Euro zone may struggle with its own Lost Decade
Additional Reporting by Andy Bruce and polling by Rahul Karunakar and Sumanta Dey.
As Europe’s crisis drags on, the prospect of a Japanese-style lost decade of economic malaise is becoming increasingly real, according to a new poll. Half of the bond strategists and economists surveyed by Reuters are now expecting just such an outcome.
Many market participants have dismissed the fall of two-year German bond yields below their Japanese counterparts as being merely a result of a crisis-fueled flight to quality bid. Two-year German yields are now close to zero, offering returns of only 0.02 percent. By contrast, equivalent Japanese bonds are yielding 0.11 percent.
But a significant portion of analysts in a Reuters poll see something more sinister in the rapid narrowing of the premium investors require to hold German debt over Japanese bonds. One half of those polled – 12 out of 24 – said it is likely the euro zone is close to entering a period of prolonged low or no growth and inflation and low interest rates, with the other half saying it was unlikely.
According to Stephen Lewis, chief economist at Monument Securities:
I don’t really see an early end to the financial crisis in the euro zone. I think it’s very unlikely that Germany and the other countries will see eye to eye in the course of this year. That’s going to keep the euro zone economy looking very weak for the next several quarters.
Europe’s economy stagnated in the first quarter of 2012 and is expected to shrink 0.4 percent this year, according to another recent Reuters poll. Data on Thursday certainly pointed in that direction, suggesting even wealthier countries like France and Germany are also starting to feel the pinch.
Greek political poll tracker
Greece faces another election on June 17. Although they reject the austerity required by the bailout, most Greeks want their country to stay in the euro. However Frankfurt and Brussels say it is impossible for Greece to have one without the other: no bailout means no euro and a return to the drachma. Whether the Greek people believe these warnings could have a big impact on the election result.
First place comes with an automatic bonus of 50 seats, meaning even the slightest edge could be pivotal in determining the makeup of the next government.
Click here for an interactive chart showing the latest polls:
The party is clicked by default in the interactive version. The absence from the “photo” on the blog was an oversight, which has now been corrected. Thank you for pointing this out.
Risk of contagion if Greece exits euro: WestLB
What happens if Greece leaves the euro? No one can say for sure. But John Davies at WestLB, finds it difficult to envision a benign outcome.
Greece’s economy, at around $300 billion, is very small compared to the euro zone as a whole. The problem is if other countries follow suit – or are pressured in that direction by stubborn financial markets.
Such a scenario doesn’t bear thinking about because it is so horrible.
There is a good chance that the market would immediately trade Portugal towards pre-debt swap Greece levels. The next in line would certainly be Ireland and Spain.
Initially you have got to assume that spreads would become even more dislocated. As you are moving out and down the credit curve the ones with the weakest credit ratings will likely suffer worst, at least initially, because we are moving clearly into the world of the unknown and that’s precisely what the market doesn’t like.
The Greek elections have left a political vacuum that is raising speculation that the country may eventually exit the euro. Last Sunday, Greek voters punished mainstream parties that supported harsh austerity in exchange for international bailout cash. That left the Greek parliament with a jumble of minority parties that have been unable to form a government.
The leaders of Greece’s once-dominant conservative and socialist parties made a push on Friday to avert new elections and prevent a victory by a radical leftist who has promised to tear up its international bailout deal.
Inability to implement the reforms set out by international lenders amid this political void could compromise the country’s life-support bailout money and lead to a default. This could make the country’s membership of the euro increasingly unsustainable, even though those very reforms risked choking growth further in an economy suffering its fifth year of recession.
Even Germany, the key driver of growth in the euro zone, might eventually be threatened by worsening financial and economic conditions around it. And what of the bullish German Bund market which seems to know no bounds? Davies again:
debt relief by more debt added faster…faster..faster.faster…
the math is compelling.
the greeks must default…default..default.default…
printing is the world’s only current option. if, and only if, the major currencies agree to unified manipulation of currencies, and stick to it, can the pain inflicted by fiat foolishness be gentled enough to allow the real people to be ok.
p.s. the printers must agree to a fixed ‘flow’, but that’s another story.
“There are human beings involved” in austerity debate
The inventors of democracy and its greatest 18th century champions both go to the polls this weekend. Greek and French voters will try to elect governments they hope will help release their economies from the grips of the euro zone debt crisis.
While exercising their democratic vote, Europeans will also be contemplating another key issue: their basic economic survival.
That is why the debate about austerity versus growth has become so important.
Financial markets see fiscal discipline as crucial to get the euro zone’s debt burden back to sustainable levels. They are going into the Greek elections favoring triple-A rated bonds over peripheral counterparts.
