Category: UK & Europe

[The] core problem at the heart of the euro zone is NOT a problem of “Mediterranean profligacy”. Many people, particularly in Germany, express the view that the Italian, Greek or Portuguese governments (and by association their people) are to blame for this crisis – accessing cheap loans from Northern European banks, not paying enough taxes, not working hard enough, etc…..

One thing is clear from the remarks that continue to emanate from Europe’s main policy makers. They do not understand basic accounting identities.

…….The European Monetary Union bloc as a whole runs an approximately balanced current account with the rest of the world. Hence, within Euroland it is a zero-sum game: one nation’s current account surplus is offset by a deficit run by a neighbor. And given triple constraints — an inability to devalue the euro, a global downturn, and the most dominant partner within the bloc, Germany, committed to running its own trade surpluses — it seems quite unlikely that poor, suffering nations like Greece or Ireland could move toward a current account surplus and thereby help to reduce its own government “profligacy”.

via New Economic Perspectives: ARE WE APPROACHING THE ENDGAME FOR THE EURO?.

For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans.

At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.

via Europe’s Fiscal Overkill – Ambrose Evans-Pritchard Telegraph Blogs.

The ECB can hold the line for now by purchasing €20bn of Spanish and Italian bonds each week. But once the ECB nears €150bn or so, the markets will brace for the next crisis.

via In Defence of PIGS – Ambrose Evans-Pritchard Telegraph Blogs.

The euro is testing the upper border of a large descending triangle against the greenback. Breakout is not expected as this is a bearish pattern, but would test resistance at its 2009 high of $1.50/1.51.

* Target calculation: 1.44 + ( 1.48 – 1.40 ) = 1.52

The pound broke resistance at $1.65 against the US dollar, immediately retracing to test the new support level. Respect would confirm an advance to $1.67. Penetration of the rising trendline warns of reversal to a down-trend, but 63-day Momentum is rising — continued respect of the zero line would be a bullish sign.

* Target calculation: 1.67 + ( 1.67 – 1.60 ) = 1.74

The Swiss Franc fell sharply before finding support at $1.25 as fears of SNB intervention subsided. Expect some consolidation, but recovery above $1.30 would indicate another test of $1.40.  Failure of support is unlikely, and would offer a target of $1.10*.

* Target calculation: 1.25 – ( 1.40 – 1.25 ) = 1.10

UK bank lending to households jumped slightly in June 2011, but the annual rate of change remains negative at -3%.

Commercial loans continue to shrink at an annual rate of 7.5%, signaling a dearth of new investment and job creation by the private sector.

Replacing all national sovereign bonds (although not loans) with common eurobonds would create a market worth €5,500bn. It would be backed by governments that together owe less debt, run a lower combined deficit and have greater tax-raising capacity than the US and Japan. It would almost certainly lead to lower yields than the current eurozone average and virtually eliminate the possibility of a bond buyers’ strike.

via Europe need not wait for Germany – FT.com.

Creating a common Eurobond would make economic sense but is politically unachievable because of opposition in Germany. Convincing Germans that it is in their best interests will test Angela Merkel’s leadership abilities to the full.

As of the end of March 2011, French banks held $410 billion of Italian debt, by virtue of their holdings of Italian government bonds and loans to the private sector, according to the Bank for International Settlement. They were also on the hook for $86 billion because of credit commitments, derivatives contracts and other loan guarantees in Italy.

The ability of the French financial system to weather an Italian storm is doubtful because French banks are less capitalized than their major European counterparts.

via Mon Dieu! French Banks Could Pull Down the Economy.