There is no doubt that the national debt circus in both the US and in the euro zone will make a grand finale this week. Or perhaps a total fiasco. I don’t dare think about the consequences of the last alternative. But if I understand the expert I trust right, the most likely outcome over the next days is a band aid solution that will keep us floating for a while longer – not much longer, thou. Here’s two independent analysis of the situation i Europe at the moment, in addition to an oversight of this weeks key numbers releases.
“Once bond yields start rising and the Euro is under pressure and the fund starts issuing bonds to pay for its obligations, who is buying the debt? China? The banks under pressure? The US?”
“Through this entire process, free markets continue to take a back seat, as all market returns this year have been driven exclusively by the politicians and their machinations. This deal does not at all change that dynamic, unfortunately, and we wonder what will.” Saxo Bank Chief Economist Steen Jakobsen writes in a commentary.
Here are some highlights:
“On the surface, the deal for Greece and troubled sovereigns is a compromise par excellence – there was something in it for everyone, and as such it was two steps forward, one step back for the fans of a fiscal union. Fiscal union, however is a concept that is foreign not only to most individual countries in the EU, but also clearly one which is tests the outer limits of the Lisbon Treaty, if it doesn’t tread beyond them.
“The declaration that this was a deal only for Greece was understandable from a political and practical point of view, but in reality it is an extremely dangerous challenge to the market. Greek “exceptionalism” could potentially be the Achilles heel of the deal as it is certainly the weakest moving part of the entire construct.”
“I could give you my take on the details of the plan – the formation of a European Monetary Fund in President Sarkozy’s words – but there are simply too many loose ends here. Still, I would like to make a few key points here: As always, there are good intentions and certainly a political will to make the debt crisis go away. Full credit give on this account and again a stern reminder to all market participants that European Leaders will do absolutely everything to keep the EU a going concern – something too many fail to understand.”
“The EFSF is now a de facto special purpose vehicle (SPV) – a vehicle for the ‘transfer union’ – a transfer union which ultimately only Germany and to some degree France can vouch and pay for.”
“This is the biggest risk here – the EFSF and the ideas behind it are fine as long as there is no need for it to actually operate to any significant degree. Once bond yields start rising and the Euro is under pressure and the fund starts issuing bonds to pay for its obligations, who is buying the debt? China? The banks under pressure? The US?
“Also what is it really the EFSF would be selling? Bail-out bonds for Greece, recapitalization of banks, loans to countries with no access to credit markets? Take your pick, it’s an awfully murky investment for any treasury to add to its portfolio.”
“Drawing any major conclusion is too dangerous at this stage, but to me the obvious thing would be to accept this as a deal that has finally altered – as least in theory – the dynamics of the EU debt crisis. It’s too convoluted and contains the awkward Greek exceptionalism component, but offers more realistic relief for the periphery and theoretically increased flexibility for employing the EFSF.”
“Through this entire process, free markets continue to take a back seat, as all market returns this year have been driven exclusively by the politicians and their machinations. This deal does not at all change that dynamic, unfortunately, and we wonder what will.
By Saxo Bank Chief Economist Steen Jakobsen.
His opinions are often contrarian by nature and provide an interesting take on key events driving market sentiment. His coverage is broad and includes opinions on macroeconomic events, forex, stock and fixed income markets.
You’ll find the whole analysis here.
Private Sector? That’s You!
Next up is managing director Sony Kapoor of the international think tank re-define.org.
Kapoor has a shady past as as a Wall Street derivative trader – among others at Lehman Brothers. For the last five years or so he’s been an adviser to governments and international organizations.
In his latest blog post, he takes a closer look at the discussion on private sector involvement in Greece, and tries to figure out what the EU leaders actually means by that:
“The first thing to consider is, whether one believes that the Greek debt burden is sustainable or not. This very basic assumption will strongly drive whether one thinks the private sector involvement on offer is good or bad. There are three opinions on this 1) Greek debt is not sustainable at current levels and will continue to depress investment and thwart growth through a debt overhang 2) Greek debt is on the knife edge of sustainability but does not pose an overhang 3) Greek debt is sustainable. We will look at all three perspectives.”
“In summary, the whole mechanism of private sector involvement does little to increase the sustainability of Greek debt and in fact imposes significant additional risks on EU taxpayers.” he concludes.
