David Worsfold
Insurance companies looking for shelter from the stormy winds of macroeconomic uncertainty swirling around the Eurozone are starting to fear that their carefully constructed and risk-matched portfolios are uncomfortably vulnerable.
There seems no end to the crises that can quickly escalate and sweep away today’s assumptions, leaving no safe havens and no source of steady reliable returns to underpin a portfolio.
Financial and economic crises are an inevitable part of the complex world we live in, but they usually have the decency to come along one at a time so we can focus attention and expertise in the right places to respond. Now, those crises are hunting in packs, stretching that expertise to breaking point.
We already know 2017 will see a series of political events unfold (read: The Calendar of Uncertainty) across Europe as Holland, France and Germany – possibly Italy too – go to the polls with unpredictable populist sentiment on the rise. The Brexit timetable will roll on relentlessly, possibly toward a cliff-edge hard Brexit, and President Trump will remain unpredictable and disruptive.
Meanwhile, the inability of the European Union and global financial institutions to deal with past crises constantly comes back to haunt the markets. On Friday afternoon, the EU pressed the panic button on Greece as the gulf between it and the International Monetary Fund over how to handle this summer’s €10.5bn debt repayment tranche dramatically widened.
Jeroen Dijsselbloem, the Dutch finance minister and president of the Eurogroup of finance ministers, who called the surprise meeting with other key players in Brussels on Friday afternoon, tried hard to play down its significance: “The story that there’s a crisis [is] roundly exaggerated,” he said. “The next large payment that Greece needs to make [on its debt] isn’t until this summer. But if I can give them a push today, that would be very welcome.”
Those who know the EU well will see this as a hollow reassurance, as it isn’t an institution that regularly arranges meetings on a Friday afternoon at short notice.
Greece’s finance minister, Euclid Tsakalotos, flew in from Athens, according to Greek media reports, and was joined by Pierre Moscovici, EU commissioner for economic affairs, Klaus Regling, head of the European Stability Mechanism (the EU bailout fund), and Benoît Coeuré from the European Central Bank.
The main reason for the Greek debt crisis thrusting itself back on the agenda is because earlier in the week, the IMF and EU failed to reach an agreement on the terms of further loans to Greece. EU governments said Greece should maintain a primary surplus of 3.5% of GDP, however the IMF argued a target of 1.5% is more realistic.
The IMF is refusing to sign up to the next phase of the aid programme unless the EU grants further debt relief to Greece, as it fears the burden being placed on Greece is unsustainable. The Greek government of prime minister Alexis Tsipras has also signaled that it is unwilling to make the further deep cuts in its spending implicit in the EU proposals.
The response of the markets to the stalling negotiations was to push yields on 2-year Greek bonds to 10.03% – their highest level in eight months.
Although the next debt instalment isn’t due until July, a meeting of Eurozone finance ministers on 20 February is widely seen as the last chance to reach a deal before critical elections in the Netherlands, France and Germany this year make crisis decision-making in the EU very difficult.
Their sense of urgency is also driven by the fear that this isn’t the only unresolved crisis threatening to brutally reassert itself. Also looming on the horizon is the vulnerability of several Italian banks to insolvency and collapse. There is a growing fear, especially among institutional investors, that they could be asked to take a haircut on their holdings in the banks in order prevent the crisis escalating. Few have much confidence in the desire of the Italian government or the EU to step in with a bail out.
The barely whispered fear behind all this is the risk of contagion taking the form of a new threat to the viability and survival of the Euro.
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These events – along with all the other drivers of uncertainty today – will form the backdrop to the next Insurance Investment Exchange half-day seminar on 7 March, just a week before the Dutch elections.
Entitled ‘Quo Vadis: Understanding and Managing the Current Macroeconomic Environment’, it will help CIOs get to grips with the implications of these events, identifying asset classes and investment opportunities that could help them ride out the storms.
A powerful line-up of top speakers for the morning includes Jan Straatman, Global CIO, Lombard Odier Investment Managers, Edward Bonham-Carter, Vice Chairman of Jupiter Fund Management and the former CEO of Aviva Investors, Paul Abberley, who is now CEO at Charles Stanley. They will be joined by Peter Allen, Director, EuroIRP and former managing director, Lombard Street Research, and Keith Goodby, Willis Towers Watson.
To receive further information or register for this timely Insurance Investment Exchange seminar, please click here