Following S&P’s announcement late on Friday night that it was downgrading the credit rating of nine eurozone countries, Europe’s leaders are once again on heightened alert as the sovereign debt crisis threatens to deteriorate.
For just for a short while there seemed to be something of a reprieve for Europe, with the fiscal compact starting to show some teeth, the ECB’s 3yr LTRO helping to partially unclog funding markets and both Italian and Spanish yields falling significantly as the governments of both countries implemented credible fiscal austerity measures. However, such is the scale of the problems being faced by Europe that new fires are breaking out once more.
With both France and Austria being stripped of their AAA credit rating, the EFSF’s firepower has been substantially curtailed – unfortunately this bailout fund is fast becoming a damp squid. Furthermore, those never-ending talks concerning a Greek debt-restructuring broke up on Friday with the IMF apparently demanding that bond-holders’ losses should be much higher. The discussions are set to reconvene on Wednesday.
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Finally, the ECB is unimpressed by the draft fiscal compact being worked on by European lawmakers. One member of the ECB’s executive board, Jörg Asmussen, wrote to lawmakers claiming that the draft “clearly run (sic) against the spirit of the initial agreement on an ambitious fiscal compact” and the provisions allowing highly indebted countries to breach deficit limits in the event of “severe economic downturn” represented an easy escape clause. For the ECB, such trenchant criticism is both unusual and also worrying because it is the one doing most of the heavy lifting in terms of ensuring that the euro project does not crash and burn. The single currency is once more on the back foot after Thursday’s impressive recovery, falling to 1.2626 overnight, an 18mth low.
There is another Merkozy meeting this week, and both France and Spain will be conducting bond auctions – a key test of how S&P’s announcement has affected confidence. Spain’s new PM, Rajoy, will conduct his first press conference since taking office, at which he will outline his fiscal austerity plans against the backdrop of S&P having downgraded Spain to A from AA-. Once again, it is a critical week for the single currency.
Commentary
MPC patience is rewarded. MPC policy-makers will be relieved. Latest figures from the ONS suggest that inflation pressures are easing, with factory output prices barely changed over the past five months. Together with the massive discounting and promotional campaigns undertaken by struggling retailers in recent months, the MPC is finally being rewarded for its patience and persistence. With the UK consumer in hibernation, retailers are likely to remain in sales mode for some time to come. Some of the major utility companies have also announced reductions in gas prices. The pressure on prices in the UK is definitely moderating, although the high cost of energy is still an issue.
German lawmakers agitate for Greek euro exit. In contrast to the public pronouncements from German Chancellor Merkel, there is growing support from within her own CDU party to cut Greece loose from the euro. The CDU leadership meets today, with some of Merkel’s colleagues arguing that Greece should not be given any further aid because it will be unable to repay. Leading the chorus for a Greek exit are deputy parliamentary caucus leaders Michael Meister and Michael Fuchs. Meister claimed recently that, were Greece to leave the single currency now, it would be much less of an issue than it might have been previously. Fuchs was even more candid, suggesting recently that “the problem (for Greece) is not whether they are capable of paying their loans – they will not, not at all, never”. Clearly, German politicians’ frustration with Greece is growing, and for good reason. Greece is a busted flush, and everyone knows it.
A more confident US consumer. An improving jobs picture, higher equity prices and signs that the economy more generally is strengthening continues to improve the mood of the US consumer. According to the latest Reuters/University of Michigan survey, their consumer confidence measure jumped to 74.0 in the current month, a 8mth high and well above expectations. The improving trend noted in this survey is consistent with other reports.
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