A Sea of Red
Friday, May 14, 2010 at 06:48PM If an ECB in QE mode, €60 billion in cash, €440 billion from a pooled EMU effort and €220 billion from the IMF only lasts a week, then I'd humbly submit that we have a problem.
(Screenshot from Bloomberg, click for better viewing)
It is difficult to say whether it was former Fed chairman Volkcer's comment on Euro breakup which set alight the initial fire, but what is certain is that it does not seem that markets have calmed down. And they shouldn't be. The package may be impressive, but the growth prospects of the Eurozone has now been moved down more than a couple of nudges and still there is looming and large risk that debt restructuring will come eventually (I believe so for example).
As ever, I should point out that in my world slumping stocks do not constitute a problem as such, but volatility is rising and with it, risks of a veritable rout against which it is difficult to see where policy makers will find the tools prevent a sea of red turning into severe bloodletting.
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Have a nice weekend by the way; I am sure things will be better on monday, well I am keeping my fingers crossed at least.
Reader Comments (3)
This is exactly the problem with it: when the bad times come, the ones having a bad time can't devalue and if they try running a fiscal deficit they run into the SGP.
In 2003 it was Germany & France running deficits, and Spain was mad at them for it. Now it's reversed. It will always be someone, because all of them now lack the flexibility to deal with the inevitable bad times that come as part of everyday economic life.
If you come up with a structure where bad times lead to the necessity to perform extraordinary feats just to keep the structure from falling apart, well, it's not because the bad times are so bad, it's because the structure wasn't sound to begin with.
No one got it when Soros made a few shekels off the Bank of England in the forerunner structure to the euro, and I remember being completely baffled by that one. It seemed obvious that if you had these problems with the prototype, it might be time to go back to the drawing board. But no one did.
The worst is definitely ahead. But not on Monday. I give it till the Fall. September/October things will really come to a head. In the markets, if a fall like this one we just had is getting lots of publicity, that means the move is close to ending. So we'll have a little recovery, and then when everyone's attention is elsewhere it'll sneak up again, at first be ignored, and then only get attention when it's too late.
Bear Stearns got a lot of publicity, but Lehman turned out to be the one in 2008.
Greece is getting the publicity now, but someone else (my money is on Spain, with Belgium a close second) is going to turn out to be the one.
Nice to see you again and thans for the comment.
"No one got it when Soros made a few shekels off the Bank of England in the forerunner structure to the euro, and I remember being completely baffled by that one"
Right, this is where it started I guess (a series of bad decisions I mean). Basically though, I am torn on a personal level since I am a great believer in the European project (and especially economic union), but it does not work at the moment. That much is obvious.
Claus
I think the EU is a good idea. The euro isn't.
For the EU, you just have to figure out what is appropriate at the national level, and what is appropriate at the continental level. But IMO that should be already obvious with a currency: it should fit the economic area it applies to.
Europe has a few economic zones: one based around London, a continuous one from Belgium to northern Germany, another one centered around Milan and taking in pieces of France and Switzerland, and other isolated ones around capitals like Madrid and Paris. National borders don't perfectly fit these zones, but they're a much much better fit than is the euro.