Eurozone crisis: Young and restless, the new masters of Europe
7 August 2012
International Herald Tribune
With a click, the young City traders can bring down governments or threaten the survival of the euro. But, by their own admission, they have difficulty interpreting the confusing signals from European leaders and act cautiously, in a vicious cycle that feeds the debt crisis.
James Konrad, a bookish 27-year-old with a polite manner, used to make a living at a sports betting company, weighing the odds of muddy terrain affecting the sure-footedness of racehorses. These days, he takes bets on the muddy terrain that is European politics.
Mr Konrad trades up to £3 billion, or $4.7 billion (3.8 billion euros), worth of eurozone bonds a day for Royal Bank of Scotland. The bets are just as uncertain in both fields, but the sums are vastly larger in his current job, amounts that seem to stagger even him. “How do you make someone understand that you’ve traded a billion worth in bonds?” Mr Konrad said. “A billion. It’s easy to get lost in the zeros."
The bond market has emerged as a mighty protagonist in Europe’s economic crisis, representing a seminal shift in power from politicians to investors and a relatively obscure cohort of bankers. Their collective day-to-day judgment can now topple governments and hold the key to the survival of the euro.
If that market seems an unfathomable Goliath to outsiders, in interviews bond traders themselves confessed to being fearful and confused. They now juggle astonishing levels of risk and wealth for investors – some 6.7 trillion euros, or $8.3 trillion, in euro zone government debt, according to the European Central Bank.
Fundamental economic concerns that some European countries have too much debt is a major factor driving the market. Many investors are worried about the medium and long-term risk of holding European government debt, and have made what they consider the rational decision to reduce their holdings or even bail out. And while European leaders maintain that the common euro currency will survive the crisis, not all economists are so sure.
Some traders worry openly that too many of their colleagues lack the skills to decipher conflicting signals from Europe’s leaders in an industry ever more dependent on perception and political guesswork. The short-term fluctuations of bond rates, they concede, are not always an accurate reflection of value and risk. Yet traders are being taken as the last word by politicians on any range of government policies – and are often misinterpreted, they said.
The outcome of their decisions, the traders are first to admit, is not necessarily consistent or rational – or indeed clear in the message that it sends. Yet rarely has so much power rested in their hands.
Oracle of Delphi
“We used to be able to measure everything to the nth degree,”said Tim Skeet, managing director of fixed income at the Royal Bank of Scotland. “These days, nothing is measurable. This has become less about number-crunching and more about the oracle of Delphi."
Economists tend to treat the bond market as a rational player imposing budget discipline on politicians. Politicians portray it as having the conscience of a mob, accusing “bond vigilantes”of undermining Europe’s recovery and its cherished welfare state. The reality is more nuanced.
That fear among traders and their jittery investors helps explain why rates have surged for troubled countries like Italy and Spain, and why interest rates have hovered near negative territory for more trusted German bonds; so terrified are investors that they are effectively paying Berlin for the privilege of lending it money.
But in risk, there is also profit – lots of it – as well as loss. The amounts now at the command of the bond market have made it vulnerable to the kinds of speculation, volatility and returns more associated with the stock market. As government debt across the European Union has reached 88 percent of gross domestic product, and much higher in a number of countries, according to Eurostat, some sovereign debt funds have made investors annual returns of 9 percent. Of course, investors who held Greek government bonds suffered steep losses.