Credit Matters: The year ahead
Bail-outs, Lady Gaga and
royal weddings — hold
on to your hats in 2011
Predicting the future is never easy — especially if you are a credit analyst and
therefore stuck firmly in the past. But that has not put Gary Jenkins off having a
go. Having consulted the tea leaves, here are his forecasts for 2011.
1)
January
The year starts much as
the previous one ended:
with problems in the sovereign debt market. Following statements from
unnamed German officials
that what they meant to say
in the communiqué issued
on November 12 was that
“all existing bonds would
be honoured until the end
of 2013 but not beyond that
date” there is widespread selling of the asset class and it
becomes apparent that Portugal will struggle to borrow in
the market.
It approaches Germany
which agrees to put in place a
bail-out to allow the smooth
functioning of the eurozone
area. But Mrs Merkel makes
it clear that this is the very last
bail-out and “the next scoundrel who comes to my door is
How many pints
going to be turned away with a
to pay
for the bail-out?
flea in their ear and my boot up
their arse”.
Good news from Ireland,
however, which announces that following the constant
monitoring by IMF/EU/ECB/UK officials in Dublin, as a
result of higher hotel occupancy rates and larger discretionary spending by foreign guests (including Guinness
sales up 700%) that economic activity increased 10% in
the fourth quarter. Ireland adds that if the officials stay
for another six months, it should be able to repay the
bail-out money.
February
As sovereign bonds remain unloved, corporate bonds
continue to be the asset class of choice for investors. The
most fashionable “must have” bond of the year so far is
issued by Apple. It is called an “iBond” and resembles
a zero coupon perpetual security. Indeed, the investor
must not only buy the bond but must pay an annual
fee of $100,000 to the issuer for the right to continue to
own it. There is a mad scramble to buy the bonds and
30
the issue is 150 times oversubscribed, according to the
lead bank’s syndicate desk and 15 times oversubscribed
in reality. New iFunds start up just to own this one issue
and soon it is trading at four times the issue price. The
lack of a coupon/maturity date means that the issue does
not qualify for inclusion in bond indices so Apple starts
an iIndex that is soon tracked by every leading investor
in the world. While the bond is difficult to rate, a young
analyst at Moody’s says the agency will rate it “A for
Apple”. Caterpillar says that it also thought of issuing a
bond but the rating would have been too low…
Hungary has a short term cashflow problem and
approaches the Germans for help. Mrs Merkel says that
this is the very last time and the next person who asks
is going to get “sauerkraut stuffed where the sun don’t
shine”.
March
All is calm. Bond markets recover and equities start a
new mini-bull run. The European peripherals all enjoy a
period where their bonds are much sought after by investors. Company earnings are positive and economic data
suggests a sustainable improvement. US unemployment
has its largest drop for
30 years. The mood of
the market, and indeed
Bond investors scramble for Apple’s iBond
the population at large,
starts to improve.
Volatility drops and
the sun starts shining.
Peace breaks out across
the world as soldiers
lay down their arms
and vow that they will
“carry war… no more”.
Upgrades beat downgrades 10:1 and Simon
Cowell says that he is
finished with television and is off to live
on a desert island. Just
as everything appeared
to be going well… in a
meeting in Brussels an
unnamed official says
that they are going to
go public with their latest idea: in the event of
EuroWeek Review of the Year 2010 and Outlook 2011
030,32,34,36 EDIT Credit Matters ROYR.indd 30
31/01/2011 11:29
Credit Matters: The year ahead
a bail-out, bondholders must hand
over their first born
child. President
Trichet begs for a
change of heart but
in the end can only
get agreement that
rather than take the
child, the EU will
instead take a pound
of flesh from every
bondholder. “They
must share the
pain,” is the rallying
cry as the new strategy is made public.
There is mass panic
in the market as
bondholders refuse
Merkel: I see no need for a
to buy any sovereign
bigger bail-outs fund
debt. Equities collapse and Belgium
asks Germany for some short term assistance. Mrs Merkel says that she feels like Bruce Willis in Die Hard II. But
she emphasises that this is the last bail-out. Bondholders
will get paid (for now) but there will be “No more bailouts — and that’s my final word.”
