You could bet. Will it be Spain or Italy which breaks the Eurozone first?

Outcome of Italian elections has caused a chaos within the Eurozone. European leaders were honestly sad because of stalemate political situation in Italy. You could see during first days of the week how sentiment and not fundamentals drive the European markets what is nothing extraordinary. It is just interesting how present world operates. I still do not get why European leaders thought that some strong socialist, centrist or any other political party in Italy is able to change the situation in country with almost 130 % debt / GDP ratio, falling GDP and strong social programs for aging population. So what happens next? Italian problem could cause some chaos in other countries. Why? Let´s imagine that markets gain sentiment (hopefully based on some logical reflections about fundamentals of government bond market) that the ECB is not able to safe Italy from troubles by its OMT mechanism. This could definitely cause real troubles. We have to realize that the OMT is namely based on the conditions that government in trouble will proceed on austerity program requirements set up by the Troika. And there will be no strong government in Italy to strongly follow any possible austerity program. So this could start some doubts about the OMT program which could consequently affect other countries as well. But I think that once the OMT will be worthless for markets the ECB will introduce something new. So do not panic; at least not for now.

France unemployment hit a new record of 3.2 million. The same situation was last time in 1997. This is definitely not good news for France. It means more troubles for public finance. Probably just only accidentally French Industry Minister called for weaker Euro the same day as unemployment data were published. He states that the ECB should do its job more properly and that the Euro is too strong and that the ECB “should prepare to confront a new currency war in which the weakening of currencies becomes a political tool.” Just small time remark. The call for weaker Euro came just two weeks after the G20 meeting of finance ministers and central bankers where everybody proclaimed big NO to currency wars.

Unemployment in the euro area was 11.9 % up from 11.8 % in January. The Eurostat report showed that 18.998 million people were unemployed which means 201,000 of new unemployed from the previous month. The data also showed that youth unemployment was at 24.2 percent, with recorders as Spain (55.5%) and Greece (59.4%).

The Bank of Japan will have a new governor Mr. Kuroda which means that the country is really prepared for so called currency wars. It is accepted that Mr. Kuroda will strongly ease the monetary policy and announced his planes on April´s BOJs meeting. The retired governor Shirakawa made a last warning about asset price bubbles and excessive stimulus by research paper issued by the BOJ. He called for the government finance reform which is probably one of the reasons why he must retire and be changed by Mr. Kuroda.

The GPD data from the U.S. was below the expectation but better than earlier estimates. The U.S. GDP rose by 0.1% in last quarter of 2012 compare to 0.1% decrease estimate a month ago due to the hurricane Sandy and lower military spending. It was probably one of the reasons why Ben Bernanke reconfirmed the set of the monetary measures before the Senate and House. But the real issue in the US was so called sequestration or using of mandatory spending cuts in the federal budget due to the fact of falling fiscal cliff debates. The president did order for all federal agencies to manage their spending within next seven month to save $85 billion. “These reductions will result in significant and harmful impact on national defense and domestic priorities” declares the order. But to imagine the amount of so called devastation to the economy you have to see bigger picture. First it is just a plan. I think that all parties hope for the deal about the Fiscal Cliff and nobody will take this very seriously. Second you have to realize the size of sequestration which is best described by this chart:

4_catastrophic_cut

And finally $85 billion is for the U.S. really almost “nothing”. The Treasury is able to increase the U.S. debt by $ 80 billion per one day as you can see on here:

5_one_day_spending

So the situation of public finance is not going very well within the U.S. As we mention many times not only federal government has many problems but local governments as well. And here is probably one of the first city bankruptcies: Detroit declared financial emergency which could lead to emergency manager. Reasons behind? The city overestimated its revenues and spent well beyond its means, the city “borrowed massively” and the Detroit’s long-term debt has ballooned out of control and could reach up to $14.99 billion. And problems do not rise only in public finance area. The student’s loans which are sometimes used for other purposes than studding (meaning drugs, tattoos, motorcycles) hit almost $1 trillion over past years and the delinquency rate of student’s loans surpassed the debit cards for the first time.

Matúš Pošvanc

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