Christopher Fildes

Ministers propose but markets dispose — the wraps come off Project Rubicon

Ministers propose but markets dispose — the wraps come off Project Rubicon

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Apologies for absence. I was, indeed, away last week — in airports, in limousines, in meeting rooms booked under false names in secluded hotels, and in the engine-rooms of my financial advisers, urging the number-crunchers on. Secrecy was of the essence, as with all coups, and there can have been few so dramatic as this since Lionel de Rothschild backed Disraeli to scoop up the Suez Canal. Mine, too, represents a financial solution to a financial and economic problem with political overtones. This week the wraps will come off Project Rubicon. It will be a revelation to the money managers who are now scouring the world in search of trading opportunities. Conventional investment, as they know, is out of fashion. So far this century, shares have been boring at best, and bonds at today’s prices can only appeal to optimists, or pessimists. The money has flowed towards managers who promise something better — into the hedge funds and deployers of venture capital and private equity. Some of these promises will come unstuck, as we are beginning to see. There are not — there never can be — enough good things to go round. Some funds profited from the ‘convergence trade’ — buying (as it might be) Greek debt in the belief that when the drachma joined the euro, Greece’s credit would be thought to be as good as Germany’s. Now they are looking for a divergence trade, to bet on the same process in reverse. Project Rubicon can help them.

Top of the list

The idea now dawning over Europe is that its single currency may not, after all, be there for ever. It is losing the props that were supposed to shore it up; the Stability and Growth Pact, now more or less optional, and the constitution, less than that. What will be the next prop to fall out? Could a country fall out, or be forced out? One candidate is on everyone’s list. Italy joined the euro rather as Britain joined its predecessor, the Exchange Rate Mechanism: ‘like an overweight businessman taking up squash’ (said Robin Angus, the bard of Charlotte Square) ‘in the hope of getting fit and with the prospect of a heart attack.’ Within the ERM, Italy’s attack came just before our own, but at least we learnt from our experience. Italy chose to repeat it, and is now puffing and wheezing, with its economy in recession and its public debt putting on even more weight and earning a rebuke from Brussels. As support goes or might go, that falls short of a message of sympathy. Prognosis: doubtful.

A modest proposal

The markets need to find ways to respond to this. Selling a currency short would be one thing, but selling a component part of a single currency is harder. Avoiding euro bank-notes issued by the Bank of Italy — they have a capital S before the serial number — would be a slow process at best. Avoiding Italy’s debt, or pricing it below Germany’s, would be a slow process, too, though it seems to have started. There is no established mechanism for a country, once inside the euro, to emerge from it. The draughtsmen of the treaty left that out, on purpose. Countries can leave the European Union, as Greenland did, but would still, in theory, be locked into its currency. In practice, a flight of capital or cash might serve to force the locks. The beauty of my project is that it would pick them, and (as Swift said of his Modest Proposal) I trust it will not be found liable to the least objection.

The Italian job

Project Rubicon amounts to a leveraged buy-in for Italy. A consortium led by Negroni Finance, my special purpose vehicle, and backed by major investors worldwide, will name an indicative price for the country as it stands. A cash offer would have to follow due diligence and access to all three of the traditional sets of accounts. We would then invite offers for the operating divisions. Our analysis makes clear that Italy is a conglomerate, put together in the nineteenth century and financed by the City of London, with Hambros in the lead. For the royal house of Savoy, this was a Safeway moment — the chance to expand and move south. Such moments are not always what they might seem. This one appears to have thrown up a head office culture, with a large apparatus of centralised control and much reliance on paperwork. At divisional level, notably in the north, all this is regarded as inefficient and obstructive. Failures of financial control and bouts of creative accounting have left the whole concern over-indebted. We would expect to refinance this debt, to pass some of it on and pay much of it off.

Viva lo scudo

Experience shows that in conglomerates of this kind, there is value and enterprise below head-office level bursting to get out. We shall put this to the test. For Sicily, we expect a local syndicate to make us an offer that we can’t refuse. We shall open negotiations with the Vatican about the re-purchase of the Papal States. In Tuscany, we shall be sensitive to British interests and, through Tony Blair’s good offices, may establish Chiantishire as a Special Administrative Region, like Hong Kong. Venice will resume its serene independence. Lombardy and Piedmont will seize the chance to run their own affairs, and their leaders are already calling for the lira’s return. Indeed, many more of these historic entities will want to assert themselves by issuing or re-issuing their currencies: the florin, the ducat, the Genoese mark, and the Papal scudo, whose deficient silver content did so much to torpedo Latin monetary union, last time round.

Free to respond

What all this may imply for the future of Europe’s single currency, or indeed of Europe, is for others to debate. We at Negroni Finance will remain open to expressions of interest. It is not for us to impose political solutions, but we are free to respond to market forces. From that point of view, we might argue that the decision, carried out six years ago, to abolish Europe’s biggest market — the market in currencies — was premature. It introduced a new rigidity into the member countries’ economies when they were quite inflexible enough already. Their subsequent performance tells its own story, and if that story has a moral, it ought to be familiar: ministers may propose but markets dispose.