The premium investors require to hold French debt over German Bunds has also risen in the run-up to the French vote as Francois Hollande became the favourite to win.
But as economies fall deeper into recession and double-digit unemployment hurts prospects for growth, the view that austerity alone will not solve the euro zone debt crisis, seems to be gradually winning over some investors in the bond market – the heart of the crisis.
Sanjay Joshi, head of fixed income at London and Capital, says:
Dr. Doom goes to Beverly Hills
When it comes to predicting a dark future, Nouriel Roubini – the NYU economist who earned the moniker Dr. Doom after he correctly predicted the financial crisis – is not about to let anyone get in his way.
Even if it’s his host. And even, or maybe especially, when there are 500 witnesses.
That’s precisely what happened Wednesday morning, when Michael Milken – the former junk-bond king – shared the stage with Roubini at Milken’s Global Conference. What was billed as an interview in one of the Beverly Hilton’s grand ballrooms had the feel of a pitched battle.
Roubini warned of a massive oil shock following a potential clash between Iran and Israel – or possibly the United States, sometime after the November presidential elections. He talked about geopolitical instability in the Middle East. “It’s a mess,” he said.
Milken countered with a graph showing the U.S. has bigger fossil fuel reserves than any other country in the world, and suggested that natural gas, extracted from shale reserves that are largely outside the Middle East, will eventually make Arab clashes irrelevant to energy.
Roubini: “I think people are a bit too optimistic about how fast the shale revolution is going to occur…. I think people believe that in five years from now we are going to be energy independent – I think they are deluding themselves… I think it’s more like a 10-20 year process.”
Milken: “I think I want to answer that with leadership.”
This is a fight between bubble economies and non-bubble economies. When the top marginal income tax is high, say 74% under LBJ/Nixon/Ford/Carter, bubbles are unlikely; the OPEC blockade was external. Otherwise, you get bubbles in defense in the 80s or dot-coms in the 90s or housing in the 00s. Milikien’s 80s fortune was from his junk-bond business that earned $500M/year, easily double that in 2012 dollars. Maybe if Stephanie/Thom/Randi were allowed to compete with Beck/Rush/Hannity on the radio this would be common knowledge.
Dancing on the edge of a (fiscal) cliff
With hundreds of billions worth of stimulus measures set to expire on Jan. 1, investors are all too aware that the United States is hurtling toward what economists are calling “a fiscal cliff.” It’s just that most seem to think Congress will execute one of its typical last-minute, hairpin turns to avoid plunging the economy over the edge.
As Russ Koesterich, global chief investment strategist at iShares told Reuters recently, “people are worried but they feel some sort of fix will get done.” Certainly the equity and bond markets back him up: the S&P 500 is up a healthy 12.7 percent this year while benchmark 10-year Treasury yields remain pinned beneath 2 percent.
Ethan Harris at Bank of America-Merrill Lynch isn’t so sure. After all, we’re talking about the same group of politicians who nearly forced the United States to default last year and earned it a credit downgrade from S&P in the process. This time, Republicans and Democrats will have just seven weeks to stitch up a deal, and they’ll have to do it while the wounds inflicted by a brutally negative a presidential election campaign are still fresh.
At stake are about $240 billion in income, capital gains, dividend and estate tax cuts – the Bush tax cuts – that are scheduled to expire on Jan. 1, along with Obama’s $90 billion payroll tax cut. Also set to start next year will be the first round of a 10-year diet of automatic spending cuts totaling $1.2 trillion. These were triggered when a Congressional committee failed last year to agree on a long-term deficit reduction plan.
Harris is warning clients to prepare for the worst:
Absent new legislation, fiscal policy will tighten by more than 4 percent of GDP. Even if just half of the threatened tightening occurs, it would be a major shock to growth.
Financial markets may not even have to wait until 2013 to feel the sting. As Harris puts it:
What do Americans really want?
Judging by the heated political rhetoric, you would think there is a great divide in America over the proper role of government. The drama is played out in battles over budgetary policy where one side wants low taxes and small government, and the other favors taxing the rich to pay for government programs.
Interestingly Americans, when faced with making the tough fiscal choices themselves, are remarkably pragmatic.
The Committee for a Responsible Budget since 2010 has invited people to go to its website and figure out how they would cut the U.S. budget debt load, which is fast approaching 100 percent of GDP. They must make specific choices, such as whether to cut farm subsidies or Social Security payments and what tax rates to impose.
Over the past two years, one quarter of a million people have logged onto the budget calculator, and the results show an America willing to compromise:
- 94 percent would reduce the budget deficit through some combination of tax reform and spending cuts
- 82 percent of Republicans supported letting some of the Bush-era tax cuts expire
- 71 percent of Democrats favored raising the retirement age
Netherlands at core of the crisis
The Netherlands has become the latest country to come into the firing line of the euro zone crisis.
