Behind the curve: Eurozone playing catch-up

Europe is in the dangerous situation of playing catch-up and as the Chancellor George Osborne has commented, there is a matter of weeks not months to sort this out.

Things are starting to spin out of control
Simon Miller
On 30 September 2011 10:28

If you‘ve been watching the Rugby Union World Cup you may have noticed the expression: “they’re playing catch-up rugby”.

When this happens, usually the team playing catch-up will inevitably ship points to the leading team as gaps appear and mistakes happen.

Watching catch-up rugby is a bit like watching Eurozone politicians and bureaucrats as they desperately attempt to prevent their particular ship from sinking.

On Thursday the German parliament, the Bundestag, voted to approve the increased European Financial Stability Facility which will increase the country’s liabilities to €211bn (£183bn) of the €440bn to much shrugs of shoulders in the markets.

The reason for this passivity is that, at the end of the day, this is responding to July’s crisis. It is yesterday’s issue and the Eurozone is playing catch-up against a speed of events that leaves them inevitably behind the curve.

The de-facto mood in the marketplace is that Greece will default, it is simply a matter of when and how and the mooted proposal of a controlled default while keeping Greece in the euro is the worst possible outcome for both the euro and Greece.

When a country defaults, usually it slashes rates, devalues the currency and tries to rebuild its equilibrium until it can become a worthwhile trading partner again – just take a look at Argentina.

If Greece is still within the euro, all these options will not be available to it and the ensuing on-going liabilities, which we must presume will land at the feet of the stronger countries such as the Netherlands and Germany, must affect their own bond rating.

And it is the bond market where we get most of our answers to the attitudes of the marketplace.

This week saw Italy struggling to roll over its debt paying 4.68% for €3.1bn, an 81 basis point rise from last month. Simply put, the markets don’t trust Italy to honour debts and is pricing accordingly. In August, both Spain and Italy saw their 10-year yields reaching above the dangerous 6% level.

Basically, the markets are now pricing in contagion and recession. And yet the European Central Bank is still trying to plug the gap by buying the bonds. This is simply economic madness, a political not economic decision.

As was seen with the sub-prime crash, why would you buy what is essentially bad debt? In addition, it has to be asked - how much more money can the ECB actually spend in trying to firewall Europe?

Rumours are abound that there is yaap (yet another action plan), this time to the tune of €3trn. Where will they get the money from? Germany? Holland? With the political mood in those countries, I would hesitate to say that they would have the appetite for such a capital transfer and risk adoption.

Europe is in the dangerous situation of playing catch-up and as the Chancellor George Osborne has commented, there is a matter of weeks not months to sort this out.

G20 leaders have given the Eurozone six weeks to sort things out before the Cannes meeting. However, with a team of 17 nations with 17 differing concerns, getting the Eurozone to anticipate events and react accordingly will always see them playing catch-up rugby and for the sake of the global economy, it has to be hoped that they won’t drop the ball.

Much has been made by the Treasury about the UK being ahead of the curve and the bond yields reflect this adaptability. Unfortunately for the Eurozone, and with the fallout – us, while eurocrats keep yapping, the markets are beginning to bite and bite hard.

Simon Miller is the Editor of Financial Risks Today

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