Tags: parisis | Economic | Uncertainty

Uncertainty Churns on Both Side of the Atlantic

Tuesday, 20 September 2011 03:13 PM Current | Bio | Archive

Wall Street’s biggest bond traders are stockpiling Treasurys at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan to buy longer-term debt. Keep in mind the OECD (The Organization for Economic Cooperation and Development) cut its forecast for U.S. gross domestic product on September 8 to 1.1 percent in Q3 and 0.4 percent in Q4, in what was a substantially downward revision from its prior estimates of 2.9 percent and 3 percent.

As far as I’m concerned, I can’t believe the Fed is able in today’s environment to stimulate U.S. growth in any meaningful way. So, we’ll have to wait and see what comes out …

Across the Atlantic, things are certainly moving in the wrong direction especially now that S&P has downgraded Italy, the eurozone’s third largest economy and number eight in the world, to ‘A/A-1′ from ‘A+/A-1+’ with “outlook negative” while the transfer and convertibility assessment (because of the use of the euro) remains ‘AAA,’ as it does for all members of the eurozone.

Yes, confidence in several members of the eurozone getting their houses in order sooner rather than later is vanishing further. It becomes clearer by the day the eurozone won’t be able to continue functioning under its actual structure and composition. How that will end is a question for later.

The rationale S&P gives for its downgrade is that it also doesn’t buy Italy’s recently announced and ratified austerity program.

It states: “However, we think that the government’s projection of a 60 billion euros ($82 billion) savings may not come to fruition for three primary reasons: First, we view Italy’s economic growth prospects as weakening … Second, nearly two-thirds of the projected budgetary savings in the crucial 2011-2014 period rely on revenue increases in a country already carrying a high tax burden … Third, market interest rates are anticipated to rise.”

It’s only a question of time until Italy will also lose its A/A-1. By the way, Italy’s public debt relative to GDP (No. 8 in the world IMF data) stood at 119 percent, which is second highest in the eurozone after Greece.

So, investors won’t be on the opposite site of down to earth logic considering the situation in the eurozone will first get worse before getting better.

And talking about obvious signs of withering confidence, Reuters reports that the Bank of China, which is one of the big four state-owned commercial banks of China and a big market-maker in the country's onshore foreign exchange market, has stopped foreign exchange forwards and swaps trading with several European banks, which include the top French banks Societe Generale, Credit Agricole and BNP Paribas due to the unfolding debt crisis in Europe. Besides, another Chinese bank said it also had stopped trading yuan interest rate swaps with European banks.

Continuing talking about confidence, former IMF Managing Director, Dominique Strauss Kahn, in his first comments since stepping down from his post, said on Sunday on French TV, Greece is unable to pay its debt and its creditors will have to take losses on the debt they hold: “Greece got poorer, we can say Greeks will pay on their own, but they can't … There is a loss and it must be taken by governments and banks … Governments haven't solved the problem, they just delayed it, and the snowball grows.” In the meantime, German Finance Minister Wolfgang Schäuble’s commented yesterday that it was “down to Greece as to whether it stayed in the eurozone or not.” It now becomes clearer the French and Germans no longer remain a solid barrier to Greek default.

Now that Ecofin, the EU Economic and Financial Affairs Council, has deferred its deadline for a decision on the next tranche of Greek funding and as October also happens to be the month Greece is obliged to roll over a large amount of debt, it now seems to me (of course I can be wrong) those extra few weeks could also give the Troika, which is composed of the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB), the means to prepare for Greece’s failure to meet its demands.

As a sign of the distrust that has marred Europe’s response to the crisis, eurozone officials seem more and more unwilling to take Greece’s promises at face value. Even Jean-Claude Trichet, the ECB president, said the crisis was “one of deeds, not words.”

German Chancellor Angela Merkel continues reaffirming her public standpoint: “It would be a disastrous message politically if it turned out that those who don't exactly fit in the eurozone are thrown out.”

It seems to me that Greece is now playing its last cards with some quite prepared to leave the euro-club should it show any further degree of wavering in its rehabilitation.

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Wall Street s biggest bond traders are stockpiling Treasurys at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan to buy longer-term debt. Keep in mind the OECD (The Organization for Economic Cooperation and Development) cut its forecast...
Tuesday, 20 September 2011 03:13 PM
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