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from MacroScope:
Possibility of Spanish downgrade looms over euro zone
Spanish government bonds have had a good run since the European Central Bank said it would protect the euro last year. But some analysts say the threat of a rating downgrade to junk remains an important risk.
Credit default swap prices are discounting such a move, according to Markit. Spain is only one notch above junk according to Moody's and Standard & Poor's ratings, and two notches above junk for Fitch. All three have it on negative outlook. Bank of America-Merrill Lynch says it sees a “high probability” of a sovereign rating downgrade in the second half of the year.
As the table above shows, a cut to sub-investment grade would prompt Spanish sovereign debt to fall out of certain indices tracked by bond funds, resulting in forced selling, which could drive Spanish borrowing costs higher.
from Breakingviews:
Hollande gets serious on Europe – at last
By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
François Hollande knows that the widening Franco-German divide lies at the heart of the euro zone crisis. In a press conference on Thursday, the French president showed that he wants to find a way to work with German Chancellor Angela Merkel to take Europe forward. He suggested the creation of an “economic government” of the monetary union, while addressing a key German concern: Paris seems ready to accept sovereignty transfers of a sort that would make such a centralised body effective.
from MacroScope:
There is no sovereign debt crisis in Europe
Evidence that Europe’s austerity policies are not working was in ample supply this morning. The euro zone as a whole is now in its longest recession since the start of monetary union. France has succumbed to the region's retrenchment. Italy’s GDP slump is now the lengthiest on record. And Greece, still in depression, shrank another 5.3 percent in the first quarter.
To understand why this is happening, Brown University professor Mark Blyth says it is necessary to forget everything you think you know about the euro zone crisis. The monetary union's troubles are not, as often depicted, the result of runaway spending by bloated, profligate states that are finally being forced to pay the piper. Instead, argues Blyth, it is merely a sequel to the U.S. financial meltdown that started, like its American counterpart, with dangerously-indebted risk-taking on the part of a super-sized banking sector.
from Hugo Dixon:
Brexit would be bad for Britain
Quitting the European Union would be bad for Britain. Membership of even an unreformed EU is better than “Brexit”. Quitting would mean either not having access to the single market - at a huge cost to the economy - or second-tier membership.
The debate over Brexit has moved into high gear in the past 10 days, after the UK Independence Party – which wants Britain to pull out of the EU - performed well in English local elections. The Conservative party, which rules in coalition with the pro-European Liberal Democrats, has been thrown into turmoil because UKIP has been winning votes largely from the Tories.
from Hugo Dixon:
Austerity debate misses half the point
The austerity debate misses half the point. It is true that governments, especially in the euro zone, shouldn't chase an austerity spiral ever downwards. But they can't just sit on their hands. They must drive even harder for structural reforms.
The last few weeks have witnessed a sea-change in the debate over fiscal austerity. A seminal academic paper by Carmen Reinhart and Kenneth Rogoff, which purported to show that economic growth was impaired if government debt levels exceeded 90 percent of GDP, has been discredited.
from Global Investing:
Why Abenomics is leading to a squid shortage in Japan
"Abenomics" -- Prime Minister Shinzo Abe's aggressive reflationary fiscal and monetary policy -- is widely praised for injecting optimism into the world's third largest economy and making Tokyo stocks the best performing equity market in the world this year.
However, in Japan, something odd is happening as a result of Abenomics -- a big shortage of squid.
from MacroScope:
The limits of austerity
With debate about the balance between growth and austerity well and truly breaking out into the open, flash euro zone PMIs – which have a strong correlation to future GDP -- are likely to show why a bit of fiscal stimulus is sorely needed. Talk of a European Central Bank rate cut is growing, euro zone policymakers at the G20 last week began to ponder loosening up on debt-cutting in an attempt to foster some growth and European Commission President Jose Manuel Barroso added his voice to the debate yesterday, saying the austerity drive had reached its “natural limit”.
Crucially, we haven’t heard similar from Germany but something is afoot, starting with the certainty that the likes of Spain and France will get more time to meet their deficit targets when the Commission makes a ruling next month. Portugal has already been given more leeway and today its finance minister will spell out new spending cuts which are required after the constitutional court threw out Plan A.
from Hugo Dixon:
Greece will probably pull through
Greece is not yet out of the woods. But there is a credible path that could lead the country back into the sunlight. That’s the main conclusion of a week I have just spent in the country.
Although the economy will have a terrible 2013, next year should be better. But the outlook is fragile: political crisis could yet rear its ugly head, tax evasion is rife and there’s the risk of external shocks.
from Hugo Dixon:
Italy could do with market pressure
Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.
The fall in 10-year bond yields, which were 4.3 percent on Friday compared to 4.4 percent just before the election, is attributable to two factors. First, nobody wants to bet against the European Central Bank which has promised to do whatever it takes to preserve the euro. Second, the Japanese central bank’s pledge to buy gigantic quantities of bonds at home has buoyed asset prices elsewhere, including in Italy.
from Breakingviews:
Whatever happened to the inflation “Weimarists”?
By Dan Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Whatever happened to predictions the United States would soon experience Weimar Republic-like inflation? When the Federal Reserve kicked off its massive stimulus campaign, critics invoked this dark period of modern German history and its images of wheelbarrows full of valueless cash. Four years later, only the most stubborn hawks still fear such hyperinflation. Consistently low price growth has made Ben Bernanke’s easing look safe - so long as his exit works.