April
To celebrate the wedding of Prince William to Kate Middleton, the UK government decides to print bank notes
with pictures of the happy couple on a strictly limited
edition basis. It charges quadruple face value but they
still sell out in hours. The whole world wants these souvenir notes. There are queues outside every branch of
every bank across the globe. The chancellor and governor of the Bank of England decide to scrap the limit on
numbers to maximise profit. More and more are printed
until the national debt of the UK is fully repaid. The
UK becomes so wealthy that it is announced that all the
medals in next year’s Olympics will be gold, irrespective
of whether the competitor finishes first, second or third.
The price of gold soars to $20,000/oz as this time surely
the printing money policy must lead to inflation. France
has issued Eu10bn of gold-linked notes and cannot
repay. It approaches the UK which agrees to lend it the
money subject to the French now using English as their
first language. The French reluctantly agree. There are
riots in Paris and half the nation goes on strike, although
whether this is because of the national embarrassment
of having to be bailed out by Les Rosbifs, or because it’s a
Wednesday, is unclear.
all of this printing of money will definitely lead to hyperinflation this time. The British government is due to
pay for the gold which will be used in the 2012 Olympic
gold medals and runs out of cash. It decides to approach
Angela Merkel otherwise the choice is either a loan or the
medals will have to be gold coloured paper with chocolate inside. It tries to keep the visit secret by sending Nick
Clegg. Merkel hasn’t a clue who he is, mistaking him for a
waiter from her local restaurant. She thinks she must have
forgotten to tip him so she hands over a few DMs to keep
him quiet.
June
Ben Bernanke causes uproar
when he is spotted with a book
under his arm as he enters the
Fed building. Deflation for
dummies is not what the market expected Ben’s bedtime
reading to be and Treasury
yields rise as the market
questions the ability of the
Fed chairman to deal with
the crisis. Four European
banks issue Cocos on the
same day to kick start this
exciting new market.
Unfortunately, due to
an administrative error,
Obama:
pulls the
one of the banks issues
plug on B
ernanke
when its tier one capital
ratio is technically below the trigger
point and thus on the day of issuance the bonds convert into equity, causing a selloff in the new market.
With this important new layer of capital not available
to financial institutions the regulators go back to the
drawing board and publish a consultation paper titled
Are old elastic bands, bits of string and paper clips the
future for bank capital enhancement? Bank shares are hit
hard while the price of elastic bands etc soars, causing a
May
Apple announces its new product, “iNotes”. At first people
think it will be a really cool new paper computer but it
turns out to be Apple’s very own paper currency. Twitter goes into overload with IT types saying that they are
only going to use iNotes in the future. President Obama
is heard before a press conference saying in exasperation “can they even do that?” but the reply from Apple
is “yes, we can…” iNotes start to drive the euro out of
circulation. Germany decides to try and retake control of
its destiny by printing Deutschmarks, purely for home
consumption. Gold goes to $30,000/oz on the basis that
32
Royal Wedding souvenir banknotes clear UK’s national debt
commodity bubble that stokes fears of inflation. Estonia takes the wrong side of the commodity trade and
goes cap in hand to Germany for assistance. Mrs Merkel
says that she will not allow this moral hazard to grow
EuroWeek Review of the Year 2010 and Outlook 2011
030,32,34,36 EDIT Credit Matters ROYR.indd 32
31/01/2011 11:29
Credit Matters: The year ahead
Gold — it
thanks Mr Bernanke for everything he has done for
the US economy and for his time serving the country, going on to announce that the new Fed chairman is none other than Lady Gaga. When asked
why she has been appointed, Obama just shrugs his
shoulders, lights a cigarette, takes a deep breath and
blows smoke up into the clear blue sky. Finally he
says: “Well she can’t do any worse, can she?” To combat deflation Gaga raises rates, saying: “If you want
things to cost more, then you should charge more.”
She adds that there will be no more QE because “it
doesn’t go with my hat” and that the Fed will now sell
its holdings of treasuries and mortgage bonds so that
she can buy more outfits.
The economy starts to recover and the US clothes
and fashion industry leads the world. Apple doubles
sales with its new iDress, which Lady Gaga just adores.
