Politicians fiddle while Rome burns

Allister Heath
SO Angela Merkel and Nicolas Sarkozy agree – there is a problem in the Eurozone, apparently, and something needs to be done about it. But as to what that should be, forget it. With this weekend’s get-together bound to fail, the EU’s so-called leaders may call yet another summit on Wednesday. The situation would be laughable if it were not so serious. Yet it is not only the politicians who are failing: right now, almost any deal would be welcomed by short-sighted and naïve investors, regardless of the viability of any agreement. It is desperately important that taxpayers be protected.

The Eurozone crisis was all that the City’s great and good wanted to talk about at last night’s Mansion House dinner hosted by the Lord Mayor (unfortunately, Lord Turner, the Financial Services Authority’s chairman, did not oblige, delivering instead a rather hectoring lecture on the future of UK regulation). Many of the MPs present were also keen to discuss Monday’s crunch vote in the House of Commons about whether or not to hold a referendum on EU membership; it is the first major rebellion of David Cameron’s leadership of the Tory party, with many of his MPs keen to loosen the ties between Brussels and the UK. Labour is opposed, which means the motion won’t pass. But the Eurozone crisis threatens not only to cripple the UK’s economy; it could well end up being the biggest threat to Cameron’s premiership.

This is not 2008 – companies, market participants and the authorities have not been hit by a massive, devastating bolt from the blue. But the situation is nevertheless starting to spiral out of control. The gap between the yield on 10-year Italian government bonds and German debt hit 3.98 per cent yesterday, the biggest spread since 1996. Strains are beginning to seriously affect activity. Of course, the Eurozone sovereign debt crisis is the primary driver – but regulatory action to make the banking system hold greater amounts of capital and change its assessment of risk is also driving some of the retrenchment. Banks’ cost of capital has shot up, making swathes of activity unviable.

Two areas of particular concern are private equity financing and commodity trading, especially but not only in the Eurozone. The European leveraged loan market is all but closed to new deals, at least given the fees that people are prepared to pay; only existing issuers are able to access the junk bond market. Alternative sources of finance, such as mezzanine debt, may be a way forward but so far these have yet to be tapped properly. Commodity trading, especially by the smaller firms, is also facing serious problems as some banks (especially the French) reduce their supply of dollar-denominated credit to the sector. Aircraft financing has also been hit. Given all of this, the inability of the politicians to get to grips with the crisis beggars belief.

For over forty years, he ruled Libya as a bloodthirsty dictator, murdering and torturing his enemies in his attempts to impose his bizarre totalitarian ideology on his people. His death yesterday means that long-suffering Libyans are finally free to rebuild their lives. We must all hope that Libya’s victorious rebels will seize the opportunity to create a pluralistic, liberal democracy respectful of minorities, coupled with a free, capitalist economy – and that the country blazes a trail for the rest of the region to emulate.

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