Eurozone Bond buying by ECB will not help solve the problems in Spain or Italy. It may simply delay the big blow by buying some more time & with that in fact, increase the impact later. The stabilization of economic sentiment from its current weak fragile state will require a much more constructive stance from EU partners, especially regarding the targeted speed of fiscal adjustment. The EFSF/ESM bond-buying request by Italy is only a matter of when & not an option. Political risks, debt burden, deepening recession, constructive reforms remain the four vital key issues. Global financial markets lack confidence that Spain or Italywill take sufficient structural reform measures, thereby weakening the timely ECB debt buying measures also.
The economy in Greece is expected to shrink around 6.6% this year and then 2.0% next year, much worse than June’s poll which penciled in declines of 5.8% and 1.3%, respectively. Greece is desperately trying to keep the country glued together, but has just dealt another setback, it seeped out that the next bailout payment of €31 billion, to be paid in June, then delayed till September, expected to be delayed once again, and this time only till October. The Troika was supposed to send Greece€31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, re-hire laid-off workers. The Troika then Instead of sending the payment, promised to send its inspectors, who in turn are technocrats, not decision makers. In late July, the inspectors returned to Athensyet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. The Troika, the ECB – European Central Bank, the EU – European Union, and the IMF – International Monetary Fund will be conducting a mega inspection in September, not for a few days, but for the entire month. Of the still needed €11.5 billion in austerity measures, €7 billion have been identified with the government, but they’re still looking for the rest. The meeting when Greece’s fate will be decided is rumored to be on October 8. One of the bailout conditions is to cut 15,000 civil servants by the end of 2012 and 150,000 by 2015. Given the unmitigated jobs fiasco, such cuts—if the coalition government can even agree on them—may trigger another revolt in the streets. And that could start at the end of August.
Greece that is out of money again, would default on everything, from bonds held by central banks to internal obligations. On August 20, the day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And now who would get blamed? Two weeks ago, ECB stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed. No the ECB has cleanly passed the buck back to, surprisingly the Bank of Greece itself by directing Greece to sell its now worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks under the Emergency Liquidity Assistance.
Economists see slow progress on Greece’s budget deficit. It will shrink from last year’s 9.3% to 8.0% this year, compared with its target of 7.3%, and just 6.8% in 2013. That would put Athens well off-track from its aim of getting the deficit below 3% by the end of 2014 from 9.3% in 2011.
A Greece exit from the Eurozone will set a repeatable precedent for others to follow. The departure of Greece from the Eurozone could lead to Spain, Portugal and Italy leaving too. Debt-distressed nations of the Eurozone may consider that preferable to a painful and potentially overbearing burden of repeat newer debts on their backs with little benefit to show for it but a hell of a lot to pay for. A Greece exit would most importantly, frighten it’s creditors to an extent that all other loans or Bailouts to other Eurozone nations would come to a grinding halt as the debt value would suddenly collapse to an almost paltry quantum. The credit squeeze on other Debt ridden nations would precipitate their departure from the Eurozone also. Unlike Greece, when nations like Spain or Italy, with a significant contribution to the GDP of the Eurozone exit the Euro, it would hurt the export competitiveness of the Eurozone in international trade. Heavy weights like Germany or France would experience further bank crises due to the high levels of debt from these nations on their Banks books. But the Euro may rise tremendously as balance of payments would show a much stronger picture.
Among the struggling Eurozone peripheral economies, only Ireland looks on course for a return to modest growth any time soon. While the survey pointed to a reduced likelihood depression-mired Greece will exit the Eurozone soon, it also underlined why Spain is the new focal point of the bloc’s sovereign debt crisis. Spain’s economic woes & spiraling unemployment, will keep markets in doubts on the medium-term solvency of Spain. As a consequence Spanish bond yields and the corresponding spreads over Bunds will stay high or even climb further.
Spanish Prime Minister Mariano Rajoy last week inched closer to asking for an European Union bailout for his country, where government borrowing costs have failed to recede much from near-unsustainable levels. In the present deteriorating conditions it seems very likely that Spain will opt for of a full sovereign bailout before the end of the year. ECB President Mario Draghi last week signaled that the ECB was preparing to buy Spanish and Italian bonds, but only after EU bailout funds were triggered and countries had asked for help.