Her threat of higher rates to come leads prices up and
deflation worries disappear as inflation starts to work
through the system. Gold hits a new record high.
comes fro
m trees, y
ou know
and refuses to help. The
Estonian delegation burst into tears and
says: “Its not fair, you helped the others.” Mrs Merkel
reaches into her pocket and gives them a cheque for
Eu1bn. “No more,” she screams at the top of her voice.
“You understand world, this is the very last time!”
July
Astonishing scenes across the world as electronic
devices stop before starting to play the tune from Close
Encounters of the Third Kind for 10 minutes. Everything then goes back to normal. The next day aliens
from Mars land their Sinclair C5 spaceship on earth.
First contact has been made! The aliens are technologically and intellectually light years ahead of life on earth,
although they admit they don’t have anything as cool as
the new iPhone. They talk of how they have hollowed
out Mars so that all life lives inside the planet and they
did this just to annoy David Bowie. They say they have
come in peace and would like to meet our leader. They
are taken to Angela Merkel. They act rather sheepish in
front of the Chancellor of Germany and finally admit
that all that technology and space travel has cost a lot of
money. In fact they are broke, and wonder if Mrs Merkel could lend them some money. She goes nuts and
says that as far as she is concerned bondholders in Mars
must take some losses. It turns out that they are such
superior beings they never needed to evolve any analysts and hence do not have a market at all. Mrs Merkel
is persuaded that if Mars goes bankrupt the knock-on
impact to the other peripheral planets could be devastating so she lends them some cash but has a signal
sent into space saying: “No more bail-outs” in computer
code to ensure that this is the last one.
August
All the economic indicators suggest that the US is still
facing a deflationary nightmare. Ben Bernanke is said
to be in Japan to learn about how to deal with this
problem. He is then spotted in a strip joint nursing his
ninth drink, which was cheaper than his first. “How the
hell did this happen to me?” he keeps repeating, while
sobbing into his glass. Two days later President Obama
34
September
After a half pint of shandy a rating agency analyst lets
slip that the US should not really be rated AAA. After
the ensuing media frenzy Moody’s announces that it is
introducing a new category of AAAA for the US only
and states that the outlook has been changed from “stable” to “set in stone” and that the new rating will not be
amended, or even thought about, for at least 2,000 years.
The market remains volatile for a few days but calms
down when Lady Gaga states that ratings are not important. “It doesn’t matter what other people think of you.
What matters is how you feel about yourself.”
In Europe the race to succeed Jean-Claude Trichet as
president of the ECB heats up as Germany decides to let
the UK make the decision as it does not wish to be seen
as biased towards the obvious candidate, Axel Weber.
Prime Minister Cameron decides that if
he picks any Euroed chairman
s new poker-fac
d’
pean he will only
Fe
e
th
is
a
Lady Gag
upset all the others,
so chooses Gideon
Gono, governor of
the Reserve Bank
of Zimbabwe, to do
the job on a part
time basis. This is
seen as inflationary and gold hits a
new all time high.
The Greek financial
situation deteriorates
even after its ninth
“one-off” tax on
profitable companies.
It asks Angela Merkel
for assistance. This
time she just flips.
“Never. Never, never
never, never!” “There
will be no more bail
outs — this is the very
last one!”
October
Apple declares itself an
EuroWeek Review of the Year 2010 and Outlook 2011
030,32,34,36 EDIT Credit Matters ROYR.indd 34
31/01/2011 11:29
Credit Matters: The year ahead
independent country and asks for
UN recognition. Millions flock to
live in the virtual “iWorld”. President Obama threatens sanctions
against Apple and a diplomatic incident appears unavoidable. However
Fed chairwoman Lady Gaga plays
peacemaker and persuades Apple to
pay an extra tax on every sale of the
revolutionary new iHouse.
The Rugby World Cup gets off
to a bad start for Wales as Gavin
Henson refuses to play unless there
are hundreds of sequins added to
his shirt. Once this is completed the
tournament is a tremendous success.
