More Greek elections?
Attempts to form a Greek coalition government appear to be running into the sand with no one prepared to dance with the two mainstream parties, New Democracy and PASOK, raising the probability of a fresh round of elections with all the uncertainty that will entail. The far-left Socialist Coalition will have a stab at forming an administration today but doesn’t really have the numbers to do it.
The only plan that looks like it offers a glimmer of hope is that put forward by PASOK leader Evangelos Venizelos. He is after a “pro-European” coalition and has pledged to spread the cuts Greece has been ordered to make under its bailout programme over three years not two. If a burst of realpolitik every takes hold in Athens (and it’s worth noting that nearly all the parties say they want to stay in the euro), that could just be enough to get others on board. BUT, Venizelos would then have to go to Brussels to persuade the EU to go along with this relaxation of its targets and, on and off the record, officials lined up yesterday to say there was no prospect of that happening. And his PASOK was the party that was most badly humiliated at Sunday’s election so it’s hard to see how it has a mandate to rule the Greeks, a majority of whom voted firmly against austerity, even it is in a broad coalition.
So new elections next month are likely which leaves a very compressed timeframe and who knows what political landscape will result second time around. The EU/IMF/ECB troika is supposed to return in June and can’t negotiate on the next bailout tranche if there is no government. In any case, Athens is supposed to find 11 billion euros of extra cuts as part of the aid programme and none of the parties are in a position to do that as things stand.
One of the burning questions is whether Greece’s euro zone partners are in any mood to cut it some more slack — the atmospherics a few months ago when the second bailout deal dragged on and on suggested they certainly weren’t then. And even if they were, they would have to take into their calculations that any relaxation by Greece would presumably be demanded by Ireland and Portugal too, which could put markets back on alert.
However, the reaction yesterday — with stocks ending well up on the day — suggested that some markets have either bought into the theory that the contagion threat posed by Greece is significantly diminished (see yesterday’s note for reasons) or that they think that the euro zone will somehow muddle through again. Safe haven Bunds have ticked up at the open and European stocks look set to open flattish so not much to go on there.
Either way, the bigger picture is that Spain remains far more pivotal. The government’s move to clean up troubled Bankia could signal it is finally getting serious about tackling its financial sector, which is it’s main problem. Sources say the state will lend 7-10 billion euros. The less encouraging aspect is that the government appears to be saying that won’t land on its deficit because it will be loaned at commercial rates — the sort of accounting sleight of hand that has got investors’ hackles up in the past.
Europe in recession – an interactive map
Spain has become the latest European country to slip into recession joining the Belgium, Cyprus, The Czech Republic, Denmark, Greece, Italy, The Netherlands, Ireland, Portugal, Slovenia and the United Kingdom.
Click here to view an interactive map.
*Updated to include Romania and Bulgaria
Thanks for comments – Will update with Romania and Bulgaria
This week in the euro zone
A new quarter dawns and although a holiday-shortened week isn’t likely to see dramatic investment decisions taken, the burning question is whether the strong ECB-fuelled rallies of the first three months of the year can continue. The consensus so far is yes, but at a more modest pace.
Markets will pick through the details of the Spanish budget and the euro zone’s decision on increasing the capacity of its firewall. Implementation risk in the first case, and shallow ambition in the second leaves scope for disappointment.
The standout events of the week are the policy meetings of the European Central Bank and Bank of England. No policy changes will result but within the former at least, there is growing internal debate about the long-term consequences of creating a trillion euros of three-year money which no doubt prevented a credit crunch, but according to monetarist theory at least, will inevitably fuel future inflation. There is also the conundrum of creating banks forever reliant on central bank support rather than being able to stand on their own two feet and start lending to each other again.
Bundesbank chief Jens Weidmann has been leading a push by a group of ECB policymakers for the bank to prepare for a shift to exit mode just a month after it completed the second of the lending operations. His ECB boss, Mario Draghi, is more relaxed and it is highly unlikely that the ECB will change course for several months yet and quite possibly not this year.
That applies in spades to the Bank of England. BoE Governor Mervyn King sat firmly on the fence last week, saying he did not know whether more QE would be required in Britain or not. King illuminated the other common theme coming from central bankers, saying the onus was firmly on the politicians now. The major western central banks seem to be in a holding pattern, disinclined to provide yet more stimulus yet viewing their economies as far too fragile to hit the policy reverse switch.
For investors pondering whether they could be derailed by a burgeoning economic slowdown, euro zone and UK purchasing managers’ indices – which have a strong correlation with GDP – will be a must-watch as will equivalent reports from China. Spain will hold a pre-Easter bond auction. The glut of ECB money has helped Italian and Spanish debt sales go down a storm in the first quarter of the year – banishing the fear about their refinancing mountains – and that effect is likely to persist for some time yet, though not forever.
