Tags: Italy | Greece | eurozone | crisis

Italy Adds Fuel to Greece’s Global Wildfire

Monday, 07 November 2011 08:03 AM Current | Bio | Archive

The G-20 is planning to meet again, possibly before Christmas, with the aim of resurrecting a deal to “provide an international firewall around Greece.”

A well-informed source informed the press that the G-20’s three-part package of measures fell apart because the Bundesbank’s veto of using part of German central bank’s gold and foreign exchange reserves to fund (15 billion euros or $20.66 billion) the European Financial Stability Facility (EFSF), which is the special purpose vehicle financed by eurozone member states to combat the European sovereign debt crisis.

The extra G-20 meeting would only take place if the German central bank can have its fears put to rest.

So, without any exaggeration, we can say that the “turmoil” caused by Greece, but also Italy, continues to rattle the markets.

Until recently, Greece leaving the eurozone was for EU politicians the “unthinkable” as they apparently couldn’t come to grips how a nation could disentangle itself from the single currency taking into account the fact that the Maastricht Treaty always envisioned entry into the eurozone as being irrevocable.

While this is true, we must also note that the irrevocable meaning that was attached to entering the EU-eurozone should now no more be considered as “eternal.”

The reason for this was the joint press conference held by German Chancellor Angela Merkel and French President Nicolas Sarkozy in Cannes on Wednesday when, for the first time ever in public, they raised the prospect of a Greek exit when they noted: “The question is whether Greece remains in the eurozone, that is what we want. But it is up to the Greek people to answer that question.”

Interestingly, Merkel also said over the weekend the market turmoil could last for a decade and there was still “a chunk of work” to do. If you ask me, these comments coming from here don’t bode well at all …

As for literally all investors it is extremely important to take into account what’s going on in the EU and the eurozone because where the eurozone goes there will go the markets, at least that’s what I think.

Investors should keep in mind that in December of 2009 the European Central Bank (ECB) published its “Legal Working Paper” titled: “Withdrawal and expulsion from the EU and EMU: some reflections” that concludes (last paragraph, page 44): “…Finally, if changes to the EU’s composition, whether by voluntary withdrawal or expulsion (or by the accession of new Member States), are not to lead to crises that are prejudicial to the EU’s progress towards further integration, the treaty revision procedure in Article 48 TEU should be overhauled, despite the recent conclusion of the ratification process of the Lisbon Treaty…)

In this context, Jim O’Neill, chairman of Goldman Sachs Asset Management, made some interesting over the weekend saying that countries as diverse as Portugal, Ireland, Finland and, of course, Greece could pull out of the single currency rather than have to operate under a single eurozone treasury where the Germans want more fiscal unity and much tougher central observation.

O’Neill continued: “That will emerge for those that want to stay in this damn thing, or can stay in. With that caveat, it is tough to see all countries that joined wanting to live with that, including the one that is so troubled here (Greece) … If you wind the clock back, it was pretty obvious that economically probably only Germany, France and Benelux of the original joiners were the ones that were ideal for a monetary union…”

Yes, a shipload of food for thought…

Finally, EU Economic and Monetary Affairs Commissioner Olli Rehn just said that Greece had breached confidence last week with the other members of the eurozone and had put itself on a path towards leaving the euro, although he also added that it now appeared to be on its way back from the brink.

Unfortunately, we must admit investors face these days literally unchartered territory on both sides of the Atlantic and for making good investment decisions, which is of course not a question that concerns traders, you have to be more than a genius or extremely lucky.

In the EU, I don’t think it’s an overstatement to say that literally nobody has a clue what will happen within the next couple of hours, forget trying to figure out what could come in the near future. The only thing that’s practically for sure is that the EU is sliding back into recession.

Mario Draghi, the new President of the ECB said in his first press conference: “…The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks. Some of these risks have been materializing, which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely … the downside risks to the economic outlook for the euro area are confirmed in an environment of particularly high uncertainty. Downside risks notably relate to a further intensification of the tensions in some segments of the financial markets in the euro area and at the global level, as well as to the potential for these pressures to further spill over into the euro area real economy…”

In the U.S., growth continuous at a much too low pace to bring down unemployment while the housing sector remains in the doldrums. Investors should not overlook the U.S. economy has now to generate 262,500 of jobs each month during the next 5 years to come back to the employment situation we had in the U.S. in December 2007.

When we look at the 80,000 payroll jobs that were created in October we should ask ourselves if this is doable nobody knows and only time will tell. To me it’s very simple: As long there is no a sound employment level with wages that allow “spending” in the American way as we have know it over the past decades, there won’t be a serious revival of the U.S. economy.

Bottom line: Uncertainties and lack of confidence and economic growth continue to dominate the landscape. Being patient is in my opinion the only way to go at this moment.

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The G-20 is planning to meet again, possibly before Christmas, with the aim of resurrecting a deal to provide an international firewall around Greece. A well-informed source informed the press that the G-20 s three-part package of measures fell apart because the...
Monday, 07 November 2011 08:03 AM
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