Tags: hans | parisis | Shock | Waves | Jolt | Eurozone

Shock Waves Jolt Eurozone From All Directions

By    |   Monday, 11 July 2011 05:45 PM

It’s once again “all hands on deck” in the European Union and the eurozone in particular.

Again, rising pressures in the markets caused by a diverse group of peripheral eurozone countries make it crystal clear that the core of the current crisis is about the “structure” of the EU and consequently the eurozone itself rather than the problems of any one country in particular.

It’s a fact that the current ongoing crisis started around 18 months ago. We should keep in mind that the first signs of investor unrest in Greece didn’t come when the new government discovered there had been a massive understatement of the scale of the nation’s budget deficit back in the fourth quarter of 2009. Interestingly at that moment, the former Greek finance minister stated: “We will reduce the deficit, we will control the debt and there will be no need for a bailout … We are not Iceland; we are not Dubai.”

Neither did it come in December of that same year when Fitch cut ratings on Greek debt to BBB plus with a negative outlook, which was the first time in 10 years a leading ratings agency gave Greece a rating of below A grade. Goldman Sachs commented at that time: “Unless the ECB fiddles with its rules before the end of next year, then from the beginning of 2011, Greek sovereign bonds will no longer be eligible for ECB collateral.”

Instead, the first material outflows from Greek sovereign debt became obvious in early January 2010 after ECB “chief economist” and member of the executive board Juergen Stark stated that the markets were deluding themselves if they thought member states would “put their hands on their wallets to save Greece.” In short, the crisis was, and still remains, about whether core Europe is ultimately prepared to stand behind its weaker members.

Now, for about a year and a half it has been interesting to see that each fresh wave of the eurozone crisis has coincided neatly with fresh signs that the German public and their political representatives remain extremely reluctant to put their hands in their pockets.

From a hindsight view, we now know that Stark’s comments on Jan. 6, 2010, whereby he stated that markets can’t assume the rest of EU will rescue Greece. Then, on March 28, 2010, a Financial Times/Harris poll informed that more than 60 percent of the Germans opposed offering financial support to Greece while almost one third of Germans believed that Greece should be asked to leave the eurozone have proved to be decisive factors in the euro’s sharp downward move during the second quarter of 2010.

Similarly, the roots of the Irish crisis in the fourth quarter of 2010 can also be traced back to the news back in May 2010 of German Chancellor Angela Merkel, speaking to the German Parliament in Berlin. She said then that “above all, what's necessary is to develop a process for an orderly state insolvency... with that we would create an important incentive for eurozone member states to keep their budgets in order,” while Greece’s latest travails can be put down to essentially the same pressures.

In this actual sea of “uncertainties” in the eurozone, there is only one outstanding certainty: that’s there is still no sign that the Greek public and that of any of the other peripheral nations is losing faith in the single currency.

Unfortunately, the same cannot be said about German “voters.” A recent Allenbach poll shows that 71 percent of Germans now have “little” or “no trust at all” in the euro while another poll in December 2010 by the same company showed almost half of Germans even then wanted to return to the “German mark.”

Given the news over the weekend that the Greek crisis is causing signs of contagion in Italy, I wouldn’t be surprised that one of the key developments in the weeks to come could be a further negative swing in German public opinion away from the euro. Yes, that would be very bad news but would not mean the end, of course, for the euro. For now I suppose “they” will fix it but nevertheless, investors should keep in mind that in the autumn of 2012 we have German national elections… What happens then is still anyone’s guess.

For all the above, but also because the just released OECD Composite Leading Indicators (CLIs) designed to anticipate turning points in economic activity relative to trend, point to a slowdown in most major economies for May 2011. In Canada, France, Germany, Italy, the United Kingdom, Brazil, China and India we see the CLIs pointing to slowdowns while in the U.S., Japan and Russia we see tentative signs of turning points in the growth cycle emerging.

The outlook for Japan should be interpreted with some caution, reflecting the necessarily higher degree of uncertainty in the relationships between the leading components of the Japanese CLI and overall economic activity in the wake of the March 2011 earthquake, while inflation keeps rising practically everywhere, my preference remains “risk off.”

On the inflation front, we saw most remarkable numbers in China over the weekend with a rise of 6.4 percent in June's CPI, which was the highest in three years, while food prices increased by 14.4 percent, after an 11.7 percent rise in May, and non-food price inflation rose to a 10-year high of 3 percent.

By the way, pork prices, which are extremely important in China, surged the most and registered a remarkable 57 percent year-over-year growth. The abysmal U.S. employment numbers that came out on Friday aren’t helping either to change my preference from “risk off” to “risk on.”

So, I’ll keep it simple and stay, for the time being at least, with the dollar, the Swiss franc (especially against the euro) and gold.

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It s once again all hands on deck in the European Union and the eurozone in particular. Again, rising pressures in the markets caused by a diverse group of peripheral eurozone countries make it crystal clear that the core of the current crisis is about the structure of...
Monday, 11 July 2011 05:45 PM
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