Weekending 10 September 2011Posted: September 10, 2011
What a week – and what an end to it: the end of Jurgen Stark, at elast at the ECB, as chief economist and executive board member, with three years still to run in his term. Earlier in the week Deutsche’s Josef Ackermann summed it up on the state of European financial markets, “The ‘new normal’ is characterized by volatility and uncertainty — not only in respect to market developments, but also in consideration of the future of the financial branch”, indeed we live in new normal times – as if we needed any more proof actually.
Friday afternoon ZH reported the market chatter was of Greek default over the weekend. Things do look desperate for the Hellenes: from DJ Greek service, [A]fter the interruption of negotiations with the Troika last week, the postponement of disbursement of next €8 billion tranche is possible. Government officials note that available funds are sufficient to meet basic needs until the end of the month.
However weekending events – actual and prospective –should not be allowed to swamp our attentions from earlier developments – whether Ackerman’s from the hip or Trichet’s top-blower, not forgetting Obama’s plan and lots more.
We ended last week’s comments with the remark that “With summer officially over from next week (although US closed for Labor Day week-end) it must surely look like a blood bath in prospect for financial markets globally (and certainly in Europe).”
And sure enough so it proved to be.
With stateside close Monday for Labor Day, Deutsche’s Josef Ackermann set about echoing Mme Lagarde’s earlier Jackson Hole lecture on the true state of European banking: “It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels”; but also as to the financial sector more generally: We have a financial industry that is still not really providing convincing answers to the questions about the meaningfulness of many modern financial products and trading in securities. The questions are getting louder and require new responses”; and by the way, he does not like the Lagarde prescription or Eurobonds either. Oh dear, complications.
The markets also tanked led by European banks. Italian yields rose – to over six per cent intraday – bunds went below two per cent … etc, etc.
Tuesday saw the Swiss spring a whopping devaluation of the SWF finally pegging the swissie to the euro, administering a hiding to those hedgie baddies (and some small relief to Merkel), but also intensifying the rumbling global currency war. There was also one felt some hint of invisible coordination about the chapter.
Wednesday, things picked up (a bit) for Dr Merkel. Having lost the election in her home state of [nm] on Sunday there was light relief as Karlsruhe’s Federal Constitutional Court ruled against a petition to have German government involvement bail-outs and bond buying declared unconstitutional. But, the court also declared, from here on out German governments will have to behave differently to how they behaved in the past: there is such a thing as parliament and the Eurobond is out as is EU economic government or a supranational fiscal authority. Edward Harrison has an interesting overview here of the dilemma created: “Yes, I am a eurosceptic and have always been. But we are here now” and “The euro exists. And that does change things.In my view, eurobonds and a “supra-national” fiscal agent are almost the only mechanisms which make the euro zone viable. Therefore, with these options now excluded, the euro zone is almost doomed to failure.” Quite.
Stark’s resignation Friday, was “for personal reasons”. Ho hum and ho hum again. It was for the same reason as Axel Weber resigned in February 2010: the ECB bond buying as Reuters reported in its exclusive and as did the FT later, including in its story this beaut of a quote from BarCap economist Julian Callow, “To lose one German may be regarded as a misfortune; to lose both looks like carelessness”.
The markets of course dutifully plunged and peripheral CDS spreads blew out with Greece well north of 3,000 bps (up 17.2% on the day to 3,188).
Also Friday, we had a veritable deluge of bad vibes from the Athens front. Not only is the government capacity to meet its wage bill running out but also industrial output is plummeting, down 2.8 % In July y-o-y but annualized at 8.4%; imports are drying up too, down 12.2% in July y-o-y (a sure sign of demand destruction) and June unemployment was 16%. Yes, Greece like Ireland is caught up in that Irving Fisher thing, debt deflation, but a strain ever vicious than the Irish strain.