Thursday, August 4, 2011

The (easily predicted) after effects on Europe of the US debt ceiling increase

It's been a long time since I posted here, due to family and work commitments I haven't really had time for a good internet-based whinge. Good to be back!

The country now is in a total state of depression. No leadership whatsoever. Either stupid or treasonous or both.

The market is down 512 points today so from the moment the ceiling was raised over a trillion dollars has evaporated from the American Wallet.

If this races east then Europe will be decimated tomorrow. Another black friday to come perhaps?

This was easily predicted.

Despite and because of the measures recently taken at a July 21 summit of the European Heads of State to try to stop so-called contagion (as if the collapse were not systemic) from Greece, Ireland, and Portugal, the contagion continues, with Spain and Italy on the edge.

On Wednesday, Spanish and Italian 10-year yields stood respectively at 6.24 and 6.10 percent.

European Commission President Jose Manuel Barroso said this surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern. "In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said.

Italian Economy Minister Giulio Tremonti held two hours of emergency talks with the chairman of Eurozone finance ministers, Jean-Claude Juncker, in Luxembourg, but neither disclosed anything of substance after the meeting.

"Italian and Spanish bond yields rose to their new record highs. This is a very alarming and scary thing," Finnish Prime Minister Jyrki Katainen told public broadcaster YLE. "The whole of Europe is in a very dangerous situation."

Prime Minister Silvio Berlusconi addressed the Italian parliament on Wednesday after Italian markets closed.

France's Societe Generale warned investors that it may miss its 2012 profit target after taking a 395-million-euro pretax charge in the second quarter on its exposure to Greek debt. Its shares fell 7 percent.

The Swiss National Bank cut its interest rate target and said it would very significantly increase its supply of liquidity to try to bring down the value of the Swiss franc.

In response to the contagious panic, there are desperate calls for hyperinflationary QE3.

A Financial Times op ed by the chief economist of Citigroup argues: "If the markets continue to distrust in Italy and Spain, nothing other than the reopening by the ECB of the bond purchases to acquire unlimited amounts of Italian and Spanish bonds stands between the public debt market and a disaster that could destroy the Euro zone." And Spain's El Pais says the only way to stop the free-fall in Spanish bonds is for the ECB to start buying in the secondary market, as they did with Greece, Ireland, and Portugal.

A Dow-Jones wire quotes an unnamed "senior official of a Group of 7 nation," [which it says is not the U.S.] that the U.S. through Geithner and Obama is "supporting the European nations' creation of a larger [three times larger, $1.5 trillion] EFSF." The same wire quotes Madame LaFarge saying that the IMF will have to get new resources to deal with the situation. Otherwise, the wire says the U.S. is "worried" that Europeans haven't bailed out enough and that Italy's crisis shows that the EFSF is too small.

On Thursday, Spain is planning to sell 3.5 billion euros in 3- and 5-year notes, and is expected to have to pay about 1% more than its last auction. El Economista reported today that Spain's borrowing cost for the first half of 2011, compared to the same period a year earlier, rose by 54 (fifty-four) percent, or 1.2 billion euros.

El Pais runs a panicked article on the crisis which begins: "The nightmare is getting worse." It then goes on to say the spread of Spanish bonds over German bonds hit a record 403 points yesterday, and has dropped slightly today, with rumors of Chinese and/or ECB purchases in the secondary market. Opposition leaders met with Spanish PM Zapatero today; CiU head Duran emerged from the meeting to tell the press: "After the conversation, I recognize that the situation is extremely serious." Better late than never...

Meanwhile, a number of large British-centered banks have joined Deutsche Bank in an assault on Spain and Italy. Barclays said on Tuesday that its first half profits fell 38% from last year and that it is reducing its portfolio of Spanish construction and property loans. On Monday, HSBC said it is limiting credit lines to customers in Spain and Italy. In addition, RBS has been selling Italian sovereign debt, and HSBC has been selling both Spanish and Italian sovereign debt.

1 comment:

  1. Interesting topic.
    Greece already fell, the question now is which country will follow it.