Clouds in the sky, but not all of ash

ashcloudWe are back in uncertain territory, writes Darren Williams, senior European economist at AllianceBernstein. Indeed. If ever we left such climes, which I'm not sure we did.

It’s been a worrying couple of weeks. The AIFM directive. Will it destroy the European (for which read London) hedge fund industry as the naysayers predict? The German ban on short-selling. Will it augment rather than diminish volatility? The ash cloud. Will my dad get back from Spain or will I have to row over and get him?

The law firm Decherts suggests the German short-selling ban, rather like a Blutwurst dinner, may not be as alarming as it first appears. “In view of the fact that only the conclusion of CDS transactions and the naked short selling of EU sovereign bonds effected in Germany are affected and that the possibility of ‘synthetic short selling’ is not restricted, certain trading strategies are still permissible,” writes the firm’s financial services group.

As for the AIFM directive, it looks like we will have to wait until July to discern its final complexion. Expect much wailing in the interim. Which gives us plenty of time to focus on the concerning matter of euro meltdown as summer begins in earnest.

“Strong global growth, an expansionary monetary stance and a falling euro would normally point to solid euro-area growth,” continues AllianceBernstein’s Williams in his commentary. “But the deterioration in credit markets represents an important challenge to a fragile euro-area recovery.”

Meanwhile, his colleague on the Asian desk, Anthony Chan, manages both to put “Greece and Europe’s other small, debt-ridden countries” in their place – “the bottom line is that European peripheries are not that important for Asia,” he writes – and to raise the spectre of global meltdown, going so far as to mention the L-word.

“In the worst-case scenario of a second round effect that spills over onto the US and the rest of the world outside Europe, the damage could potentially resemble that caused by the Lehman crisis,” writes Chan.

And, of course, disaster breeds disaster, as Chan’s colleague Williams observes: “...The longer financial stress lasts, the bigger the risk that it will overwhelm positive fundamentals.”

Even if the troublesome ash cloud from the tough-to-pronounce Icelandic volcano clears and never comes back, and we are able once again to holiday with impunity, it looks like stormy skies over Europe this summer.

Fiona Rintoul, Editorial Director
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