The ECB’s dramatic intervention and the debatable move by euro zone leaders to create a more potent rescue fund from mid-year buys time, but no more than that, for governments to push through structural reforms to make their economies more competitive and balance the need to cut debt while not snuffing out growth, a balancing act that has not been achieved so far. Until that is done, the underlying fault lines remain.
Today in the euro zone – a blizzard of bailout numbers
Brace yourself for a blizzard of numbers.
EU finance ministers gathered in Copenhagen are poised to decide precisely how much firepower their new rescue fund – to be launched mid-year – will have. A draft communiqué suggests that as of mid-2013, presuming no new bailouts have been required in the interim, the combined lending ceiling of the future ESM and existing EFSF bailout funds will be set at 700 billion euros (500 billion pledged to the ESM plus the roughly 200 billion already committed to Greek, Irish and Portuguese rescue programmes).
Up to mid-2013, if 700 billion proves to be insufficient — i.e. someone else needs bailing out — euro zone leaders will be able to bolster it with the 240 billion euros as yet unused in the EFSF, according to the draft, although German Finance Minister Wolfgang Schaeuble said last night that 800 billion should be the absolute limit.
Sorry, there’s more. Because the ESM will not have its full 500 billion euros capacity on day one – it will build up over time – the real available figure for the next year is more like 640 billion euros. Confused? You should be.
Nonetheless, this is probably sellable by Angela Merkel to German MPs and her public as not being a real increase at all (which is not that far from the truth) while also probably being enough for Christine Lagarde to seek greater crisis-fighting funds for the IMF from its non-European members, most of whom have said they would provide nothing until the euro zone shows some serious intent of its own. The IMF spring meeting looms next month.
The big question is, is it enough to keep markets calm? The possibility of drawing on the extra 240 billion over the next year might do the trick but it’s not yet guaranteed that that will be agreed. If the ministers only offer up a 500 billion fund plus the money already committed to bailouts (which really is not new money at all), there could well be a wobble. The other big setpiece of the day is the Spanish budget, which Rajoy insists will be tough. Markets are watching closely. Spain reported a budget shortfall of 8.5 percent of GDP in 2011 and faces a target of 3 percent next year. It can ill-afford any slippage; its bond yields have already started rising since Prime Minister Mariano Rajoy rejected the first 2012 target agreed with the European Commission and secured a softer goal.
Rajoy has promised a tough budget which economists predict will push Spain into a pretty deep recession this year. The government believes 35 billion euros of cuts will allow it to meet its deficit targets but given an economic downturn will cut government revenues, some analysts estimate nearly double that amount will be needed. The outside pressure for reform is unrelenting. Schaeuble said a youth unemployment rate nearing 50 percent was little surprise considering the state of Spanish labour laws.
Europe’s wobbly economy
Things are looking a bit unsteady in the euro zone’s economy. Just ask Olli Rehn, the EU’s top economic official, who warned this week of “risky imbalances” in 12 of the European Union’s 27 members. And that’s doesn’t include Greece, which is too wobbly for words.
Rehn is looking longer term, trying to prevent the next crisis. But the here-and-now is just as wobbly. The euro zone’s economy, which generates 16 percent of world output, shrunk at the end of 2011 and most economists expect the 17-nation currency area to wallow in recession this year and contract around 0.4 percent overall. Few would have been able to see it coming at the start of last year, when Europe’s factories were driving a recovery from the 2008-2009 Great Recession. And it shows just how poisonous the sovereign debt saga has become.
Not everyone thinks things are so shaky. Unicredit’s chief euro zone economist, Marco Valli, is among the few who believe the euro zone will skirt a recession — defined by two consecutive quarters of contraction — in 2012. This year is “bound to witness a gradual but steady improvement in underlying growth momentum,” Valli said, saying the fourth quarter was the low point in the euro zone business cycle.
That could still happen. Business surveys support the idea that the worst is behind us, while European Central Bank President Mario Draghi agrees that last year’s collapse in confidence has now steadied, albeit at low levels. So far, the ECB has not given a strong signal on whether it will take interest rates below the 1 percent level for the first time, but the bigger risk is whether a disorderly Greek default or the threat of a severe credit freeze — which the ECB’s nearly 500 billion euros in loans has so far helped avoid – come back to crush the green shoots of growth.
The ECB’s latest lending survey showed for the last three months of 2011 reinforces the concerns of a credit crunch, as banks are still not passing the money on to the real economy. Thirty-five percent of banks reported they had tightened the standards they apply to loans to businesses, compared to only 16 percent in the third quarter. The ECB is set to make its second offer of three-year loans at the end of the month and that could ease credit risks, but may also discourage banks with bad loans on their books to reform.
