TELEGRAPH Business News
Euro dives as wheels fly off eurozone economy
By Ambrose Evans-Pritchard (first comes the story, then the blog, which is well worth reading!)
The euro has suffered its sharpest drop in four years as a blizzard of weak data from Germany, Belgium, France, and Spain spark fears that economic contagion may be spreading from the Anglo-Saxon world to Europe.
The IMF has cut its eurozone growth forecast three times since October
Spain's business federation warned that Spanish unemployment will rise by 500,000 this summer unless the government takes "valiant measures" to offset the housing and construction crash. "For every dwelling not built, two workers will lose their jobs," said the group's president, Gerardo Diaz Ferran.
The country's credit group ASNEF said the volume of personal loans had dropped 30pc in the first quarter, the worst performance since the country's financial crisis in the early 1990s.
Troubling data in Spain has been building for months, but investors have tended to focus on Germany as a proxy for the whole eurozone. A shock drop in Germany's IFO business confidence index caused an abrupt change of mood in the currency markets.
The German data follows a slide in the Belgian index, which captures crucial port activity in Antwerp. The headline confidence figure fell to -7.4 in April from plus 1.2 in March, with a dramatic slump in the export order books to -14. This is flashing near-recession warnings.
David Owen, an economist at Dresdner Kleinwort, said Europe would soon be engulfed by the twin effects of a "collapse in export volumes" and a slow motion credit squeeze. "The wheels are coming off the eurozone economy," he said.
BNP Paribas warned clients yesterday that the "decoupling story" was no longer credible. "We see Europe in the early stage of a credit crunch, and if we are right credit supply will shut down," it said. Key governors of the European Central Bank began to back away from their hawkish stance of recent weeks, clearly disturbed by the market perception that they are mulling a rate rise to choke off price rises. Inflation has reached a post-EMU high of 3.6pc on surging oil and food costs.
Jean-Claude Trichet, ECB president, went out of his way to brief journalists that "sharp" currency moves had "possible implications for financial and economic stability", a coded threat of co-ordinated intervention by world central banks.
The comments caused a second scramble for dollars in mid-day trading as speculators rushed to cover "short" positions against the greenback.
The ECB is under heavy pressure to soften its rhetoric from both France's president Nicolas Sarkozy and Italy's premier Silvio Berlusconi, though the pair have so far stopped short of invoking treaty powers to force a change in the exchange rate - at least in public.
The EU-wide lobby BusinessEurope said: "The strong euro is alarming and in particular the speed of its appreciation since the start of 2008 is a key concern for European companies."
France is succumbing to the slowdown. Insee business climate index fell harder than expected in April to 106, from 108 in March.
Eric Chaney, Europe strategist at Morgan Stanley, said the April survey by French corporate treasurers was "alarming", pointing to distress in the financial system. "Let's call a spade a spade, some sort of credit crunch is unfolding in the funding of French companies," he said.
The IMF has cut its eurozone growth forecast three times since October and is predicting 1.4pc growth for the bloc this year and 1.2pc next year. It warned in its regional report this week that Europe will suffer 40pc of the entire $940bn global losses stemming from the credit crunch, with losses of $123bn faced by European banks alone.
Postscript ---Credit Suisse slumps to £1bn loss as crisis hits
Credit Suisse has posted its first quarterly loss in almost five years - a £1.06bn deficit that was almost treble analysts' expectations.
Switzerland's second-biggest bank announced the loss after making a further SFr5.3bn (£2.62bn) writedown for the first quarter in a performance labelled "clearly unsatisfactory" by chief executive Brady Dougan.
Ambrose Evans Pritchard
This bear growls on
No bear wants to be a perma-pessimist, ever waiting for the sky to fall.
So, sunk in a deep armchair with an optimistic bottle of Rioja (Baron De Ley Reserva), I have tried to tot up reasons why the great credit smash-up of 2007-2008 may now be safely over, heralding sunlit uplands once again.
1) Ben Bernanke has carried out the most dramatic rescue since the creation of the US Federal Reserve. His emergency rate cuts - 125 basis points over eight days in January - was a "game changer", as they say in London’s American Quarter, Canary Wharf.
By cutting rates from 5.25pc to 2.25pc since September, the Fed has averted 're-set Armaggedon' on the Greenspan mortgages – those floating rate 'teasers' taken out in 2005 to 2007. Payments will barely jump at all for most subprimers. Big difference.
The cuts are heavenly manna for the banks. These miscreants can now play the "steepening yield curve", using their monopoly privileges to borrow cheaply from the US Government and lend back expensively to the same US Government on long-dated bonds. This is the time-honoured method for rebuilding balance sheets. It works wonders. Even better (from the banks point of view), few people are aware of this massive bail-out.
2) Bernanke has accepted 'bus tickets' as collateral. The broker dealers (Bear Stearns, et al) can take their waste to the Fed’s Discount window, putting a floor under the entire shadow banking and $516 trillion derivatives nexus. Meanwhile, Fannie Mae* and Freddie Mac* have been armed with nuclear weapons to win the credit war. De facto, if not de jure, the mortgage industry has been nationalized. Big difference.
*[Fannie Mae is the nation's largest mortgage buyer and a financial juggernaut that affects the lives of tens of millions of home buyers. It was created during the Depression to make sure that sufficient funds were available to mortgage lenders, then rechartered by Congress in 1968 as a publicly traded company.
Fannie Mae, like Freddie Mac, which was created by Congress in 1970, buys mortgages from lending institutions and then either hold them in investment portfolios or resell them as mortgage-backed securities to investors. The two companies play a vital role in providing financing for the housing markets.]
