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Euros are in a muddle for the next decade


maxwellreid

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We are smack on the 5th year anniversary of GFC1. Things were shakey up until China hosted the Olympics then all hell broke loose 4 years ago prior to USA elections.

 

 

The main issues ahead for Europe - if everything goes to plan - and the market behaves.

 

http://t.co/gzEl5SGS

 

http://www.economist.com/node/21560307?fsr...c/draghi_s_plan

 

THERE is a common pattern to each stage of the euro crisis. First, there is panic in the markets. Then either the politicians or the European Central Bank (ECB) respond with commitments or actions that quell nerves. And each time the periods of calm become shorter.

 

...September 12th when the German constitutional court is due to rule on the legality of the euro areaÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s permanent rescue fund. That date also matters because it is when Dutch voters go to the polls.

 

And this is only an initiative to solve financial issues. We will not see a political program until mid to late October and the report will only outline stronger financial controls from a central body, but it could shape stronger political unification if the financial pact survives. The political solutions are decades away.

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after the summer holiday torpour: some dates to look out for (hard to say forward to !!)

 

Greece: The troika is due to return to Athens in September and make a ruling on whether to release additional tranches of funding to Greece. If the troika decides to cut the taps offÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂand we don't think it willÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂthen Greece would default and exit the EZ. The Greek government aims to renegotiate the second bailout program when the troika returns to town in September. If the troika plays hardball and does not grant the Greek government any concessions, then the governing coalition would likely collapse. Also in September, the Greek parliament will have to pass a number of measures to generate ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬11.5 billion in savings for 2013-14. With a high degree of austerity fatigue in Greece, we can expect social unrest.

 

Portugal: With Portugal starting to slip on its fiscal targets, we expect Portugal to begin negotiations on a second bailout package. Currently, Portugal is meant to return to the markets in 2013 but, with bond yields well above sustainable levels, we regard this as highly unlikely.

 

Spain: The auditors Deloitte, KPMG, PwC and Ernst & Young are due to present their full reports on the capital needs of Spain's financial sector in September. The findings of this report will be used to determine the exact amount the Spanish banking sector will need to borrow from the EZ's bailout fund, the European Financial Stability Facility (EFSF).

 

Italy: The Italian general election campaign will begin in earnest in September. Although polls point toward a center-left-led coalition, Italian politics is at its most fluid state since the early 1990s and, with so many voters still undecided, it is impossible to call the election.

 

Germany: The German constitutional court is due to vote on the legality of the ESM (the successor to the EFSF) and the fiscal compact on September 12. We expect the court will deem the ESM legal but, if this does not occur, it would serve a major blow to EZ policy makers, who have committed the ESM to potentially purchasing sovereign debt in the primary markets.

 

France: The French government is scheduled to unveil its 2013 budget in September. Markets will be disappointed if it does not include large spending cuts, but the announcement of further austerity risks riling trade unions and stoking civil unrest.

 

Netherlands: A general election is scheduled for September 12. Recent opinion polls suggest the ruling right-of-center VVD will be unable to form a right-of-center majority government. Consequently, coalition negotiations are likely to be protracted. The left-wing, euro-skeptic SP may win enough votes to be the second-biggest party. This would make it more difficult for the new Dutch coalition to secure parliamentary support for additional support measures for peripheral EZ countries.

 

Eurozone: There is a progress report on establishing the ECB as a single banking supervisor due out in September. Given that many details have not been hammered out yet, there is a chance that the progress made on this first step toward a banking union will disappoint.

from EZ: The Drama Ahead in September By Megan Greene, Roubini Global Economics (www.roubini.com)

 

their conclusions

In terms of the broader EZ developments, we expect the Greek government to collapse by the end of the year, and a Greek exit in early 2013, followed by an exit by Portugal by end-2014. Moreover, we expect Spain to receive official support from the EFSF/ESM in late 2012 after the ESM has been fully ratified (the second half of September at the earliest), while Italy will hang on longer but will eventually need support as well.
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Nipper - thanks for that.

 

then Greece would default and exit the EZ

 

Theoretically Greek can default and stay in the EMU. It has part defaulted already. Do not expect Greece to leave if the political landscape changes. There is no rule to force a country out of the EMU. They never though it could happen. Who gets paid and who does not get paid is the real issue. Could Greece organise an exit if the political landscape changes? I think not.

