Welcome to the bear market
The continued fall in equity markets has rattled European newspapers this morning, as the MSCI World index fell by over 20%, the official definition of a bear market. Most analysts and investors quoted see more troubles ahead, especially in the financial sector, after speculation of huge capital increases at Fannie Mae and Freddy Mac in the US, but also at European banks. FT Deutschland has several articles on the start of the bear market, including interviews with investment managers who say that the psychology among investors feeds the bear market, as people hold off equity purchases in the expectation that prices will fall further. The paper financial column Das Kapital says that even at current prices shares are still overvalued to the tune of 20-40% on the basis of historical data, as earnings, which have been bloated during the bubble years, are now very likely to return to normal levels.
Fed to extend facilities
You can always bet on it: when the stock market falls, the Fed pulls up some rabbit out of a habit with the intention to calm the markets. This time Ben Bernanke said the Fed would extend its facility for primary dealers, i.e. for the large investment banks. He also called on Congress to consider new legislation to help winding up a bankrupt bank, the FT reports. Following his comments, the US stocks recovered a little, as did the dollar.
Euro area real-world interest rates are rising and rising
The Wall Street Journal economics blog has a very useful analysis of real world European interest rates even before the ECB signalled the most recent hike. ECB data show the average interest rate for new one- to five-year loans over €1m to non-financial firms rose to 5.70% in May, from 5.42% in April. In June 2007 that rate was 5.28%. There was also a spike in mortgage rates.
Slovakia’s euro membership – the deal is done
Slovakia’s crown will convert to euro at a rate of 30.126 to 1, a rate lower than hoped for by the Slovakian government, which wanted another appreciation to ward of the possibility that euro entry will produce high inflation. The blog A Fistful of Euros says Slovakian consumers should be very careful when making the transition, as those numbers invite retailers to round up prices.
Steinbruck says sorry
German finance minister Peer Steinbruck sort of apologised for his remark that he disagreed with the ECB rate increase, insisting that he did not agree with the French on the ECB. He merely wanted to point out that high interest rate differentials between the US and Europe should be taken into account, the FT reports. His remarks caught surprise as Germany traditionally plays the role of a staunch supporter of the US. Speaking during the Ecofin meeting Mr Steinbruck claimed he had been “misunderstood”.
FT Deutschland reports Steinbruck as saying during yesterday’s Ecofin that the biggest threat to the world economy is not the credit crisis but inflation. So here we are. There is no change of heart in Germany.
Siemens and Greek politicians
Siemens is in the Greek press for some time now over allegations of using slush funds to bribe Greek politicians. Prime Minister Costas Karamanlis has this week requested the formation of a cross-party parliamentary committee to tighten the law on donations to political parties, reports Kathemerini. Karamanlis’s request comes at a time when polls indicate that the majority of Greek voters – six in 10 - are convinced that the two main parties, New Democracy and PASOK, have received under-the-table payments from Siemens. The same proportion of respondents feel that neither party is determined to tackle corruption.
New obstacles for the French presidency
In the middle of an oil price crisis the European Commission has chosen the worst moment to present its project “Eurovignette”, a long awaited directive to allow every member state to impose a higher tax on heavy goods vehicules. Amid rising oil prices, lorry drivers protest throughout Europe calling on the government for support. Le Monde writes that the current situation puts the member states in the difficult position either to preserve the directive or to seek short term solutions (to which Sarkozy could be prone to). The article goes on saying that it will complicate the French presidency in particular under its environment priority.
We need developing countries to participate
Jean Pisani Ferry in Le Monde argues that even if Europe were to take its fair share in the global slowdown necessary to calm down raw material prices the real question is whether the emerging countries could be engaged as well. Since 2000, 80% of the increase in oil demand comes from emerging countries, 20% only from industrialized countries. This is the real difference with respect to the oil crisis of the 1970s. The current risk is that efforts of industrialized countries to stabilize prices thereby accepting severe consequences for their economies could no longer neutralize emerging countries that are much more tolerant towards rising prices. Pisani Ferry calls for an international concerted action based on consensus and a concept for task sharing. The current G8 meetings in Japon are an opportunity to discuss these issues. Developing countries will have to play their role in the solution so it would be more than fair to offer them a place at the discussion table instead of a mere breakfast invitation.
Lisbon ratification count
Jean Quatremer provides the useful services to chronicle the ratification process of the Lisbon Treaty. After the Irish No, the British, the Cypriots, and now the Dutch have ratified the Treaty. The Dutch Senate yesterday completed the final act, with a majority of 60 ouf of 75. The only opponents were a party on the hard left, a Christian party, an animal rights party and senator without affiliation. Further, Quatremer reports, Belgium, Spain and Italy have come a long way in the ratification process, and are certain to ratify. Only the Czech Republic is currently refusing to move forward, so that it appears that Dublin and Prague may well be alone at the end of the year.
Monacelli on the ECB
Tommaso Monacelli has a detailed analysis in Lavoce of the latest ECB’s rate hike. He makes essentially two points. The first is that the ECB cannot allow governments to pressure it, and that rates may therefore be higher than they would otherwise be. Then he looks at different theories about which type of inflation a central bank should react to – domestic inflation, and the concept of pure inflation – the first of which he finds flawed, the second difficult to implement. He concludes that the ECB should be much clearer about its medium-term forecasts, including the role of its own monetary policy. At the moment, the signal the ECB emits, is far too diffuse.
Munchau on nuclear energy
Wolfgang Munchau argues in his FT Deutschland column that the SPD’s proposals to change the German constitution to forbid the construction of nuclear plants is typical for the way the country deals with its constitution. When politicians get desperate they would to enshrine their losing agenda in the constitution. The SPD and the Greens are scared stiff by the change in public consensus, as registered by a recent Eurobarometer opinion polls, according to which more and more people are in favour of nuclear energy. The CDU is promosing to campaign on this issue, and this may well be the last moment for a U-turn in Germany’s terrible energy policies.
Buiter on oil
Willem Buiter has a thoughtful entry in his blog, speculating about the consequences of $200 or $500 oil per barrel. One point he makes is that the US is totally unprepared even for the current price, but even the worst possible outcome would only have a still manageable effect on growth, some 10%, or three years worth of growth. The main impact will be on the poor, both in industrialised and developing countries. There would be no more cheap air travel, and since developing countries consumer more energy-intensive products at the margin, their welfare is likely to be reduced as well.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.