Stimulus beckons as financial crisis deteriorates
This was another terrible day. The markets crashed again, with the Dow Jones closing at below 8000. BASF, Renault and PSA Peugot Citroën announced shockingly large cut in production, and there are now fears that the latest CPI fall in US consumer prices foreshadows a period of deflation.
The half-way good news is that the Europeans are moving towards a joint stimulus package, of around 1% of GDP, according Michael Glos, the German economics minister, who said that the overall size of the stimulus would be about €130bn and Germnany’s share €25bn, according to Frankfurter Allgemeine. The main focus will be investments into infrastructure, energy efficiency, climate control, and technical innovation. The EU summit on December 10 will deal this issue, and it appears that this programme is similar to China’s in that it includes measures that have already been taken. As Germany already announced its own programme, there will be no pressure on German to spend more money. (So it appears that the programme, in its current incomplete, is more likely to stimulate press reports than the economy. And government will juggle with a lot of real and misleading data. But at least there is now a recognition that economic stimulus is something governments should do jointly.)
The FT leads with a story this morning according to which the governor of the Austrian central bank called on Germany to launch a more ambitious stimulus package as part of a wider co-ordinated European response.
BASF production cuts...
This is really bad news from Germany, as BASF announced that it will cut a quarter of its production from next January, a decision that affects some 20,000 employees. Frankfurter Allgemeine says the decision is an indicated that new orders must have dropped abruptly for such an extreme measure to incur. And since chemicals are an intermediate input in the production process this is really bad news for the economy.
..also in the French car industry
Renault and PSA Peugot Citroën shut down some of their largest plants for a couple of weeks; others like ArcelorMittal, Michelin, Yara, Rhodia slowed down production significantly amid falling demand. Les Echos writes that this has never happened before to such an extent and warned that it could accelerate the process of de-industrialisation in France.
Meanwhile, Sarkozy inaugurated his national investment fund, endowed with€20bn, dedicated to support small and medium enterprises with future technology.
A really bad day on the markets
The Fed warned about a long recession (something that is not exactly new), which was sufficient to give the markets renewed incentive to panic. The DJIA fell to below 8000, down some 5% on the say. Earlier in the day, the cut in production at BASF weighed on the German Dax index, which also lost some 5%. The S&P was down over 6%. And the news of a fall in US consumer prices by 1% in October made the markets even more nervous as traders and investors are weighing up the possibility of a deflation (we think that possibility is very close to, though not equal, zero.) The iTraxx crossover CDS index briefly breached an all-time high of 900bp, which means that risk aversion has now reached new dizzying hights.
Here is an interesting chart from Calculated Risk, comparing the time horizon of the last four big equity crashes.
Irish Recapitalisation plans
The Irish government is on the brink of launching a multi-billion euro rescue plan for the country's banks as the share price of a second major institution fell below €1 yesterday reports the Irish Independent. It is not yet clear what kind of recapitalization the government is to pursue; markets expect the state to buy preference shares. Financing sources could be the National Pension Reserve Fund either directly or as assets to borrow on the back of it.
The Greek relaunch package
The Greek government is preparing a spending package of almost €1bn. The finance ministry already approved a €500m rise in public investment and a further rise of €400m in social spending, reports Kathemerini. The government hopes that the package will help convince the public that it is sensitive to their needs at a time of economic crisis.
French Socialists to vote
The Socialists vote tomorrow on who will be their next leader is the story in the French press. Seen as a power battle between two women - Martin Aubry and Segolene Royal - it is also a battle between two different visions for the party. Le Monde editorial writes that while both focus on social policy Aubry wants a party for its militants and Royal for its supporters. Pascal Delvit, political science professor in Belgium, says that this dispute is typical for the malaise of Socialist parties in Europe. In Germany, the SPD is tattered between the centre and the left. In the last five years Socialists lost support in Spain, Austria, Italy, Belgium or the Netherlands. And it is not clear at all that the financial crisis will change this.
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