Wednesday, June 30, 2010

It's the Euro Debt Crisis, Stupid

EUR/USD 1.2226 Hi 1.2238 Low 1.2165
USD/JPY 88.59 Hi 88.71 Low 88.38
AUD/USD 0.8536 Hi 0.8560 Low 0.8463
EUR/JPY 108.31 Hi 108.53 Low 107.67

Well, what you gotta love about the FT is it's remarkable consistency. As a paper they are there to paint a picture, to create a narrative. And they do. The facts are secondary but the narrative is crystal clear: whatever economic problems there may be out there in the world there is one unifying theme: it's all the fault of the European Sovereign Debt crisis.

Today, consistent with their mandate, the FT is leading with not one but two "Euro doom-and-gloom headlines". The first, in nice big bold letters is: Markets tumble on ECB loan fears. Right. No mention of the plunge reported yesterday in U.S. Consumer Confidence, which is probably attributable to the European Debt Crisis anyway. No mention of the major correction on the Chinese stock market. No mention of the strong rally which European stock markets registered Monday this week; a rally which was not replicated on U.S. markets...... No, the poor performance of global stock markets Tuesday was entirely the result of the dire state of the eurozone.

The Financial Tabloid's second (slightly smaller headline) today was: What will save the euro? Well nothing to worry about there, the FT's Wolfgang Munchau has the answer: Only a closer union can save the eurozone. Phew, glad they have the answers up their sleeve, I was beginning to think the Euro was a lost cause.

Now it doesn't bother me overly that these people continue to produce ponderous, all-knowing articles about the "crisis" in the eurozone after completely missing the imminent and obvious Anglo-Saxon "Credit Crunch" until well after the global economy was splattered all over its windscreen. What really bothers me is the lack of reporting of the basic facts. Basic facts are important. Opinions are a dime-a-dozen, largely superficial and of no great import to anybody. But facts count.

So let's get to some facts. As part of the FT's leading front-page article our friends Oakely, Mulligan and Atkins note that the euro tumbled "to an eight-and-half year low against the Japanese yen" yesterday. Well yes, indeed. And the USD/JPY hit another major low too. In fact the USD/JPY has been on the slide since the Credit Crunch started and looks likely to hit an all-time record low soon. So the low seen on the EUR/JPY is probably not that significant. Not that you'd notice from reading the FT.

One of the interesting little tidbits that I garnered from an ocean of opinion in another article yesterday, which was trying to make the point that Greek debt troubles parallels the subprime crisis (it was a laboured point and the parallels were shaky), was this: in June 1992 five year bonds in Greece yielded 8.25%. The government deficit was 11.5% of annual GDP and debt was 110%. Greece's rating at the time was triple B minus. Right. Sixteen years later in June 2008 the Greek deficit was 5% and accumulated government debt was 98% of GDP, even though Greece had been running government deficits in the interval.

HUH ???
How did they manage that? Well it happens all the time actually. Same thing happened in Italy. In Italy government debt to GDP ratios have been up around the 100% level for decades. It's part of the furniture.

And why were these basic facts on Greece interesting? Well for all the talk of "this is not sustainable", this will end in disaster etc. etc. etc. ad nauseum, it seems that even with relatively high yields, a massive level of accumulated government debt and ongoing deficits the Greek "situation" was sustainable in 1992 and, in fact, the history shows it was sustained.

You can, of course, make the case that: this time it's different but then we are right back to opinion and conjecture. The naysayers can have their opinions but the facts are facts and they speak for themselves. Please no more back-of-the-envelope calculations. No more straight-line projections, opinions and general blatter. Can we get back to reporting at least the data, maybe even the history and some facts.

Friday we have Non-Farm Payrolls. The market is not expecting good news. Yesterday when U.S. Consumer Confidence came out well under market expectations the markets sold the EUR/USD, which makes sense. Not. Well it didn't last. Everything, everywhere is not the fault of the European debt crisis. This boring refrain will run into trouble sooner or later. Euro bears beware.

OIL 76.11
GOLD 1,243.70

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Ivana, this is not interesting at all.

Think about something bigger. For example, what kind of financial politics government should carry in contracting economy.
You mean in a contracting economy?
I don't take the view that the government should fix everything. Policies should broadly be the same in a contracting economy and in an expanding one. Responsible economic and financial management have been lost in the rush to 'manage' the economy and look at the results.
>> Policies should broadly be the same in a contracting economy and in an expanding one.

Wrong, think about this more. Don't want to give you an answer why right away.
Sensible regulation should be put in place at the get-go, reacting to crises is not what we need or should expect.

Here's a nice little article on the recent Greek "crisis" which makes some interesting points:
Sorry, I can't see the link. It's truncated here. :(
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