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									                  The Alphen Angle is an electronic publication of
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Asset Sensibly
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                  10 May 2010
                 The European Debt Crisis – what went wrong and what does it mean?

                 I apologize for discussing a topic which has been flogged to death of late, but the
                 European debt crisis is so topical and its origins based on such a bizarre vision that it is
                 well worth an Angle. Consequently, I hope you will forgive me for raising this topic

Adrian Clayton   So, let’s begin our discussion with where it all started. As far back as 1957, in Rome,
                 the Europeans signed a treaty called, strangely enough, the Treaty of Rome, which had
                 as its aim ‘an ever closer union among the peoples of Europe’. In 1979 the European
                 Monetary System was created and in 1992 the Economic and Monetary Union was
                 formed setting the basics for forming a single currency. Then in 1999 the euro was
                 born and member countries created exchange rates between their own currencies and
                 the euro. Three years later, in 2002, the euro was introduced in physical form and
                 along with a central currency for 12 member states came a single central bank (the
                 ECB) and of course one single interest rate applicable to all.

                 What was the purpose of this system? The economic rational was to create both
                 internal and external economic benefits for member nations. In theory, a trading block
                 encourages heightened internal trade (at the expense of outside parties), but is also
                 designed to be powerful enough to pressurise external countries to trade on more
                 favourable terms with the collective force of member nations.

                 What was the inherent assumption that made financial wizards believe a European
                 Union could work? European monetary architects believed that member countries
                 were economically homogenous enough to integrate their financial systems into one
                 union. Once inside, it was thought that members would adhere to strict monetary and
                 fiscal disciplines which would ensure economic stability, thereby ensuring long-term
                 financial prosperity.

                 What went wrong? Although the credit crisis is no laughing matter, it is rather amusing
                 that economics is a social science yet economists are notoriously bad at predicting
                 human behaviour. In the case of the Euro-zone the assumption that differing cultures
                 would behave similarly with respect to economic activity has proven to be utterly naive.
                 A brief search of the internet will highlight the many differences between Greek and
                 German social customs.

                 In Greece, it is common-place to build but not finish houses. Why? Greeks feel that
                 they should only complete what they need for today; the rest can be dealt with ‘as and
                 when’ needed. There are uncompleted dwellings scattered throughout Greece. Those
                 that have visited Greece will know that to Greeks, GMT time means ‘Greek Maybe
                 Time’. The Greek people do not live by the clock! Greece is quite simply a laid back
                 place affected by balmy weather and the hot Mediterranean sun.

                 Against this, the Germans pride themselves on their ‘planning culture’. It prizes forward
                 thinking and a clear understanding of what will be done at a specific time on a specific
                 day! German lives are expected to be highly organized, better described as rigid with a
                 strict demarcation between work and private life.
                          10 May 2010

                            Now expecting such obviously different peoples to conduct their financial affairs
                            similarly, talks to the very heart of the current financial woes in Europe. As we now
                            know, the Greeks were fudging their economic stats to remain in the EU. They gave
                            up their much beloved drachma, a currency which served the Greek people for 3100
                            years and with it their sovereign independence to sit at the same table as the
                            Germans and share a common means of exchange.

                            But whilst they could forgo a currency, the Greeks could not give up an ancient
                            culture, one which feasts on harvests with little concern of consequence. An innate
                            desire to spend with little emphasis on austerity, a new economic environment where
                            interest rates were much lower than what they had ever been used to, and a new,
                            strong currency accentuated the problem. The result, a spending bonanza!

                            But the party could not last indefinitely and the market wised-up to Greek economic
                            and statistical alchemy and by October of 2009, the deficit of 12.7% of GDP and
                            $419bn of debt was on the radar screens of all of those with an appetite to make
                            money on the ‘other side’ of Greek celebrations. We now know what this has meant
                            for the euro and the radical interventions that this situation has demanded from global
                            monetary authorities.

                            As we write, the ECB is creating liquidity in the financial system to prevent a repeat of
                            the Lehman financial clog-up. The Swiss, Canadian, US and Japanese Central
                            Banks have intervened too, and the Fed, desperate to shrink its stretched balance
                            sheet is once again enlarging it to stave-off potential disaster. The size of the EU
                            ball-out is 40% larger than the US’s TARP of 2009.

                            At the heart of these matters, both in Europe and in the US is debt. Certain
                            economies are bloated and are now experiencing the pains of right-sizing, the
                            agonizing shifts required for normalization. One senses that it will take time, a long
                            time before the final chapter of this novel is completed; until then markets will be
                            desperately trying to find an appropriate level that justifies such uncertain times.

                            Enjoy your week.

                       ADRIAN CLAYTON                                                    SHAUN LE ROUX                                            NEELS VAN SCHAIK
                       MARK SEYMOUR                                                      PHILIPP WÖRZ                                                    MARK CLIFF
PSG Alphen             GREG FLASH
Asset                If you have any queries regarding the above commentary please contact Mark Cliff on 021 799 8069 or 083 700 3600 or

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