I believe, as many economic analysts do, that global growth is accelerating. Backing that up, two days ago I looked at four economies where growth has been good. But, yesterday, I looked at four economies where growth has been poor and big problems remain. Today I want to look at four more and sum up.
According to an account in the Financial Times last week, the latest rate cut by the ECB created a worrying north-south split, with the German-centered group opposing rate cuts and the southern faction wanting them. Today Austrian and German central bankers went to the press to counter this portrayal and affirm their desire to keep ECB monetary loose. Below I have some thoughts on the issue.
The German-language media have been voicing concerns over the ECB’s low interest-rate policy and its effect on savings and investment in the euro zone. This makes sense given the state of the economy in Germany and Austria is significantly more robust than in the eurozone periphery. The German Bundesbank has already warned of overheated housing markets. Another warning on housing from Ireland crystallizes for me the risks with using monetary policy for reflation.
Last year I predicted that the route that Europe would go would be fiscal integration coupled with explicit mechanisms for allowing an exit from the euro zone. For example, in November during the Italian crisis I wrote: I continue to predict that the move will be toward temporary ECB intervention followed by tighter fiscal integration and explicit mechanisms for euro […]
This week’s second weekly-length post is just another review of the Price Waterhouse Coopers study that is big news in the German press. I have now seen the numbers in a bit more granular detail and I wanted to run through them for me because a few things need to be put in perspective. The interesting bit is that I haven’t seen these numbers reported anywhere in the-English language press. Yet, they are all over the German-language press. My understanding is that this is because the study was one undertaken by the Frankfurt office of PwC.
My view is that the euro zone sovereign debt crisis will end in a combination of monetisation, breakup or default. Let’s review why.
Fitch has not been as aggressive as the other two agencies, keeping Austria and France at AAA up until now. As such, its negative comments about the Netherlands are noteworthy and likely signal a harder line by Fitch in the coming months. As a result, we think both Austria and France are likely to come under negative scrutiny by Fitch as well, as we view both as inferior credits to the Netherlands.
Since the Great Financial Crisis began, Austrian house prices have zoomed at a pace well above the rate of inflation and the rate of rentals. The price action and other anecdotes make this sound suspiciously like a bubble. The same has happened in Germany on a lesser scale.
According to Austrian newspaper Der Standard, Austrian banks had 18.1 billion euros of exposure to foreign sovereign debt at the end of October. The debt to which the banks were most exposed were Polish, Italian, German and Hungarian sovereign debt.
One of the key factors behind the poor sentiment toward the euro, which was pressed to new 13 month lows in Europe today, is the challenge posed by the sovereign and bank refunding needed this year, while rating downgrades loom around the corner. Euro zone sovereigns have an estimated 800 bln euros of debt servicing and spending to fund this year, while the banks have a little bit more.
News links for 4 December 2011.
What is becoming clearer to almost everyone is that this is now no longer simply a Euro periphery sovereign debt crisis. It has become a full blown crisis of confidence in the Euro itself.