Houses, Prices and Consumers
Hmm… I have a feeling we – “the consumers” – will get the blame this time, too.
We don’t by enough houses, we don’t borrow as mush money as we should do and we don’t spend money as much as we ought to, to get this long overdue recovery going.
Shame on us!
This is the more predictable news of the week ahead:
Key releases for the week will be the first estimates of second quarter GDP for the UK and US, published on Tuesday and Friday respectively.
“We estimate that the UK economy contracted by 0.1% whereas the US grew by 0.5% (or 1.9% annualized),” Markit Financial Information says:
“Both are weaker than governments and policymakers would have hoped for, highlighting a soft-patch in growth as both countries face the combined headwinds of weak domestic consumer demand and a downturn in global trade flows, which has hit export sales.”
Confirmation of such disappointing performance could tip the balance towards more quantitative easing in both countries, where policymakers are currently split three ways between hawks, doves and fence-sitters.
The US GDP numbers will be preceded by house price data from Case-Shiller on Tuesday and durable goods orders on Wednesday, while the first insight into whether the weakness of the UK household sector persisted into the second half of the year will be provided by the Markit Household Finance Index, which showed sentiment dropping back to levels last seen at the height of the recession in June.
Mortgage lending and consumer credit data will also be published for the UK on Friday.
One of the factors that might help lifting the global economy out of its current soft-spot is a v-shaped recovery in Japan.
The Markit/JMMA Manufacturing PMI, industrial production, retail sales and unemployment data should help shed some light on how this recovery is taking shape.
Any increase in the inflation data for Germany on Wednesday could meanwhile pose problems for the ECB, where rates have already been hiked twice since April but recent data have shown a worryingly steep downturn in euro zone economic growth.
Other central banks remain worried about inflation, including most notably the Reserve Bank of India, which is expected to hike rates on Tuesday.
Markit’s Household Finance Index (HFI) will provide an insight into consumer spending, savings and debt trends, as well as inflation expectations, house prices and job security. June’s figures showed household finances deteriorating at the fastest pace since early 2009.
The UK will take center stage mid-morning, when economic growth estimates for the second quarter are published by the Office of National Statistics (ONS).
A quarterly decline in GDP is not out of the question, given especially weak official measures of construction output in recent months.
Investor attention will then shift to the United States, where the S&P Case-Shiller House Price Index will shed light on the health of the housing market. The index of home prices in the nation’s largest cities is expected to signal another fall in prices following April’s 4.0% annual decline.
New homes sales in the US will also be watched closely to see if a dip in May, which followed two months of robust increases, is a temporary blip. A noteworthy reduction could dash housing market recovery hopes raised by stronger-than-expected home starts data for June.
Sandwiched between these releases is the publication of the Conference Board barometer of consumer sentiment for July.
Alongside the University of Michigan survey published last week, June’s numbers showed a stagnation of consumer confidence.
The publication of German consumer price inflation is the key release for the euro zone on Wednesday. Meanwhile, CBI industrial trends data will provide insight into the UK manufacturing sector.
In the US, building permits and weekly MBA mortgage applications numbers are published in advance of durable goods orders data.
Thursday begins with the publication of Japanese retail sales numbers ahead of German unemployment and Italian wages data.
The CBI distributive trades is the only data release in the UK, though recent data have been a poor guide to retail sales, while usual jobless claims numbers are accompanied by pending home sales data in the US.
The day starts with the release of the Markit/JMMA Japan Manufacturing PMI, which showed Japan’s manufacturing recovery remained on track in June, with output growth quickening amid easing supply side pressures.
A host of official data for Japan follows shortly afterwards, with the preliminary estimate of industrial production for June the pick of the bunch. Unemployment, inflation, household spending, construction and housing starts data will all be watched to see how quickly the economy is recovering from March’s earthquake and tsunami.
In the euro zone, producer prices data for Italy and France are published ahead of the flash estimate of consumer price inflation across the single currency area as a whole. The headline rate of inflation was steady at 2.7% in June.
UK consumer credit, mortgage lending/applications and money supply data are also released.
The first estimate of US economic growth for the second quarter tops the bill on Friday, with the pace of annualized GDP growth forecast to remain broadly similar to the 1.9% expansion seen in the first quarter.
University of Michigan consumer sentiment data (final) are accompanied by the Chicago PMI, which will be watched closely due to its good track record with the ISM manufacturing index.
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