With all the focus on China, oil and deflation danger in the old continent, it is easy to forget about the problems in the euro-zone. They have never gone away.
Here are some updates on what’s going on in 3 countries, with very different troubles brewing:
- Greece: The birthplace of democracy has basically lost almost all control of its fate after accepting the troika’s demands in July 2015, but the situation hasn’t changed. The country still suffers an economic depression and the debt is not any closer to being sustainable. The recent negotiations are stuck on pension reform, which basically means more cuts rather than real reform. And what about the debt? This is being kicked over and over again, awaiting for those reforms. The first review, a pre-requisite to talking about the debt, was supposed to happen in the fall of 2015 and we are deep in winter. Another Greek crisis could happen in the spring.
- Spain: Over a month has passed since the inconclusive elections on December 20th. Since then, the leader of the currently ruling center right PP, Prime Minister Mariano Rajoy, rejected attempting to form a government while saying he is still the candidate. A grand coalition with the socialists is the options the market want, but Rajoy may have to go. More cases of corruption in his party complicate matters. And, the option of left wing coalition, something the markets and some socialists don’t want, is still on the cards. The current stalemate in the fourth largest economy is is currently a side story, but the longer this goes, the more uncertainty it brings to the euro-zone. New elections are also an option.
- Italy: The third largest economy has some banking issues. The third largest bank, Monte dei Paschi, is seeing customers pulling out deposits. According to reports, it has a mountain of bad loans. Apart from this story, there is fear of more trouble brewing in other banks across the continent due to bad loans. Despite the recent cut in the ECB’s deposit rate, now at a negative -0.30%, money parked at the safe haven of the central has reached new highs.
This may not necessarily be euro-negative: we have already seen how the euro works as a perfect safe haven / funding currency. The starkest example was the recent Greek crisis in July, when the euro dropped once the aGreekment was reached.
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