 

So they cannot be forced out and may not be able to get out even 49.9% want to. Something to think about. :) Greece has not got a great track record on majority votes in the last few years.

 

 

 

Spain

...to determine the exact amount the Spanish banking sector will need to borrow...

 

Expect some banks to hit big hurdles that force the Troikas hand.

 

expect Spain to receive official support from the EFSF/ESM in late 2012

 

Watch ratings agencies on this. Possible junk bond status? And the social impact is huge with up to 29% unemployment. :(

 

 

 

The Italian general election campaign
Greece Mark II - If there is any log jam in Italy's government stopping financial advancement, red flag the issue.

 

 

Dave

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Apparently the price of oil, as measured by the Brent index (which I think is the one likely used for most European transactions) and converted to euros, is at historic levels, even higher than in 2008 when the West Texas Crude index famously topped out at around US$147 a barrell.

 

http://www.macrobusiness.com.au/2012/08/cr...at-euro-record/

 

That has to be stinging, particularly in economies like Spain and Greece which are already deep in the throes of economic depression and are stuck with a currency they cannot depreciate.

 

A while back there were plenty of articles written and even a few books published which argued that not only did the price of oil peak at about the same time that the sub-prime bubble was at its zenith but that the bursting of the housing bubble in the US was in fact caused in large part by oil reaching prices that the US economy and US consumers simply could not sustain. Not sure the verdict is in on that proposition yet.

 

I suspect that European countries are far less dependent on oil than the yanks are but surely it remains a major factor there as well (?).

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My view.

 

EU is too fractured to kick Greece out and has no mechanism to do it.

Greece is too fractured to get out.

 

 

From info late last week.

From the Strategists at Bank of America-Merrill Lynch re the Greek crisis, arguing that the "markets do not fully appreciate the challenges that Greece and the Troika are facing in the next few weeks".

 

The good case (baseline) scenario, for now

 

A successful conclusion of the review is our baseline scenario. Assuming Greece chooses to implement the required reforms, we believe that the Eurozone will be able to eventually address political constrains for increasing Greek funding once more. For the ongoing program review, the Eurozone governments can give their commitment to cover any funding gap looking forward. To ensure debt sustainability, the Eurozone could provide funds for bank recapitalization directly from the ESM, as they plan to do for Spain. In any case, the decision for the first review tranche will have to take place by early October, as the Greek government could soon run into liquidity problems. What happens after this review will again depend on program implementation.

 

The bad case scenario

 

Five things can go wrong in Greece in the next few weeks, in our view.

The coalition government could fail to agree on the new austerity package.

The Greek Parliament could fail to approve the proposed austerity package.

Implementation problems could continue after Parliament approval.

Social unrest could get out of control.

And some Eurozone members could oppose further commitment to increase funding for Greece.

 

We believe that Greece's survival in the Eurozone could be at risk if any of these risks lead to a failure of the new program.

 

Merrill adds that it believes Greece needs more money. The bank calculates that taking into account factors such as the deteriorating growth outlook, Greece will need an additional haircut of at least ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’‚¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¬40bn to bring the debt path back to the targets set out in Greece's reform programme.

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Zerohedge makes this observation:

 

For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically.

 

Now ZH has a habit of calling the end of civilisation as we know it at least three or four times a day but they do have a point: for a major economy's banks to bleed so much so quickly surely is not sustainable. Not sure how hot that money is, maybe a statement from the authorities affirming the backing of deposits would be enough to see much of the cash flow back.

 

http://www.zerohedge.com/news/spain-whom-bell-now-tolls

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<h1 class="printer-headline">French unemployment passes 3m mark</h1>

 

French Labour Minister Michel Sapin says the country's unemployment has passed the symbolic number of three million registered jobseekers and will keep rising.

 

Asked on radio about the number of jobseekers hitting 2.99 million in July, Mr Sapin said there was no doubt the number had risen beyond that.

 

"What will next year's unemployment rate be? Nobody knows. We have already hit three million. The numbers you are talking about, which are the numbers for July, are already outdated," Mr Sapin said on Sunday.

 

"The question is, will it rise by very much? Yes, it will rise. At some point will we be able to reverse it? Yes," he said.

 

"These are economic decisions, European decisions," he said. "We need growth to create jobs."

 

French President Francois Hollande's Socialist government is struggling to tackle rising unemployment after he took office in May amid the debt crisis that is dragging down European economies.

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