struck was matched by the satisfaction that it ensured Greece’s debt as a percentage of its GDP would fall to 120 per cent instead of reaching around 160 per cent by 2020.
However, this action had an equal and opposite “reaction” for private bondholders, an equivalent loss on their holdings. What was good news for Greece is bad news for some of the largest European banks. Dexia, BNP Paribas and Société Générale had only written down their exposure by 21 per cent. Increasing this to 50 per cent generates a combined loss of around €3bn. There are two sides to every deal.
Viewing a situation in context is also at the heart of Einstein’s Theory of Relativity, connecting time and space. The faster you travel, the slower time will pass. At the edge of a black hole, where the gravitational pull will be incredibly strong and equivalent to moving at a fast speed, time will move far slower. As the EU ministers stand at the edge of their own “black hole”, the gaping holes in bank balance sheets, time is surely passing at a snail’s pace. Especially as they continue to “kick the can down the road”. Enforcing €106bn of recapitalisation when the IMF has already reported the figure needed may be as high as €200bn shows risks remain.
The very method used to tackle the sovereign debt crisis goes against one of Einstein’s lessons. He once remarked “we can’t solve problems by using the same kind of thinking we used when we created them” – using debt to solve a problem of debt does just that.
Still, recent news from the particle accelerators at Cern has raised questions over the great scientist’s theories. Perhaps Nicolas Sarkozy is hoping we have discovered neutrinos that can travel faster than the speed of light. If it means we can do the illogical and travel back in time, it would give him a means of action to stand by his words, that Greece shouldn’t have joined the euro in the first place because its economy wasn’t ready.
For the moment though, as real scientific advances enable machines to be built that can carry out 17 quadrillion calculations a second (the Alma Correlator in Chile), and as EU leaders regret past decisions and struggle to make new ones, perhaps enlisting the help of a rocket scientist or two wouldn’t be a bad idea.
Gemma Godfrey is the chairman of the investment committee and head of research at Credo Capital, a former fund manager and a quantum physicist by background.