George Kerevan: European debt contagion: could it cross the Channel?

Published on Thursday 4 August 2011 23:34

IT'S August, folk are on holiday, and the markets are in turmoil. So what else is new?

Mind you, the loss of all this year's equity gains, following the sudden unravelling of the latest half-baked plan to save the euro plus America's botched budget deal, merits a bit of panic.

But here's the bottom line: this week's market wobbles are a response to the rudderless state of North Atlantic politics rather than economic fundamentals per se. Unfortunately, replacing politicians is more difficult than eliminating structural deficits.

At root, the eurozone's problems are the result of Germany and France flouting the already weak Maastricht rules limiting sovereign borrowing, giving a blank cheque for Spain, Greece and Italy to do the same. The ensuing debt crisis in southern Europe would have been contained if Greece had been allowed to default. No American president would, or could, guarantee California's debts.

But stiff-necked Berlin brokered a series of half-hearted bailouts that merely convinced the markets Germany would guarantee all eurozone debts. That's why the markets put Italy in play this week after the ludicrous Berlusconi made a dithering speech claiming the Italian economy was rock solid.

It only took the head of the European Commission, Jos Manuel Barroso, to suggest (in all seriousness) that Germany fund a new bailout fund worth 40 per cent of total EU GDP, to trigger the big sell-off.

How does Europe get out of this self-made trap? We've reached the end of the bailouts. Either the eurozone countries sell collective euro bonds guaranteed by the German taxpayer - which means a common European fiscal policy imposed by Berlin - or the eurozone collapses. Bet on the latter.

Where do this week's events leave Britain? Chancellor George Osborne, whose calm under fire could promote him to the history books, has had a good crisis so far. The markets have confidence in Osborne - confidence is a rare commodity - to deliver his austerity package. As a result, interest on UK sovereign debt is grounded at 3 per cent - enough to let Britain borrow 10 per cent of GDP this year without hint of default. Besides, the markets are too busy playing eurozone members off against each other to bother about us.

Here's Osborne's nightmare: UK growth has flat-lined as a result of anaemic consumer demand and weak exports. Far from reducing borrowing, Osborne has actually had to increase it over the past few months. What happens if Plan A - eliminating the structural deficit bequeathed by Gordon Brown inside one parliament - goes awry? The markets will turn on Britain and dump Treasuries unless Osborne raises taxes. Osborne might but Vince Cable won't. Which points to more quantitative easing in the short run to boost growth.Scotland's nimble oil firms have little to fear

TWO feisty Edinburgh oil exploration companies were caught in the big equity sell-off - Bowleven and Cairn Energy. AIM-listed Bowleven clocked up three double-digit price drops in only four days, after it revised downwards the probable recovery from its Cameroon wells. Cairn saw shares slide after one of its four Greenland exploration wells proved barren.

Taking a longer view, nimble companies specialising in oil and gas exploration and production are where it's at. The true dinosaurs are the energy giants that integrate discovery and production with downstream refining and marketing.

Integrated energy multinationals emerged in the 1990s. The idea was to off-set risks and share revenue streams. A wave of mergers took place creating so-called "super majors": Conoco with Phillips, Chevron with Texaco and Exxon with Mobil. BP hoovered up Amoco.

But last month ConocoPhillips announced plans to split into two separately traded companies, one exploring and pumping, the other devoted to downstream business. BP and ExxonMobil could follow. Today, refining is a low margin business given high oil prices. As a result, super majors trade at a heavy discount to smaller, upstream companies. Hence a split to unlock value.

As Corporal Jones advises: "Don't panic!"