“The lack of political unity,” says James Dailey, “is likely to be the downfall of the euro.” Dailey, the macro fund manager who is CIO of TEAM Financial Managers in Harrisburg, Pa., said his opinion on the dire outlook for the euro and the European Union itself hasn’t changed a whit despite the recent developments in Europe, including last week’s EU/IMF bailout of Ireland and Portugal’s 2011 austerity budget.
In an e-mail interview on Monday, Dailey characterized the bailout of the Irish banking system as “really a bailout of German and U.K. banks on the backs of Irish taxpayers,” and he suspects that “the more these kinds of arrangements are made, the greater the likelihood of widespread political/societal upheaval” on the continent.
In a follow-up to a phone interview on the European debt crisis with AdvisorOne on Nov. 16, Dailey raised the highly charged “haircut” issue: “The political elite in Europe have made it clear that protecting senior bondholders is something they are willing to bet the farm on, just as the U.S. elite decided. They are likely to continue until market crises make it impossible, via a currency and/or bond market crisis” or if political upheaval “shakes up” the ruling elite.
Dailey (left) thinks there’s a good chance “we will get some of both over time,” and points in particular to German Chancellor Angela Merkel’s “reversal on sharing the pain” as a clear indication that there is “zero appetite for restructuring within the current leadership.”
He’s not surprised by that approach, since he argues that “it takes true political courage and leadership to swallow horribly tasting medicine.” Moreover, the so-called bailout in Ireland is not the end of the story, saying he wouldn’t be surprised “if the whole deal cut with Ireland results in massive political change and the country eventually defaulting.”
Asked to comment on an Economist article suggesting that Kazakhstan’s own 2009 bank crisis was instructive—the majority of the creditors of the country’s BTA bank were forced to “share the pain” in the restructuring that was completed in September 2010— Dailey was unimpressed that Europe could learn from the central Asian country. To begin, Dailey said the “interconnectedness of the European banking system with each other, as well as the sovereign debt system, is much more complicated and could result in unintended consequences that could be severe.” Second, Dailey pointed out that Europe lacks the underlying political unity that Kazakhstan “enjoys.”
Dailey also is far from sanguine that Portugal’s 2011 “austerity” budget will forestall prospects of a Greece-Ireland bailout on the Iberian peninsula. “It may kick the can down the road a bit,” but ultimately he thinks Portugal’s “structural debt problems are probably too severe.” Assuming a full-blown crisis doesn’t unfold in the near term in Portugal, however, the budget move “may buy them some time.”
Dailey sees Americans’ reaction to TARP, the Greek riots following that country’s austerity moves, and now the “burgeoning political crisis” in Ireland as symptomatic of a desire among the political elite to avoid the tough decisions. “I continue to believe,” he wrote, “that the longer they intervene and prevent restructuring, the worse the eventual resolution will be,” such as a currency crisis. There is no question, he argues that “a restructuring would result in significant pain and sacrifice, but it is the best of a set of horrible alternatives.”