Once again, very little was achieved at the Group of 20 summit meeting in Mexico notwithstanding that the participants were, as is usual practice on these kind of occasions, satisfied with the “progress” that was made.
Maybe more interesting were a couple of comments:
• EU President Jose Manuel Barroso said: “The euro is very high, it is not a problem. It is a very strong currency. If you ask in Europe, many would like it to be a ‘little weaker.’ He also said while speaking to journalists the EU is not about to take economic lectures from its G-20 partners when asked amid fears the eurozone crisis could put the global economy back into recession, adding “the crisis did not originate in Europe ... this crisis was originated in North America. And many ‘in’ our financial sector were contaminated by unorthodox practices from some sectors of the financial market.”
• Brazil Finance Minister Guido Mantega commented on markets losing confidence in eurozone actions: “… that means that the measures which are being taken are not enough to fix the problems because instead of reducing, they are increasing.”
• South Korean President Lee Myung-Bak said: “The world is looking to the June 28-29 EU summit for important conclusions on the eurozone ...”
Yes, the big question remains “what” and/or “who” will untie the eurozone Gordian Knot?
Only last week, Germany’s Chancellor Angela Merkel said: “We need not only a monetary union, but we also need a so-called fiscal union, which is more common fiscal policy. And we need ‘above all’ a political union.”
From his side, the fresh elected French President François Hollande said that there should be “no” political union until there is a banking union.
And then, Germany's Bundesbank executive board key member Andreas Dombret said the eurozone banking union should “only follow” deeper fiscal union.
Also the German Bundesbank rejects in its recent monthly report proposals for an EU bond redemption fund, noting that comprehensive shared liability would “throw liability and monitoring considerably out of balance.”
No wonder that outgoing World Bank Chief Robert Zoellick told "The Observer" (UK - The Guardian) the “risk of a (EU) Lehman’s moment is rising” while adding “… developing countries need to prepare for the uncertainty coming out of the eurozone and the wider financial markets.”
To me, Mr. Zoellick is right and uncertainties coming out of Europe can only grow further until we will reach some day, some kind of a climax, but “when” that is expected to happen is a question nobody can answer today.
With what we know today, it appears very unlikely Europe will deliver some kind of a “grand bargain” at next week’s summit of EU leaders on June 28-29.
Investors should keep in mind that Germany will continue focusing on the fact that Greece isn’t meeting the conditions of its latest bailout and, as a result, Germany will probably reject any calls to extend the program’s timetable to allow Greece more time to reach its targets.
To me, but that’s my personal opinion, Greece has no other sensible choice left than to leave, at least “temporarily,” the eurozone, the sooner the better, under Article 50 of the Lisbon Treaty of 2007 that amended the Maastricht treaty of 1992 and that states:
• Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
• If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.
At the same time, it should also be clear to investors that while a state can leave, there is no provision for it to be excluded.
Now, coming back on Spain's problems for a moment and notwithstanding the EU aid that was put in place 10 days ago, Germany has remained steadfast in its opposition to direct funding to the banks in Spain.
As a result that aid of up to 100 billion euros ($125 billion), when it will finally be provided, the money will be funneled via the Spanish “Fondo de Reestructuración Ordenada Bancaria”, which is the government’s “Fund for Orderly Bank Restructuring” and therefore will ultimately be counted as a Spanish sovereign debt.
It’s noteworthy there are already questions being raised over whether the initially agreed 100 billion euros “credit line” will be sufficient with some mentioning 150 billion euros ($190 billion). Whatever the final number will be, this will inevitably focus investors’ attention back onto the issue of Spain’s debt to GDP ratio. Yes, investors should be prepared for the coming downside risk!
So, Greece that is in depression and will remain in depression unless the EU “agrees” to bail it out completely, which is for now unthinkable, was certainly not the main culprit for the yield on Spanish 10-year government paper rising above 7 percent and the cost of a 5-year CDs on Spanish paper moving to a record high of 612 basis points.
Putting this in context, investors should take notice the yield on 10-year Spanish sovereign now stands about at the same level as where its Greek equivalent stood on April 14, 2010, which was precisely two weeks before the first Greek bailout was announced.
The price of the CDs for the Spanish sovereign stood Monday at the same level as Iceland’s was at the end of September 2010, which was just before the Icelandic economy collapsed.
By the way, the Spanish Central Bank has just informed Spain is delaying the requested bank audit reports until September. The first stage of Spanish bank audits was due by June 21. Yes, this certainly isn’t good news. Investors should watch out!
Yes, Europe’s troubles will continue to weigh on all economies and markets of the world, with, unfortunately, no sustainable EU improvement in sight just yet!
As an investor, I wouldn’t buy what some call “cheap” today. I still would keep my buying powder dry and wait for the “perfect storm” to develop (at least that’s my personal opinion) somewhere in 2013-2014, which should, “if” it occurs as I expect, will provide “once in a lifetime” buying opportunities. Yes, "opportunities" in the plural sense and bargains in various sectors!
In the meantime, for the time being at least, my preferences remain mainly in favor of U.S. dollar “safe” and highly “liquid” cash equivalents, Norwegian kroner (NOK), physical gold and some tangibles that can easily be traded.
Finally, as we have a Federal Open Market Committee (FOMC) meeting, the perception seems to be that the Federal Reserve will stand ready to engage in further QE in the event that either markets or economic growth in the U.S. decline further.
Clearly, the Fed is able to engage in further balance sheet expansion or rotation. However, the issue is at what point will it want to do this? And that is mediated by the political timetable, and perhaps more importantly concerns about the credibility of such policy to deliver the desired outcome.
We’ll have to wait and see what comes out.
Nevertheless I still expect, if any form of Fed easing action is taken, the impact will only be temporary and limited. Such an action certainly wouldn’t restore confidence.
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