3) The Bank of England has woken up. Better late than never. As Professor Charles Goodhart (LSE and ex rate-setter) put it: "When you’re in a crisis, you deal with the crisis. Moral hazard comes when times are easier." Quite.
4) A dodgy one, this: China grew at 10.6pc in the first quarter. The BRICS - Brazil, Russia, India, China - are holding up. (If you ignore their galloping inflation, which you can’t, of course: current inflation merely means a future squeeze.) Actually, scrap point 4. It’s rubbish.
Still 1, 2,and 3, matter a great deal. Yet, I cannot really believe the tale of salvation. The Greenspan credit bubble and Europe’s EMU bubble (Club Med, Ireland, and ERM-fixers in Denmark and Eastern Europe) have together infused so much poison into the Atlantic economy that it will require a brutal purge - like chelating heavy metals from the brain.
America, of course, is already in recession – although the cascade of defaults, business closures, and job losses has barely begun.
Japan is in recession too, according to Goldman Sachs. It is still the world’s second biggest economy by far, lest we forget.
Britain, Ireland, Spain, Italy, and New Zealand, are tipping into housing slumps and demand implosions of varying severity.
Ontario and Quebec have stalled. Canada’s growth is the weakest in fifteen years, hence the half point cut by the Bank of Canada yesterday.
Australia is on borrowed time, whatever the price of coal and iron ore. Household debt is 175pc of disposable income, up in La La Land with England, Ireland, Denmark, and the Dutch. The wholesale funding market for mortgages that underpins this nonsense remains frozen.
Together these countries and regions make up roughly 45pc of the global economy, and over half global demand. My hunch is that this bloc will be sliding towards full-blown deflation within a year as the commodity bubble pops and job losses set off a self-feeding downward spiral.
The alleged parallel with the oil spike of the early 1970s is a snare. Debt leverage has been more reckless this time. It must contract more viciously. Inflation is less sticky (going down) in the Anglo-Saxon world, if not flexless Europe, where stagflation awaits.
If you think that core Europe - Greater Germany, Benelux, and the Scandies (France is faltering) - can somehow tough it out as the rest of the OECD’s industrial family hurtles into a brick wall, read the IMF’s “Regional Economic Outlook: Europe”, published this week.
The Fund has cut its eurozone growth forecast to 1.4pc this year, and 1.2pc next – with perma-slump pencilled in for Italy. This puts it at daggers drawn with the European Central Bank, the fervent apostle of decoupling.
Europe will suffer 40pc of the entire $940bn global losses stemming from the credit crunch. Euro banks alone will lose $123bn (compared to $144bn for the US). "Loss recognition will need to catch up," said the IMF.
"Liquidity remains seriously impaired. Lenders are tightening credit standards, particularly for loans to enterprises," it said.
"The deteriorating economic outlook could weaken European and corporate balance sheets appreciably," it said.
On it goes, more or less dire, if you adjust for the IMF’s softly-softly style.
The report contains a grim chapter on what may happen along the vast arch of over-heating silliness from the Baltics to the Black Sea, funded by Austrian, Swedish, German, Belgian, and Italian banks.
"Europe’s emerging economies are susceptible to financial shocks, which could make the situation dramatically worse," said Michael Deppler, the Fund’s Europe chief.
Last year, private credit grew 62pc in Bulgaria, 60.4pc in Romania, 55.2pc in Kazakhstan, 45pc across the Baltics. Need one say more?
Current account deficits have reached 22.9pc in Latvia, 21.4pc in Bulgaria, 16.5pc in Serbia, 16pc in Estonia, 14.5pc in Romania and 13.3pc in Lithuania. The gap has been plugged by foreign loans. These are no longer forth-coming. Spreads have ballooned by over 500 basis points.
"Banking systems that are heavily dependent on foreign borrowing to support credit growth could face a sudden shortfall," said the IMF.
Woe betide the creditors. Loans to the old Soviet bloc account for 23pc of the entire asset base of the Austrian banking system, and 10pc of the Swedish and Belgian systems.
As Europe’s drama slowly unfolds, the ECB is sticking defiantly to its orthodox line. The IMF suggests looking beyond the current food and oil spike (inflation is at a post-EMU high of 3.6pc), and preparing "some easing of the policy stance".
Axel Weber, the German Bundesbank chief and leader of the Uber-hawks, will have none of it. "I do not share the vision of the IMF," he said, tartly.
One notes that the Bundesbank was quieter when Germany was in the dumps and needed lower interest rates. It acquiesced in roaring money supply growth as inflation fuelled bubbles in the Latin Bloc – the cause of their current distress. Such is the hypocrisy of EMU. Beware the pious incantations by Mr Weber, a German nationalist in Euro-clothing. (I will return to the theme of Mr Weber in another blog.)
The ECB’s "error" will become clear over the next year as the house price crash across Club Med and Ireland combines in a lethal brew with the East Bloc credit deflation.
Germany will not be immune from the blow-back. It has funded a good chunk of Club Med’s foreign debts: Spain ($362bn), Italy ($275bn), Greece ($129bn), Greece ($98bn), and - honorary Club Med - Ireland ($123bn).
Far from being the shock absorber, Europe may prove to be the accelerator of this post-bubble denouement.
Once you add Europe to the Anglo-Saxon and Japanese sick list, you reach 60pc of world GDP, and two thirds world demand.
This leaves the global boom on tenuously narrow ground. Who is going to buy all those exports from China? Who is going to keep pushing commodity prices into the stratosphere? This bear growls on.
Good Rioja, nevertheless