The cost of insuring five-year Dutch debt against default jumped to its highest since January as the government’s failure to agree on budget cuts spiraled into a political crisis and cast doubt over its support for future euro zone measures.
Dutch Prime Minister Mark Rutte offered to resign on Monday, creating a political vacuum in a country which strongly backed an EU fiscal treaty.
Five-year Dutch CDS jumped 14 basis points to 133, only a whisker away from the record of 136 basis points hit on November of last year. The premium that investors require to hold 10-year Dutch bonds over their equivalent German Bunds rose to 79 basis points – its highest in 3-years.
Commerzbank’s take on Holland:
Elections could be held in September 2012 at the earliest, because the Dutch constitution prescribes a period of 80 days between the dissolution of the government and new elections. In the interim, the government would be unable to get important reforms approved by parliament. This suggests that the 3 pct (budget deficit) target will be missed in 2013 and the country’s AAA rating is at risk.
A Dutch debt auction on Tuesday will provide another test of investor appetite following Monday’s selloff.
It began with countries of Asia, Africa and Latin America, now IMF is striking Europe and it seems that Europe either is still asleep or there is a rat. Iceland, Greece, Italy, Spain, Portugal and now Holland…people of Europe .. we need to wake up, and show solidarity to countries like the above, because, as you can probably see on your own, you are the next victim of this unsatisfied moneythirsty organization and this canserlike system.Capitalism is out of control, we need to act fast…please…
Citi solicits staff donations for its political lobby
Citigroup, the third largest U.S. bank, is actively soliciting donations from its employees for its political action committee (PAC) or fundraising group. In a letter to staff obtained by Reuters, the bank stressed the importance of the upcoming presidential and Congressional elections, urging staff to give to Citi’s PAC. From the letter:
Our Government Affairs team already does a great job promoting our positions on important issues to lawmakers, but there is one thing that each of us can do to enhance their efforts: contribute to Citi’s Political Action Committee (PAC).
Citi PAC is one of the most effective tools we have to amplify the voice of the company in Washington and enhance our profile with lawmakers. The PAC provides the resources to help suport government officials who share our views on key policy objectives and who understand the impact various policy decisions may have on overall economic investment and growth.
Said a Citi spokesperson:
Citi PAC is funded by the voluntary, personal contributions of its employees. The PAC contributes to candidates on both sides of the aisle that support a strong private sector and promote entrepreneurship.
The firm, which was forced to alter its plans to raise dividend payments following weak results from the Federal Reserve’s bank stress tests earlier this month, is also offering some professional incentives for those employees who are willing to open their wallets.
Over the coming weeks and months, we will host a series of briefings, calls and receptions for Citi PAC supporters. For examples(sic.), contributors to Citi PAC will be invited to attend a closed-door, high-level election year briefing with senior Citi executives and nationally renowned political analyst Charlie Cook. Additional details will soon be circulated.
from Global Investing:
Moscow is not Cairo. Time to buy shares?
The speed of the backlash building against Russia's paramount leader Vladimir Putin following this week's parliamentary elections has taken investors by surprise and sent the country's shares and rouble down sharply lower.
Comparisons to the Arab Spring may be tempting, given that the demonstrations in Russia are also spearheaded by Internet-savvy youth organising via social networks.
But Russia's economic and demographic profiles suggest quite different outcomes from those in the Middle East and North Africa. The gathering unrest may, in fact, signal a reversal of fortunes for the stock market, down 18 percent this year, argue Renaissance Capital analysts Ivan Tchakarov, Mert Yildiz and Mert Yildiz.
First of all, Russia's youth unemployment rate is relatively low at 14 percent, compared to Syria's 18 and 30 percent in Tunisia.
Secondly, the percentage of young men as part of its rapidly ageing population is low -- those aged 15-29 account for 11 percent in 2009 versus a range of 13-17 percent in its fellow oil-exporting peers in the Middle East. This is particularly significant since the relationship between a country's political stability and its proportion of angry young men has been well elucidated.
And although Russia’s GDP per capita is generally higher than those in the Middle East, its income inequality is more pronounced. Energy exports per capita are also lower in Russia. All this suggests there is room for the Kremlin to ratchet up government spending to cool public anger if it wanted to.
"A strategy of moderately higher government spending on the eve of Russia’s March presidential elections may help assuage current pressures. Russia’s 2012 budget already assumes that spending grows at higher rates than inflation, but we believe additional fiscal disbursement may well occur," the Moscow-headquartered investment bank said.