No expense has been spared and
every spectator and visitor to New
New Zealand’s All Blacks pitch for a bail-out
Zealand is treated like royalty and
given free food, drink and gifts. On
the pitch the Kiwis reach the final where they are faced
job of trying to get the All Blacks to peak at the right
by Wales, a team they have not lost to since December 19 time she eventually just hands over the money but issues
1953. Obviously the All Blacks are overwhelming favoura statement saying that Germany will not ever never eat a
ites and the whole country bets heavily on the home
tomato, nor bail anyone out, ever again.
team. Wales shock the world by actually competing in
December
the line-out and taking advantage of the fact that the referee blew the whistle for the start of the match just as the Mrs Merkel relaxes alone in her study. The most amazing rollercoaster of a year is coming to an end and the
Kiwis started the Haka. The four tries they score in this
markets are calm. Somehow the most recent, and most
period leads the Welsh team to an historic victory. New
defiantly last, of the bail-outs seems to have done the
Zealand enters a depression. All its money has gone so
trick. Peripheral Europe is showing signs of growth.
it turns to Angela Merkel. She agrees to become the All
Even Greek bond yields are under 7% after the Greek
Blacks’ new head coach — “But this will be my very last
finance minister announced that while doing some
rugby coaching job…” — and at the same time provides
spring cleaning in his office he found Eu25bn down the
funding to stop the country from going bankrupt.
back of a sofa.
November
The US is powering ahead under the expert eye of
Trouble in paradise! The tabloid newspapers in the UK
Lady Gaga, who is rumoured to be in contention for
report problems in the fairytale marriage of William and
Obama’s running mate in the next presidential elecKate. Millions of people around the world start to sell
tion. She would of course walk it on her own but she
their souvenir notes. The UK turns to the printing press
says: “I really want the ‘vice’ part…” Everything is going
to try to salvage the situation but soon hyperinflation
right and Mrs Merkel’s actions have been vindicated. She
takes a grip on the UK economy. “Pounds” are renamed
should be receiving the plaudits and thanks of the world,
“Ounces” and soon people need a wheelbarrow of cash
but no prizes or awards have been forthcoming, while
to buy a wheelbarrow. Food becomes so scarce that the
Gaga has been named Time ‘Person of the Year’.
British government led by PM Cameron invites celebrity
Mrs Merkel can take some personal satisfaction that
chefs including Jamie Oliver, Gordon Ramsey and Nigshe has saved the world on numerous occasions this year,
ella Lawson to a cabinet meeting where they eat them.
but she just wishes that someone would at least acknowlGold hits $36,000/oz as people everywhere fear that
edge her role or say “thank you”. She feels unloved.
the UK will export inflation around the world. A new
And then a magical thing happens. She hears a loud
£50bn note is printed, the highest denomination in UK
“Ho, ho, ho” and looks out to see Santa with his reindeer
history. French President Sarkozy finds one on a paveheading towards her office. In no time Santa is down
ment in London when on a state visit and repays the
the chimney and in her room. Recognition at last! “Mrs
debt owed to the UK. French is once again the language
Merkel”, says Santa, “normally I deliver on Christmas Eve
of France. Paris riots and strikes hit the country.
but this year I have come to see you early.”
Then a little old lady living in Kent tells her local vicar
“Well I have been very good this year Santa,” says
that she has a “Gold tree”. News leaks out and investigaMrs Merkel. Santa smiles and says: “You have been the
tions prove that gold does indeed grow on trees! The
best behaved person in the whole world. You deserve
gold price hits a new record low of “two sticks of used
the thanks of millions.” But then he lets out a long hard
chewing gum/oz”. All markets everywhere collapse and
breath and says: “The thing is is though Mrs Merkel, I
every country needs a bail-out with the exception of the
have been running my business on a non-commercial
US, where the Fed Chairwoman had sold all of its gold
basis for a long time... sourcing lots of material and then
because “it’s too heavy to wear”.
using that to manufacture millions of toys. Plus having
Everyone approaches Angela Merkel who screams
to pay for all the labour. And of course I don’t charge a
at the top of her voice: “Why are you all so stupid? My
penny for my goods or services. Truth is, I am bust, the
answer has to be No. The moral hazard is huge.” Howelves have walked out and Christmas will be cancelled…
ever not wanting to be distracted from her new full time
unless… any chance of a bail-out?” p
36
EuroWeek Review of the Year 2010 and Outlook 2011
030,32,34,36 EDIT Credit Matters ROYR.indd 36
31/01/2011 11:30