The Great Debate UK
By Kathleen Brooks. The opinions expressed are her own.
The markets have had to – grudgingly – get used to pricing in political risk in recent months. Instead of being moved by economic data and fundamental or technical factors, a large amount of recent price action has been driven by politicians, and that always spells bad news.
Firstly, we have had to listen to the machinations of Europe’s various branches of power as they try to muddle through to a solution to the euro zone debt crisis. This has done very little apart from cause excess amounts of volatility in the markets as politicians talk at odds to each other. The results are pathetic: more than 18 months since the Greek crisis first flared up not only is Athens still deep in its own sovereign crisis but contagion has spread to Italy and Spain and even threatens to engulf some of the core member states like France.
Although most of the focus has been on Europe, the spotlight may shift to the U.S. Republicans and Democrats have failed to agree on $1.3 trillion of cuts to the Federal Budget, which makes it unlikely that the bi-partisan Deficit Committee can come reach a debt deal by Wednesday’s deadline. The problem isn’t the cuts: if Congress can’t agree where the axe can fall then automatic cuts will be enforced. The problem isn’t even the repercussions of missing the deadline: these cuts wouldn’t be imposed until January 2013 and the missed deadline will not cause a default on U.S. debt or a government shut-down, unlike the impasse in Washington back in August.
Instead this suggests that the U.S. and Europe are in a chronic state of political partisanship. In the U.S. its two main political parties are pitted against each other and in the currency bloc the same thing occurs with inflation and austerity hawks in the North failing to bow to pressure to implement policies that could boost the financially weakened Southern states. Essentially the political stalemate is a bit like blocked plumbing since it disrupts the normal flow of things, which damages investor confidence and has the power to cause excess market volatility and a prolonged slump in the global economy.
-Kathleen Brooks is research director at forex.com. The opinions expressed are her own.-
The saying goes that you only really know who your friends are during times of crisis. Well European officials must have been beaming after two of the world’s largest economies promised to purchase the debt of the currency bloc’s most troubled nations. China came out first and pledged to “support Spain’s financial sector”, through participating in its upcoming debt auctions. Likewise, Japan pledged to purchase a quarter of the upcoming euro zone bond sale that will help fund the bailout of Ireland.
from The Great Debate:
The simplest way to end the imbalances in the world's economy is also sadly perhaps the most likely: for the Chinese to stop buying U.S. debt.
This is not going to happen anytime soon, for one thing deleveraging in the U.S. will for a time make U.S. Treasuries look good value, but a buyer's strike is a heck of a lot more likely than the orchestrated rebalancing the U.S. will push at this week's G-20 meeting of leading nations.