So, in economist-speak, the risks are still on the downside and uncertainty remains high. Basically, things are still looking wobbly.
from Amplifications:
A centralized Europe is a globalized Europe
By Jean-Claude Trichet
The views expressed are his own.
PARIS – Whenever people seek a justification for European integration, they are always tempted to look backwards. They stress that European integration banished the specter of war from the old continent. And European integration has, indeed, delivered the longest period of peace and prosperity that Europe has known for many centuries.
But this perspective, while entirely correct, is also incomplete. There are as many reasons to strive towards “ever closer union” in Europe today as there were back in 1945, and they are entirely forward-looking.
Sixty-five years ago, the distribution of global GDP was such that Europe had only one role model for its single market: the United States. Today, however, Europe is faced with a new global economy, reconfigured by globalization and by the emerging economies of Asia and Latin America.
It is a world where economies of scale and networks of innovation matter more than ever. By 2016 – that is, very soon – we can expect eurozone GDP in terms of purchasing power parity to be below that of China. Together, the economies of China and India could be around twice the size of the eurozone economy. Over a longer time horizon, the entire GDP of the G-7 countries will be dwarfed by the major emerging economies’ rapid growth.
So Europe must cope with a new geopolitical landscape that is being profoundly reshaped by these emerging economies. In this new global constellation, European integration – both economic and political – is central to achieving ongoing prosperity and influence.
Jean-Claude Trichet you may be too feckless to realize it, but you are well on your way to a cemented reputation of failure on par with Neville Chamberlain. You failed (and continue to fail) to understand the nature, scope, and depth of the crisis.
You more than any other held the key to averting disaster. And you more than any other deliberately ignored the danger. Now you more than any other will take the blame.
I have little doubt that your brain will continue to inculcate you from these troubling thoughts as it has previously done so well.
Billions are suffering as a result of your myopia. Here’s wishing you a comfortable retirement.
from Global Investing:
Hungary’s Orban and his central banker
"Will no one rid me of this turbulent central banker?" Hungarian Prime Minister Viktor Orban may not have voiced this sentiment but since he took power last year he is likely to have thought it more than once. Increasingly, the spat between Orban's government and central bank governor Andras Simor brings to memory the quarrel England's Henry II had with his Archbishop of Canterbury, Thomas Becket, over the rights and privileges of the Church almost 900 years ago. Simor stands accused of undermining economic growth by holding interest rates too high and resisting government demands for monetary stimulus. The government's efforts to sideline Simor are viewed as infringing on the central bank's independence.
So far, attacks on Simor have ranged from alleging he has undisclosed overseas income to stripping him of his power to appoint some central bank board members. But the government's latest plan could be the last straw -- proposed legislation that would effectively demote Simor or at least seriously dilute his influence. Simor says the government is trying to engineer a total takeover at the central bank. "The new law brings the final elimination of the central bank's independence dangerously close," he said last week. The move is ill-timed however, coming exactly at a time when Hungary is trying to persuade the IMF and the European Union to give it billions of euros in aid. The lenders have expressed concern about the law and declined to proceed with the loan talks. But the government says it will not bow to external pressure and plans to put the law to vote on Friday. That has sparked general indignation - Societe Generale analyst Benoit Anne calls the spat extremely damaging to investor confidence in Hungary. "I just hope the IMF will not let this go," he writes.
Central banks and governments often fail to see eye to eye. But in Hungary, the government's attacks on Simor, a respected figure in central banking and investment circles, is hastening the downfall of the already fragile economy. For one, if IMF funds fail to come through, Hungary will need to find 4.7 billion euros next year just to repay maturing hard currency debt. That could be tough at a time when lots of borrowers -- developed and emerging -- will be competing for scarce funds. Central European governments alone will be looking to raise 16 billion euros on bond markets, data from ING shows. So Orban will have to tone down his rhetoric if he is to avoid plunging his country into financial disaster.
But this week the tussle has intensified as the central bank has shrugged off Orban's call for more "growth-friendly policies" and raised interest rates by half a point. The rate rise, the second in as many months, brings interest rates to 7 percent, sparking rage in the ruling party. But the central bank, quite logically, argues higher rates are necessary to protect Hungary's currency, the forint, from further weakness. And it has signalled it is fully prepared to raise rates again at the next meeting if required.
from Global Investing:
Can Eastern Europe “sweat” it?
Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.
Warsaw wants to double next year's dividends from stakes in firms ranging from copper mines to utility providers to banks.
Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed "the forgotten side of the government balance sheet". It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm's length from the state and run along strict corporate standards to consistently grow profits.
The impetus isn't entirely ideological. Poland and Lithuania are desperately trying to balance their books and under European Commission rules, privatisation proceeds cannot be taken into account when calculating the budget deficit but SOE dividends can.
But "sweating" government assets to yield higher profits doesn't always come easy for central and eastern Europe. After all, this is a region where state ownership has been synonymous with inefficiency and stagnation.
Even so, the track record of emerging European governments on privatisation is mixed.
The haste at which state resources were sold off following the collapse of the Soviet Union had disastrous repercussions for economies such as Russia and Croatia. Recent efforts at state divestment from Poland to the Czech Republic to Romania have run aground on unrealistic price expectations, corruption or regulatory obstruction.
EU might treat itself to treaty change
By Robert-Jan Bartunek and Robin Emmott
French statesman Charles De Gaulle once famously said “Treaties are like roses and young girls — they last while they last.” Germany seems to have decided that the European Union’s Lisbon Treaty, which only entered into force after a fair amount of upheaval in December 2009, has lost its perfumes and must be reworked to ensure the euro zone’s debt crisis can never be repeated.
European Council President Herman Van Rompuy’s proposal to modify the treaty via a little-known section called protocol 12 has so far been unable to convince German government officials, who warned against a “bad compromise” of small steps or “little tricks.”
Van Rompuy’s sense is that changes to the protocol, which would strengthen legislation to prevent countries running up big budget deficits, could be agreed quickly and send a message to investors that the euro zone is embarking along a path to bring back confidence and resolve its crisis.
from Global Investing:
Phew! Emerging from euro fog
Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise. And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you'd be just a little blue in the face waiting for the 'big bazooka'. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse. And here's where most global investors stand following the "framework" euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers -- a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros -- were broadly what was called for, if not the "shock and awe" some demanded. Financial markets, who had fretted about the "tail risk" of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible "Phew!".
Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:
It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.
So what exactly have investors and been doing while waiting for the fog to clear in Brussels? The truth on most benchmark prices and indices is "not very much" -- at least not since world markets got the collywobbles in early August about US downgrades and debt ceilings, euro sovereign debt angst and double dip recession. Yet, since the European stocks nadir in late September prodded the Franco-German alliance into more serious action, there has been some impressive market gains of between 10 and 20% across most equity sectors and national indices. More broadly, after a year of intense political and financial turmoil across the globe, developed market equities are only down about 4% year-to-date -- a 10 point outperformance on emerging markets, for example.
And the clearing of the euro fog now allows investors to start looking beyond the Brussels cauldron and review how the rest of the world is shaping up. What they find, surprisingly for those drowning in disaster commentaries, is‘not all that bad – especially, but not exclusively in the United States. There's been a string of more positive economic data releases throughout October and these have continued through the back end of last week and early this week. The bellwether Philadelphia Fed industrial index rose to its highest in six months; U.S. durable goods orders (excluding volatile aircraft orders) rose at their fastest pace in six months in September; U.S. new home sales rose at their fastest in five months; business surveys show Chinese manufacturing is back expanding again in October for the first time in three months; U.S. power firms are reporting a pickup in industrial activity in H2, Ford has increased fourth quarter forecast for North American vehicle production. The U.S. Q3 earnings season hasn’t been half bad either – with a third of the S&P500 reported, some 70 percent beat forecasts and the main strength was in the industrial world. What’s more for markets, seasonal equity flows are typically in an updraft for the rest of the year, all things being equal. Fund managers already started rebuilding equity positions in September.
European business and consumer sentiment surveys have continued to push lower through the policy logjam, unsurprisingly, even if real data contradicts some of that anecdotal ‘evidence’. And this may well translate into the wider investment theme as the euro crisis ebbs. Europe may agree to adapt grudgingly to solve its immediate problem but tyhen pay the price in economic growth because it’s less worse than the alternative of financial chaos.
On the more immediate horizon, there may be groans from those hoping to escape summit mania as G20 leaders are set to meet in Cannes next Thursday and Friday -- with a hoped-for endorsement of the euro plan and a specific interest in the EFSF/IMF/SPV idea that seems to be courting sovereign wealth funds from China and other emerging giants from the BRICs to use a special conduit to buy euro sovereign bonds. ECB rate cuts too may be firmly back in the frame on Thursday as Mario Draghi takes the helm of the central bank for the first time. The Federal Reserve's Open Market Committee gives us its latest decision on Wednesday. US payrolls looms large on Friday, with a heavy European earnings sked including Barclays, BMW, ING, BNPP, Unilever, CS, ArcelorMittal, RBS, Commerzbank, and many more.
