viernes, 30 de agosto de 2013

viernes, agosto 30, 2013

Markets Insight

August 28, 2013 10:30 am
 
Eurozone is heading for relapse back into crisis
 
Weaknesses will be exposed as markets test ECB policy
 
 
Since mid-2012, the European financial crisis has been in remission, with the symptoms of the underlying disease temporarily suppressed.
 
A combination of austerity programmes, debt writedowns, the European Central Bank’s commitment to do whatever it takes to preserve the euro, the proposed banking union and the finalisation of the European Stability Mechanism, the primary bailout fund, helped restore relative financial stability.
 
Interest rates fell in peripheral countries and stock markets rallied, without any recovery in the real economy. As treatment is discontinued or loses efficacy, there is a high probability of a relapse.
 
Austerity has failed to bring public finances and debt under control. Increases in taxes and cuts in government spending have led to contractions in economic activity, reducing government revenues and increasing welfare payments as unemployment rates increase. Budget deficits persist, if smaller, and debt levels continue to rise.

Pleading exceptional circumstances, many nations have sought and received exemptions. Deficit and debt reduction targets have been deferred, but are still unlikely to be met.
 
Further writedowns to reduce debt to sustainable levels are difficult as the ESM, the ECB and the International Monetary Fund now directly or indirectly own large amounts of the relevant debt. Losses to these official bodies would ultimately flow through to taxpayers in countries such as Germany, contradicting assurances to German voters that they were not at risk in the bailouts.

Despite the fact that it remains untested, the ECB’s outright monetary transaction programme (OMT), which allows the purchase of unlimited amounts of eurozone debt, has been hailed a success. But it will be politically difficult for countries like Italy and Spain to ask for assistance, knowing that if a future debt restructuring is necessary, domestic taxpayers face a loss on their bank deposits.

Germany and other eurozone members remain opposed to unlimited purchase of sovereign bonds under the OMT. The programme’s legal basis remains uncertain, with the result of the German constitutional court challenge still unknown.
 
The banking union was intended “to break the vicious circle between banks and sovereigns”. The key elements of any banking union are deposit insurance and a centralised recapitalisation fund.

German opposition means there are no plans for specific additional financial resources for a eurozone-wide deposit insurance scheme or recapitalisation. Germany insists the banking union cannot be responsible for “legacyrisk, that is, problems originating from events before the finalisation of the banking union.

The banking union has become an inadequate single supervisory mechanism for a small number of eurozone banks. The EU has clarified that the goal is now only to “dilute” the link.

The weaknesses of key policies will increasingly be exposed as markets test European governments and the ECB.

First, the lack of economic growth and weakness of the real economy will increase financial pressure on European countries, including stronger countries such as Germany, which are de facto assuming an increasing share of the liabilities and risk.

Second, banking sector problems will continue. European banks may have as much as €1tn in non-performing loans. Bad debts and weak capital positions will create zombie banks, unable or unwilling to supply credit to the economy, restricting any recovery.
 
Third, crucial structural reform of labour markets and entitlements will be slow, reflecting weak economic activity and the unpopularity of many measures. In addition, the relative stability of the past 12 months has lulled governments into a false sense of security, reducing the urgency of pursuing economic restructuring.

Fourth, political tensions, both national and within the eurozone, are likely to increase.

The pressures will manifest themselves in a number of ways. Weaker countries may require extensions of existing loans, additional assistance or debt writedowns.

Borrowing costs of weak European countries have begun to increase, reflecting factors such as the economic weakness of the borrowers, political stresses, and the potential tapering of the US quantitative easing programme. Doubts about the OMT programme and decreasing flexibility to use national banks and state pension funds to purchase government debt will accelerate the pressure on rates.

For Europe, it is now a case of NWO (no way out), as without strong growth (which is unlikely) its debt problems may prove intractable.

In contrast to 2012, it is not clear that its response will be, to use the ECB’s oft-used words, “adequate” and “enough”.


Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money

 
Copyright The Financial Times Limited 2013.

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