August 16 2019
In An Italian Education, Tim Parks describes the wonderfully languorous routine of an Italian summer: the shutting down of all but essential services in hot, humid cities, leaving them to tourists, the departure for the coast, the gathering of the extended family, the early mornings to enjoy an espresso outside when the day is cool, the encampment at the same spot on the beach amongst the ombrelloni, neatly and beautifully laid out, the careful attention to one’s toilette, la bella figura being quite as important when little is worn as at every other time, lunch followed by siesta, the late afternoon passeggiata before the evening’s entertainment. Day in, day out, the rythym is much the same, punctuated by religious festivals: Sant’ Andrea in Amalfi in late June, for instance, or Ferragosto everywhere. Then the gentle return home in September, with weekend visits to the coast for those lucky enough to live nearby. It is a time to breathe, relax, close off the pressing problems of life, which can – for now – wait.
Yet summer has often been when horrible crises and unexpected events have impolitely intruded into this idyll. Often these have been financial ones. Consider:-
- 1992: 16 September – Black Wednesday – strictly not the summer but the short-selling of currencies with the ERM, not just sterling but also the lira, had been happening in the months leading up to the day when, despite interest rates being raised briefly to 15%, sterling was forced out of the ERM, with losses of ca. £3.3. billion. How humiliating for this to happen when Britain held the Presidency of the EU and not long after its Prime Minister had, somewhat hubristically, suggested in a TV interview that the pound would one day be as strong as the Deutschmark and might replace it as the ERM’s anchor currency. Oh dear.
- 1997: the Asian financial crisis – starting in July with capital flight as the Thai currency was floated, spreading to other Asian countries and Japan and resulting in IMF support to the troubled region. A portent of trouble ahead.
- 1998: a Russian financial crisis – in August when Russia devalued its currency and defaulted on its debt. One of the high-profile victims was Long-Term Capital Management, a hedge fund set up by ex-Salomon Brothers traders and boasting two Economics Nobel prize winners on its Board. Their claim to fame was having devised a brilliant new way of valuing derivatives. Despite such brainpower, LCTM managed to lose $4.6 billion in less than 4 months that summer, was bailed out by the Federal Reserve and closed 18 months later. Alas, the two obvious lessons to be learnt: (1) when clever people talk about “a new paradigm” in finance, it is time to put your money under the mattress; and (2) there is a sort of stupidity that only clever people are capable of – was not learnt by anyone important at the time. Hence…..
- 2007: the financial crisis – starting with a French bank, in August, blocking withdrawals from two of its funds because it no longer knew what they were worth (a sign they were probably worthless) and leading, via increasing worries amongst policymakers, central banks, regulators and others about the state of the financial system, to the UK’s first bank run in over a century as Northern Rock depositors decided the mattress was indeed safer. The signs had been there for some time but had been ignored. In July, Citigroup’s CEO, a lawyer-turned-banker, gave his own inimitable account of the Greater Fool theory – not realising the fool was him – when he said: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Whoever thought that putting lawyers in charge of a bank would be a good idea? They turned out to be every bit as bad as bankers at running them. The crisis went on and on and on. We are now in the interregnum between that one and the next.
- 2010-2012: the European sovereign debt crisis – this was a summer perennial at one point and, indeed, seemed to pop up on a regular basis during these years. In May 2010 it was Greece’s turn to dismay the markets with its request for a €110 billion loan, the austerity package put together to justify this dismaying Greek voters even more and leading to protests, riots, social unrest and Parliamentary shenanigans over the summer and into late autumn. A bailout was agreed but in June 2012 the crisis erupted once more with the possibility of a forced Grexit from the euro. Yet another bailout-cum-austerity package was eventually agreed. It was not the last the world would hear of Greece, though. Ireland too went through some pain, though this was – as are most matters Irish – related to land and the colossal sums Irish banks lost when the property boom went bust. Money had to be borrowed to keep the banks afloat; the costs became too painful; a bailout was obtained in August 2010 and in July 2011 the interest rate payable on this was reduced by the IMF. The European Commission announced a reduction in the interest rate on its loan to Ireland on 14 September 2011. The cognoscenti may remember that also on that day a Swiss bank announced that one of its traders had managed to lose $2.3 billion in a fraudulent and catastrophic misreading of the markets that summer. The following summer in 2012 (while that trader prepared for his trial) Spain, too, became a concern eventually obtaining a €100 billion bailout following banking losses caused by their unsustainable property boom.
- June – August 2015: Greece and the Euro – Yes. Again. A charismatic politician comes to power vowing to renegotiate terms with the EU, to end his country’s humiliation and even gets his electorate to support his showdown. It is all of no avail. He is forced to back down. His party is split. Terms are agreed – or rather dictated by the powerful neighbour. There is no more talk of boldness. The politician hangs onto power being finally ejected four years later by someone promising boring economic competence. Perhaps Greece, having provided a template for democracy , is providing another one.
- Summer 2019: Britain – our PM tells the EU, which has said for months that negotiations for Britain’s withdrawal for the EU (27 years after its eviction from the ERM – was that when the journey to Brexit started?) are at an end, that he will not negotiate with them unless they give him what he asks for first. The EU is now trying to understand what sort of a threat it is to say that you will not do something which the other party has also said they do not want to do. Meanwhile, the pound has declined against a basket of currencies at just the moment when holidaymakers are buying their foreign currency, English summer weather proving as unreliable as ever.
It is now mid-August. Perhaps this year it will be a quiet calm summer. Financially speaking anyway. Not long to find out.