Markets are starting to bet on Euro area disintegration

 

 

The future  of the euro area and the prospect of sovereign debt default are scaring financial investors, as stock markets plunged across the world. Hardest hit were Spain, down 6%, Portugal, down 5, and Greece, down 4. The euro fell to below $1.38, as investors fled into the perceived safety of the dollar and US Treasuries. Jean-Claude Trichet’s remarks at the ECB’s press conference, in which he pointed to the euro area’s strong fundamentals and that the euro area’s deficit compared favourably with that of other EU countries. The markets are focusing on the prospects of a string of potential state insolvencies in the euro area, in Greece, Portugal, even Spain.

(The main reason for these moves is a sense that the EU’s strategy is backfiring. From an investor’s point of view there is no clear endgame. Since European government refuse to acknowledge in public that they are ready to bail out, the markets logically attach a higher probability to a Greek and Portuguese default than they did before. In our view, the talk of an IMF-led bailout has greatly exacerbated the fears among investors, who regard an external solution as the clearest sign yet that the euro area is unlikely to survive a contagious fiscal crisis.)

 

Salgado critices Almunia

The Spanish finance minister, Elena Salgado, yesterday criticised Joaquin Almunia for appearing to equate the situation in Greece, Portugal and Spain. According to El Pais, she said those comments were a great oversimplication of the situation, since Spain had done its homework. (Salgado comments are also indicative of the complacency that investors are now sensing every country in the euro area. If Spain believes that it had done its homework, the chances of a major crisis approach certainty. The Spanish political class is still in denial of the need for labour reforms that would facilitate a (downward) adjustment in wages. It is inconceivable that Spain and Portugal can get out of this mess with the reforms that the leaders in both countries shy away from).

 

Strikes in Greece escalate

The FT reports from Athens that Greek customs and tax officials launched a 48 hour strike that shut down ports and border crossings, amid a sign of a trade union backlash against the government’s austerity programme. The protests are against an across-the-board wage freeze for public sector workers, and a 10% cut in allowances. The total sums to a pay cut of 4%. The walkout by tax and customs officials will be repeated twice this month again, and is likely to emulated by other unions. A civil servants union has already announced a 24 hour strike next week.

 

Crisis, what crisis?

Jean-Claude Juncker’s leadership during this crisis is taking on increasingly tragic-comedic traits. Regarding the stability of the euro area, he was quoted by Kathimerini, “there is no threat, there is no danger.”

 

 German “wise man” says EU can withstand a state insolvency

Peter Bofinger, a member of Germany’s council of economic advisers, the government’s independent  economic think-tank, said that the EU can withstand the bankruptcy of a small member. Bofinger defended the tough approach by the EU towards Greece. Financial aid from Brussels would be a dangerous precedent, as it would send a signal to Portugal and Spain that they could depend on EU aid.

 

Gillian Tett on exit strategies

Writing in the Financial Times, Gillian Tett makes the observation that the crisis is in part a consequence of the central banks’ exit strategies, which are now exposing the weakest sovereigns. In particular, with regard to Greece, the ECB’s exit strategy could mean that Greek bonds may no longer be acceptable as eligible collateral at ECB refinance operations.

 

Economist on the crisis

The Economist has an in-depth look at the European debt crisis, and a serious discussion of the issues involved. It says the EU has fledgling instruments, such as a current account support scheme for non-euro area members, which could be diverted, but the EU is not as effective as the IMF would be. The article points to a paper by Daniel Gros and Thomas Mayer, who propose an insurance system with premiums based on each country’s levels of debts and deficits – to help countries shut out from European bond markets.

 

Germany’s stability programme is short on details

FT Deutschland has the story that Germany’s 30 page stability programme does not include a single concrete budgetary measure, no savings, but also not the planned tax cut, over which the government coalition is now openly quarreling. The report also notes that the underlying assumption in the report – a growth rate of 2% - were on the optimistic side. Germany’s debt is forecast to rise from 72% now to 82% of GDP in 2013.

 

Dominique Strauss Kahn may quit early to challenge Sarkozy

This was an unexpected warning, but Dominique Strauss Kahn told French radio RTL that he would be ready to consider running for the French presidency 2012, in an unusually cautious statement.  Les Echos writes that this is a big step forward towards his return to French politics. Strauss Kahn is one of the most popular politicians in France. But the support for Martine Aubry, the Socialist party leader, is growing for what many consider as the “Merkel of the left”.    

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