On written and unwritten rules

You have to learn the rules of the game. And then you have to play better than any one else”, dixit Albert Einstein. On these rules of the game, playing better and fair play, some confusion has arisen over the past couple of weeks. And the fact that it has become headline news should start ringing bells for our policy makers. A first warning shot came from the Mr Slyngstad, CEO of Norway’s Pension Fund in an interview yesterday :

“It’s very important to create trust in the markets. To create trust you have to stay by the rules. Therefore to give preferential treatment or to give collective action clauses retroactive use is challenging . We said no no on a principal basis. The whole thing has been done with a great deal of contempt for the rule of law. Long term investors are not going to get involved with Europe’s periphery for a long time”.

This is a straightforward statement coming from a considerable sized investor as a reaction on the Greek debt swap deal. And it wasn’t restricted to Greek bonds for which others (ECB, EIB) were exempt from taking losses. The Norwegian pension fund has taken bold action and has recently almost halved its exposure towards other southern European countries as well (from NOK 94 bio to NOK 57 bio).

Over now to other rules, both written and unwritten. Apart from the current legal void concerning Maastricht prescriptions, there are however some unwritten rules as well. In case of monetary policy benevolence, it implies for example that the teacher (Central Bank) will hand out candy after the student has shown evidence of being a good pupil improving his grades. It’s a useful unwritten rule which also serves confidence, both in budgetary (discipline) and monetary policy (image of independence). So let’s turn back the clock to November last year : southern European yields – and Belgium as well – went through the roof and the world was bashing the ECB and Europe of not doing enough. It took some new government formations and budget plans first in order for the ECB to receive some kind of green light from Germany to come into action. Then we had LTRO 1 and 2. And in the post LTRO era, it seems some players suffer from some form of amnesia when it comes to playing by the (un)written rules. We have seen quite a difference between developments in Spain and Italy for example :

1) It seems now that LTRO has been pushed by the CEO of BBVA, Spain’s second largest lender with the deal being that Spanish banks would increase Spanish sovereign debt holdings. Spanish banks borrowed some 152 bio EUR end of february during LTRO 2 and did increase their holdings resulting in some lower yields. And then Spanish PM Rahoy announced a softer budget deficit target for 2012 and 2013. So quite a difference between the announcement effects of the partido popular and the results ex post.

2) Yesterday Mario Monti resumed talks with heads of unions and employers to reform the Italian job market and he presses for a complete package of structural measures to be taken before the end of this week.

So no time for complacency seems to be the message, understood by some and abused by others. And policy makers should take this to heart regardless of the advice coming from the IMF or others, stating that the current positive sentiment on yield spreads is a fragile equilibrium. It is indeed and market interpretation of facts, such as the one from the Norwegian Pension Fund, can very quickly alter the chain of events. At least Monti seems to have understood this. As for the unwritten rules and game theory : politicians might think cheating is a clever strategy and to some extend, this moral hazard…


Cet article a été rédigé par Econopolis

le 20 mars, 2012 in ECB sur Europe, Financial Markets