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If Only We Had a Defense


I’m a New York Giants football fan. Last year, they finished with six wins and 10 losses. The team lost an astounding five games where they were leading heading into the fourth quarter. In three of these contests, they lost in the opponent’s final offensive drive of the game. If they would have won those three games that they blew in the last two minutes, they would have probably gone to the playoffs. Yet, they blew each of those games because the defense was atrocious. They could have put traffic cones on the field and had a better chance to stop the other team’s last chance drive. Moreover, the Giants offense relied almost exclusively on two players, Eli Manning and Odell Beckham, Jr. So if they didn’t have exceptional performances every game, they lost. After each of these disasters, Giant fans would say things like, “If we only had a defense and a decent running game we’d be good. It sure would be nice to take the pressure off our only great players, Eli and Odell, who carry the burden every single game.” However, the Giants didn’t have a defense, and they didn’t have enough offensive support beyond Eli and Odell. After a while, we realized that it just wasn’t going to happen.

I was reflecting on the Giants 2015 season after reviewing two of this week’s major events in Europe. The first was Italy’s constitutional referendum on Sunday. Prime Minister Matteo Renzi put his office on the line by calling a vote to change the nation’s confounding legislature (that seems to ensure that absolutely nothing can be accomplished) that was instituted after World War II. The new constitution would have centralized more decision-making power and made the country governable by the Prime Minister and the majority coalition in parliament. With a new constitution, Italy might actually be able to achieve at least some structural reform that the country’s economy so desperately needs. Italy has had 60 governments since the war and before this referendum, and now they will have 61 as the country voted “NO” to the referendum. Prime Minister Renzi promised to resign if the referendum was defeated and did just that this week. Therefore, Italy will still be Italy, the third largest economy in the Eurozone, where nothing works.

Sure enough, right after the Prime Minister said, “Arrivederci!” Italy’s train wreck of a banking system (led by the failing Monte dei Paschi) has reared its head again. Monte dei Paschi was supposed to come up with a recapitalization plan by the end of December. This morning, the bank’s board asked the European Central Bank (ECB) for more time to which it responded, “no.” Since the skillful politician Matteo Renzi is no longer there, there really isn’t anyone to haggle with the ECB or figure out what to do. According to the relatively new European banking rules that forbid government bailouts, the cost will be borne most heavily by the bank’s subordinated debt holders, who happen to be unsophisticated investors who banked at Monte dei Paschi. These bondholders were told by the bank that their investments were as safe as their bank deposits. They aren’t. Most of these investors have moderate financial means. They had no idea that their bonds would be part of a bail-in to save the bank. If there’s a bail-in as opposed to a bail-out, thousands of ordinary Italians' savings will be wiped out. Since Europe’s banks are tied together through mutual investments as well as an unknown, but large amount of derivative contracts, the Italian banking system is Europe’s banking system problem. The Italian banking system is a “too big to fail” event.

The other big event this week in Europe was yesterday’s much anticipated ECB policy statement. The ECB confirmed that their quantitative easing program (QE) would be extended to at least December 2017. They reduced the amount to be purchased each month from 80 billion euros to 60 billion starting in April 2017 and affirmed that this amount will not be tapered. It has taken the bond market a little while to understand that while the ECB reduced the monthly purchase amount, they essentially increased the overall size of the program substantially. The Euro figured it out pretty fast, though, dropping nearly 2% versus the US Dollar (USD). A pretty glum ECB President, Mario Draghi, avowed emphatically that the ECB will be a presence in the financial markets for a long time. President Draghi stated that the ECB’s projection for core inflation will not get to its target of 2% by year-end 2019. The ECB projection is 1.7% for 2019, and President Draghi made a point of stating that an inflation rate of 1.7%, “Is not close to 2%.” In the financial markets, talking about 2019 is like talking about eternity. The ECB essentially told us yesterday that they are providing QE forever.

As they do at every meeting, the ECB bemoaned the fact that they are carrying the full weight of trying to pull Europe out of its malaise and prevent a new recession. President Draghi has to be downbeat about showing up at another meeting to provide more unconventional stimulus that he knows has its limits and can ultimately become very counter-productive. The ECB continues to plead with the governments of Europe to make structural reforms to promote growth. However, events like the Italian referendum earlier in the week, show them this hope is likely to remain unfulfilled. The ECB is the 2015 New York Giants version of Eli Manning and Odell Beckham, Jr. The rest of the institutions in Europe represent the balance of a very bad team. Fortunately for the Giants, there was an offseason to bring in new players and improve the team. Unfortunately for Europe, there is no offseason. For Europe, the ECB remains the only game in town.

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