Martin Flanagan: Taking a scenic route has seen euro leaders go off the rails

Instead of taking the direct route to solving the euro-crisis, the continent’s leaders have taken a scenic tour on the Orient Express

EURO-ZONE political leaders have taken the metaphorical equivalent of the Orient Express in trying to extract a sentient single currency from the region’s sovereign debt imbroglio.

As Athens has burned, and the flames have lapped towards Rome and Madrid, Germany’s Merkel, Sarkozy of France and lesser protagonists have inexplicably taken a scenic route of undemanding deadlines, fuzzy commitments on sovereign and banking bail-outs, interspersed with backtracking.

Even at this late stage, it seems to many observers that the major European Union politicians don’t get it. They seem to be wilfully misreading the scale of a crisis that outsiders fear could plunge the world into a recession, possibly a depression. That or they look paralysed with fear that the German electorate in particular won’t wear being the financial backstop for the whole profligate euro project.

So a silent prayer is merited for the news that European Union leaders have finally given themselves a deadline of two weeks to tackle the Greek bail-out and recapitalise the wider eurozone’s banks (which, UBS aside, seemed to avoid the taxpayer lifelines to major UK banks like Royal Bank of Scotland and Lloyds back in 2008).

The Brit players were largely brought down by commercial property bubbles as bankers sought better yield in a sustained period of low interest rates. Little did we know at that time that governments were largely living on tick as well, the sovereign bubble that subprime lending now appears to have been just an appetiser for.

The idea now is that EU leaders will meet on 23 October to finalise a comprehensive strategy, which will then be presented to the G20 summit on 3‑4 November.

It is to be fervently hoped that G20 meeting does not turn out to be a damp squib. It really is shaping up as D-Day for financial markets and the global economy.

It is too far into the eurozone game to really need saying, but the next absolutely crucial fortnight is time for head‑in‑the‑sand attitudes and equivocation to go out the window.

We need a step‑change by the politicians covering everything: the size of the Greek bail-out, the ringfencing of Italy and Spain from the sovereign contagion, and the scale of the European banking sector’s recapitalisation.

We are back in an autumn 2008 moment, the last time the west was looking down the barrel. It needs to be defused, categorically.

Riding out volatile market may be the best choice

DON’T catch a falling knife. Although phrased more cerebrally, that is the thrust of the latest equities update from Bill O’Neill, chief investment officer of the Europe, Middle East and Africa arm of investment banking giant Merrill Lynch. O’Neill’s thinking is that there is nothing out there to suggest the “terrible” third trading quarter for equities will give way to better times in Q4.

It is difficult to disagree with him unless one is the most determined of contra‑thinkers. It is all very well to adhere to the old Rothschild dictum of buying when there is blood in the streets. But what if it subsequently gets even bloodier?

Many investors won’t think it amounts to a dilemma, with government bond yields over 6 per cent higher than shares in the third quarter.

Against a feeble backdrop of economic stagnation and chronic eurozone sovereign debt crisis, yield rather than capital growth is becoming the investment pole star. Capital conservation rather than accumulation is the increasing name of the game.

That doesn’t spell early recovery for the riskier equity class. As O’Neill suggests, why would there be any renewal of risk appetite when there is currently no real clarity about economic and political uncertainties?

Current low equities’ valuations are pricing in a greater risk of recession in developed western countries. That is deserved on the balance of probabilities.

Equally, selling equities at these prices would mean medium to relatively sizeable losses for many investors. As a result, sometimes the best thing to do in volatile financial markets is nothing but ride it out, without taking on further exposure. I suspect that is the best policy now.