EUROPEAN markets enjoyed a respite from trouble today; equities rose, along with the euro, and yields on Spanish and Italian debt fell back. There's no enduring good news here, however. Rather, traders are probably taking profits while they await the outcome of this Thursday's emergency summit. And beneath the main indexes, trouble continues to build.
In a new debt auction, yields on Spanish 12-month and 18-month bonds rose sharply from the last debt sale; the yield on the latter rose to 3.912%, up from 3.26% a month ago. Spain will return to markets again on Thursday, when it will auction off €2.75 billion in long-term debt. Right now, the market yield on long-term debt is over 6%. If that's what Spain gets from markets in its new auction, the sustainability of its government finances will face new doubts. The Spanish government is on the brink; at lower interest rate levels its debts are manageable, but at higher rates it might well prove insolvent. This is why confidence is key. But there seems to be little urgency within the euro-zone's leadership regarding the need to get ahead of contagion.
Meanwhile, the economic picture continues to darken. Business confidence in Germany—the engine and primary bright spot in the euro-zone economy—fell by more than expected in July, according to one index. And eurostat reported today that euro-zone construction output fell by 1.1% from April to May. Since then, the European Central Bank has increased its benchmark rate for a second time, and the economic outlook has darkened.
According to the latest data, then, construction in the euro-zone is falling, manufacturing output growth is slowing (and declining outright in parts of the periphery), and the contribution to growth from government is falling around the continent. Trade has been a relative bright spot for the euro zone, but exports to emerging markets may deteriorate as they slow growth to head off inflation, and the ECB's decision to boost interest rates has prevented the decline in the euro that might be expected to accompany an intensification of the debt crisis.
In other words, every potential driver of euro-zone growth is contracting or weakening. And the governmental response is more fiscal austerity and an increase in interest rates. A return to recession seems unavoidable. I don't think that's likely to make the debt crisis any easier to manage. Indeed, if increased economic stress makes a departure from the euro zone more attractive, then creditors and depositors will become more likely to preemptively move money out of peripheral banks and economies. That, in turn, will make a euro-zone exit more probable.
One runs out of ways to state the obvious: the current path leads toward a break-up. There are other paths available, but to move the euro zone onto an alternative route will take a strong commitment from core economies and euro-zone institutions, including the ECB. Markets will watch for some sign of the emergence of such a commitment from the summit on Thursday, but I'm not sure its wise to get one's hopes up. (Economist)
In a new debt auction, yields on Spanish 12-month and 18-month bonds rose sharply from the last debt sale; the yield on the latter rose to 3.912%, up from 3.26% a month ago. Spain will return to markets again on Thursday, when it will auction off €2.75 billion in long-term debt. Right now, the market yield on long-term debt is over 6%. If that's what Spain gets from markets in its new auction, the sustainability of its government finances will face new doubts. The Spanish government is on the brink; at lower interest rate levels its debts are manageable, but at higher rates it might well prove insolvent. This is why confidence is key. But there seems to be little urgency within the euro-zone's leadership regarding the need to get ahead of contagion.
Meanwhile, the economic picture continues to darken. Business confidence in Germany—the engine and primary bright spot in the euro-zone economy—fell by more than expected in July, according to one index. And eurostat reported today that euro-zone construction output fell by 1.1% from April to May. Since then, the European Central Bank has increased its benchmark rate for a second time, and the economic outlook has darkened.
According to the latest data, then, construction in the euro-zone is falling, manufacturing output growth is slowing (and declining outright in parts of the periphery), and the contribution to growth from government is falling around the continent. Trade has been a relative bright spot for the euro zone, but exports to emerging markets may deteriorate as they slow growth to head off inflation, and the ECB's decision to boost interest rates has prevented the decline in the euro that might be expected to accompany an intensification of the debt crisis.
In other words, every potential driver of euro-zone growth is contracting or weakening. And the governmental response is more fiscal austerity and an increase in interest rates. A return to recession seems unavoidable. I don't think that's likely to make the debt crisis any easier to manage. Indeed, if increased economic stress makes a departure from the euro zone more attractive, then creditors and depositors will become more likely to preemptively move money out of peripheral banks and economies. That, in turn, will make a euro-zone exit more probable.
One runs out of ways to state the obvious: the current path leads toward a break-up. There are other paths available, but to move the euro zone onto an alternative route will take a strong commitment from core economies and euro-zone institutions, including the ECB. Markets will watch for some sign of the emergence of such a commitment from the summit on Thursday, but I'm not sure its wise to get one's hopes up. (Economist)
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