Markets attacks euro, Portugal and Spain

 

The FT and FT Deutschland lead with the story that speculation have built record large short-positions in the euro, through which they speculate on a fall in the euro-dollar exchange rate. Data from the Chicago Mercantile Exchange as of Feb 2 show 40,000 futures contracts with a total value of $7.6bn. The paper says this is the largest short position ever built up on any currency.

 

Marketwatch (aka Calculated Risk) has a story pointing to the spillover of the crisis to the Iberian peninsula. According to CMA DataVision, the spread on five-year Portuguese credit default swaps rose from 227bp late Friday to 244.06bp yesterday. The five-year Spanish CDS spread rose from 166.5 to 172.9bp. And the Greek CDS spread widened further, from 407 to 426.

 

 

Semana horribilis

Communication errors on pension policies, bad statistical figures and the attack of financial markets turned last week into a semana horribilis for the Spanish government remarks Le Monde.  Record public deficit, a historical high in unemployment and negative growth rates makes Spain the only G20 country still in recession and vulnerable to speculation. El Pais editorial wrote that without restoring political leadership Spain will find it even more difficult to sort out of the crisis. Jose Zapatero is to respond to the Senate and the Congress on his economic policies today and tomorrow and will have to find new alliances for further reform measures.  

 Amid growing nervousness in financial markets, Spain launched a PR offensive to try to assuage investors’ fears, reports the FT.  The Spanish finance minister promised bond holders in London to cut the budget deficit to 3% by 2013 from 11.4% last year. But disclosure that the treasury planned to raise a net €76.8bn through debt issuance this year unsettled markets further as it was more than expected.

 

Marco Annunziata on the euro area’s dysfunctional setup

Writing in the Wall Street Journal, Marco Annunziata compares the euro area to a self-conscious teenager, who feels misunderstood and who suffers from mood swings. The fundamental problems of the euro area are internal imbalances for which there exists no institutional framework. A political union would do the trick, but there is no political will to go in that direction. The present framework is not working, neither the stability pact, nor peer pressure. “Moral hazard is hard-wired into the existing incentives setup, and the result is a combination of lackluster growth and financial instability. The euro zone now needs to grow up and overhaul its institutions to keep pace with increasingly fierce global competition. Otherwise, in another ten years, it will look at itself in the mirror and think, ‘I could have been a contender’.”

 

Is a two-currency union the answer?

In a comment in Economonitor, Michael G. Arghyrou and John Tsoukalas propose a two-currency regime as a way out of the crisis.

“The plan we propose involves the temporary implementation of a two-currency EMU, with both currencies run by the Frankfurt-based ECB. The core-EMU countries will continue to use the present currency, the strong euro. The periphery countries on the other hand, will adopt, for a certain period of time, another currency, the weak euro. Crucially, the bonds and external debt of the periphery countries will stay in strong-euro terms. Upon its introduction, the ECB will devalue the weak euro by a percentage enough to restore the competitiveness losses periphery countries have suffered over the last decade against their main trading partners, the core-EMU countries. This will give the periphery a competitiveness boost while it introduces extensive structural reforms. The ECB will implement monetary policy for the whole of the EMU with its primary objective being price stability for all its members, strong- and weak-euro countries. It will do so in much the same way it does now, the only difference being that the ECB will be setting two rather than one reference rates.”

 

Blaming the media

This happens whenever there is a crisis, when out-of-their-depth politicians start to blame the media for talking it all up. FT Alphaville has dug a nice entry from Spain, where a senior minister blamed foreign economic commentators for this crisis.

 

Financial institutions should contribute to crisis resolution

The ECB considers it beneficial to involve the financial sector in the crisis resolution, also to avoid moral hazard for the future, reports Les Echos.  Crisis management and a resolution framework should reduce the tax payers’ contributions to a minimum. But it said that a European common resolution amid different default rules in member countries.

 

Don’t use speculative attacks as excuse for austerity

Force Ouvriere, one of the five major trade unions in France, warned the French government not to use the panic on financial markets to push through austerity measures, reports Les Echos. Structural spending cuts would be suicidal in times when economic activity,income and employment are still weak. In its press release the FO also reminded that the budget deficit of the eurozone is 6.1% of GDP compared with 11.2% of the US.

 

 

Dollar forever?

Das Kapital of FT Deutschland argues that it is easy to imagine that the flight to security from the euro into dollars out of fear of a eurozone debt crisis might reverse one day. The US has a huge current account deficit with the world, and both the  public sector and the private sector lives beyond their means . In the eurozone, savings are high and the eurozone public deficit is considerably lower.  

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