A Reuters poll of economists suggested Spain’s economy will contract 1.6% this year and then 1.1% in 2013 – the latter forecast representing a sharp downgrade from the 0.7% decline in June’s survey. The current unemployment rate of 24.6% in the second quarter seems it has further to climb. The poll showed it ending this year at 25% and next year at 25.6%. The Eurozone’s No.3 economy will also fall further behind on its budget deficit targets, even in light of Eurozone ministers last week granting Madrid an extra year until 2014 to reach its goals.
Portugal too suffered a cut to its outlook for 2013. After shrinking 3.0% this year, the Portuguese economy is expected to decline around 1.0% in 2013, compared with a 0.6% contraction in the last poll.
Similarly, it looks unlikely to meet its target of cutting its budget deficit to 3.0% in 2013, with the poll instead showing it at 3.7% by the end of next year. Ireland at least looks on track to return to modest economic growth, starting with 0.3% this year and quickening to 1.5% next year. That would put it more in line with the outlook for Europe’s bigger and more resilient economies.
And unlike its peripheral peers, Ireland looks likely to beat its deficit target of 8.6% this year, with the poll suggesting it will come in at 8.3% of GDP. The findings backed up a separate poll of economists on Wednesday, which showed Ireland will benefit from stronger exports – Reuters poll.
People who think that higher inflation would somehow help the poor and hard pressed in the European Union should study economic history more carefully. It could lead the Germans to question the viability of the Eurozone, increasing the risk that the Euro will break apart for political reasons. The Germans didn’t turn over their monetary sovereignty to the ECB to facilitate bailouts of irresponsible governments and the crazed banks that funded real- estate bubbles. Throwing greater fiscal transfers from Germany into the mix will serve only to worsen the situation. Would Germany be wrong in their line of thought if they tried to save what they have rightfully earned? The stabilization of the Eurozone should not be a goal in and of itself, regardless of the costs associated with that course.
Three years into the Eurozone debt crisis, the gravity-defying German economy has stalled and some fear it could fall into recession in the second half of this year. Over the past week, Europe’s largest economy has been hit by a series of increasingly gloomy data releases, showing declines in manufacturing orders, industrial output, imports and exports.
In an unusually stark warning on Friday, the economy ministry said these figures and a sharp drop-off in business sentiment in recent months pointed to “significant risks” to Germany’s outlook. Next Tuesday’s, GDP – Gross Domestic Product data for the second quarter is expected to show modest growth of about 0.2%. But the danger of recession in the second half of the year is growing, at a time when Europe’s single currency bloc desperately needs growth from its economic powerhouse.
“The German economy is losing momentum – there’s no doubt about that – and in the third quarter the economy will shrink compared to the second quarter,” said Joerg Kraemer, chief economist at Commerzbank. “Things will go downhill from here. The German economy is not faring as badly as the rest of the Eurozone but it can’t disconnect itself, especially as growth in China has slowed and continues to do so.”
Germany is known for its export-driven growth, but the Eurozone crisis has hit its biggest market. Roughly 40% of Germany’s exports go to its partners in the Eurozone and 60% to those in the broader European Union.
China, one of Germany’s fastest growing markets representing roughly 7% total exports, is also slowing. Chinese data this week showed factory output rising at is slowest pace in three years, new loans at a 10-month low and export growth grinding to a halt.
Peter Bofinger, one of five ‘wise men’ who advise the German government on the economy, said recent industrial output data suggested the country was on the verge of a technical recession. “It’s not the case that Germany can counter the weaker international economic situation with its own dynamism,” Bofinger told Reuters. It is too early to predict how the looming slowdown could influence the intense debate in Germany over giving aid to struggling Eurozone partners such as Greece and Spain. The ARD survey showed that 84% of Germans believe the worst of the debt crisis is still to come.
The unanswered question is whether a weakening economy will make Germans less likely to support government rescue efforts for the broader Eurozone. Merkel has said repeatedly over the past year, most recently in a statement with French President Francois Hollande last month, that she will do everything to save the Eurozone. But not all Germans support that course and the chancellor’s room for maneuver appears to be shrinking at a time when both Greece and Spain may soon require new rescues.
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