Martin Upton
Martin
Upton has a
background in financial markets and risk management.
1)
Where did you study and where are you teaching now?
I
studied at the University of East Anglia and the University of Leeds. Now I am Head of
the Centre for Accounting and Finance at the Open University Business School.
2) On
summer 1992 Bank of England and Bank of Italy were "fighting" against traders
not to devalue british Pounds and italia Lira; since summer 2011 ECB is
"fighting" against traders in order to keep low interest rates for government
bonds; do you find any similarities between the 2
situations?
The similarity is that in both cases
traders and investors took the view (in 1992/3) that the GB Pound and the
Italian Lira were over-valued (at the ranges set for these currencies
against the DM in the ERM) and that in 2011/12 traders and investors took the
view that the bonds issued by the governments of Spain, Italy and Greece
were over-valued (i.e. their yields were too low - and, by
inference, their bond prices too high - given the background economic
fundamentals of those countries). In both circumstances the view was taken by
traders/investors that it was financially rational to sell Pounds & Lira in
1992 and to sell Spanish, Italian and Greek government bonds in 2011/12 since
the market view was that in each case these assets were
over-valued.
3) At the end of summer, on 16 th september 1992,
british government decided to withdraw the
british Pound from ERM (followed by italian government doing the same with
italia Lira); do you think that the lesson learned is that it's useless (and a
waste of money) to "fight" against traders on specific
circumstances?
(Note that membership in ERM was not withdrawn but only
"suspended"). I think both
episodes – particularly the ERM debacle - show that trying to maintain the price
of a currency or of bonds (or indeed other assets) above the levels perceived by
the market as being their ‘correct market price’ is ultimately doomed to
failure. The history of the UK provides plenty of examples of how the
government and the Bank of England tried to defend the value of the Pound
against economic logic only, in the end, to have to give way to market forces.
The ERM debacle was only one such episode – see also the periods up to the
devaluation of the Pound in 1949 and 1967.
4)
In Europe there's a lot of talking about a anti-high
yield mechanism (the ECB will buy government bonds when they reach very high
yield), do you think it could solve the problems? I personally think it will be
even worse: the traders could bet even more easily if they are 100% sure that
the ECB will buy government bonds when they lose
value.
Well such a mechanism would put a ‘floor’ on
the bond prices (or ‘cap’ on the bond yields) so it would to a degree discourage
those trying to make money by short-selling. Investors will also draw some
comfort if they know of the maximum downside to their investments in such
bonds.
5)
It's been more than 2 years of talking of "saving the Euro", do u think that one
currency can work with one central bank, 17 different ministries of finance and
17 different public debts?
My view has always been that you can’t have
a stable single currency zone if you don’t have a single fiscal zone. The
problems faced by the Euro zone show that you can’t have a single interest rate
environment in a zone where member counties go ‘solo’ on their fiscal policies.
Hence the rescue of the Euro has seen a move towards a greater centralization of
fiscal policy decision making. Additionally the different nature of the member
counties’ economies (particularly the differential importance of the housing
market to them) weigh against the workability of a single
currency.
6)
The ECB decided to help some governments (like italian and spanish one) buying
government bonds in the secondary market. Understarding that help is help, why
not buying straight in the primary market ? Buying in the primary is giving
money straight to the state, while buying in the secondary is giving money to
the traders! So, ECB wants to "fight" traders (who bet against Italy and Spain)
... buying their devalued bonds! Don't you think that the ECB could avoid the
hypocrisy and buy bonds straight from the primary
market?
I suspect that the ECB only wants to act as
the ‘buyer of the last resort’. If it bought primary issues the expectation in
the markets would be for the ECB to be the ‘buyer of the first resort’ – and the
size of the investments made by the ECB would potentially balloon. Buying in the
secondary market maintains a defence against falling bond prices and helps
underpin confidence in the primary
market.
7)
If there is a break up of the monetary union, what do you think it will happen?
In the transition time, do you think people will try to use foreign currency (if
there is enough of it for an area of 330 million of people)
?
Hard to speculate on this one. I suspect
that the support of Germany and pressure from the US will continue to ensure that the Euro
remains patched up. The worry is though that the crippling economic consequences
of the budgetary restraint being applied to Greece, Spain and Italy – and Portugal and Ireland too – will create growing political and
social strains. If a country does leave the euro zone its new currency (or
restored legacy currency) would trade at levels implying a massive devaluation
against other currencies. Additionally further support would be needed for the
banking system – and not just within the country leaving the
zone.
