Time running out for Greece

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With nothing concrete emerging from the Ecofin meeting over the weekend and Greece’s creditors still balking at releasing the next tranche of bailout money, the single currency has fallen heavily overnight. Apparently the troika will be conducting a phone hook-up with Greek Finance Minister Venizelos today to discuss whether Greece has made sufficient progress on budget consolidation. At the same time, Europe’s leaders are still in obvious disagreement over the details of the July 21st agreement. Euro-area finance ministers meet again in two weeks time to make a final decision on releasing funds to Greece.

European leaders would also be aware of the growing international pressure to put their house in order, with US Treasury Secretary Geithner, the Chinese Premier and Russia’s president Putin all voicing their concerns. To make matters worse for the single currency, Angela Merkel’s party once again fared poorly in regional elections over the weekend in Berlin. Interestingly, the pro-Europe opposition SPD performed rather well. It is the dollar and the Japanese yen that have benefitted most from the euro’s latest tumble. For the greenback in particular, September has been a very fruitful month. Government bond yields for the likes of the US, Germany and the UK are back in the sweet-spot, while equities are once more on the back foot.

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Commentary

UK minister urges BoE to consider more QE. In what was his first real foray into the debate over monetary policy for some time, UK Business Secretary Vince Cable suggested on Friday that quantitative easing remained the preferred tool for stimulating demand and that the government was right not to be hijacked in their commitment to implementing fiscal austerity. Cable claimed that expansion of the money supply through QE would help to stimulate private credit demand. Under normal circumstances, Cable might be right. However, against the backdrop of unprecedented deleveraging by both the household and corporate sectors, it is not clear what else monetary policy could do to encourage credit demand. Indeed, it could reasonably be asked just why pursuing additional credit demand as a policy objective is so desirable, at a time when the economy is already carrying an unsustainable debt mountain? Whether or not more QE is warranted, it does appear that more policy-makers are convinced that it needs to be tried again. Although it is understandable, QE is flawed as a policy prescription for a lack of aggregate demand, at a time when monetary policy is already stretched to the maximum in pursuit of this Holy Grail.

Spanish regional debt continues to worsen. Although Spanish bonds had a much better time of it on Friday, the news on regional debt from the Bank of Spain was deeply worrying. At the end of Q2, the debt burden of Spain’s regions soared to a record EUR 184bln (12.4% of GDP), up from 11.6% in the previous quarter. Unfortunately, it is the regional governments that are the key to achieving Spain’s demanding fiscal targets. Tax revenues have plunged for the regions, and they are finding the task of controlling spending very difficult.   

Gold’s inglorious retreat. Of considerable interest last week was the consistent slippage in the gold price, which fell to USD 1,765 an ounce at one stage on Friday, down almost USD 150 from the record high achieved some ten days ago. As Friday progressed, the gold price did come roaring back, reaching $1,829 early in the Asian trading session overnight. It has been an incredibly rocky ride for the gold bulls; at the back end of August the gold price registered a record high of USD 1,915 only to collapse more than USD 200 within three days to near the USD 1,700 level. A number of possible explanations come to mind to account for gold’s recent tumble. Firstly, the nature of safe haven demand has altered slightly since the SNB decided to completely change tack, announcing its preparedness to print unlimited francs to prevent currency strength from crippling its economy. It is just possible that some of the enormous Swiss franc losses experienced by investors and traders in the wake of the SNB move have triggered a re-examination of the prospects for safe haven destinations such as the Japanese yen and gold. It is also possible that recent Swiss franc losses required some to liquidate profitable investments elsewhere. Secondly, demand for the dollar has definitely perked up over the last couple of weeks. Some of this is safe haven demand, some of it is dollar-hoarding by US banks and money market funds, some of it is investor concern over Europe’s frightening sovereign debt and its banking crisis and some is due to the President’s stimulus package. This most recent price move in gold needs to be put into context. The gold price has been in an 11-year bull market and this year alone is still up 26%. Even so, if the dollar makes further headway in the months before year-end, then gold bulls may need to endure some further suffering for a while longer.  

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