Having led European nations into the sovereign debt crisis it is surprising just how quickly media appears to have forgotten all about those falsified national accounts from Greece preferring to turn its more hostile attentions onto Hungary and Spain! So be it but despite the appearance of calmer markets towards the end of the week none of us can ignore that we now live in a world of austerity meaning that the only game in town is caution.
In Madrid today to speak to the Economia Forum I note that UK Deputy Prime Minister gave another reminder to our friends abroad that the position for all governments that needed to get budget deficits down was “challenging”. Interestingly though Clegg was not preaching or attempting to mock the other afflicted. In fact Clegg made the odd interesting observation with regard to not taking an eye off growth whilst at the same time attempting to downwardly adjust deficits so that we all start living within our means. In doing so he talked of collective action needed to remove barriers to trade citing that full implementation of the Doha round would in the governments view be worth at least £150bn before moving on to that intemperate subject of structural deficits on which he gave nothing that we didn’t already know away!
Meanwhile as hinted above, the rating agencies appear to have been sharpening their knives – well at the very least giving them a polish! Desperate to now grab the initiative back the big rating agencies that came in for some particularly harsh and probably justified criticism in recent weeks and months
for their part helping to blow up the credit bubble it seems that all of a sudden they have suddenly come out of the closet warning some countries that no matter how much respective governments might be attempting to address oversized deficits and sovereign debt issues it probably won’t be enough. Thanks for nothing then. To be fair from a debt downgrading perspective most sizable rating agencies have in recent weeks been taking a cautious stance that avoids further inflaming the current status unnecessarily. That does not mean that we should not expect a shock or two from rating agencies over the coming weeks and months and that would immediately further aggravate inflamed debt markets. For now assuming the political situation in Greece does not flare to the point that the government might be brought down leaving a void and that at the very least concern on Hungary stabilises a situation that a week ago looked as if it was getting out of control should normalise. Government knows exactly what they have to do and to a great extent they are attempting in various forms to do it. Greece was the test case and there is no doubting that events there have left a very nasty taste in the mouth. Spain with near 20% unemployment already has displeased but appears now to be genuinely on a challenging case of readjustment and realignment albeit that the process will be very slow and certainly not without potential for more industrial strife.
Over the past few weeks the Euro has borne the brunt of global market wrath and yesterdays attempt by ECB President Jean Claude Trichet to settle things down appears to have worked for now. But for all that the Euro is probably going nowhere but further down over the next few weeks albeit that dollar parity looks far less likely than it did two weeks ago. Stock market reaction has unsurprisingly often been negative for most of this week and not even amazingly good University of Michigan consumer sentiment figures in the US that steered toward the hope that the US recovery was still alive and well could help. The UK market of course was dominated by B making comparison with other markets somewhat out of balance.
With rating agencies holding ‘court’ threatening to sharpen debt rating axes that hang precariously over several European states their seeming presence back on the scene can hardly be ignored. Certainly these guys have a place though just as central banks and the views of the respective bank governors cannot be ignored. The views of central banks should never be ignored. WE may hope too that the warnings or occasional comforting statements that they and the rating agencies provide are and will remain independent of politics and thus unbiased.
Yesterday I listened to the ECB press conference and that was as usual dominated by its President, Jean Claude Trichet. I watched with great interest for clues as to what happens next. But having left Euro rates on hold at 1% yet again M. Trichet seemed to dodge every bullet and successfully dive away from any question that he was not prepared to answer. Most of them then and what little information he did impart was probably already out in the open. Certainly for those looking for more detail on proposed bond purchases by the ECB apart from some talk about agreement on issuing three month notes most would leave the meeting empty handed. In fact no dates were given for anything at although Trichet did say that extra liquidity is being withdrawn week by week blurted M. Trichet but if he did know by how much he was not going to say. He sang the praises of the Euro as being a very credible currency with an exceptional track record and yet he said nothing about how he was going to bolster its currently flagging fortunes. In fact as far as I can tell Trichet said absolutely nothing that might stir the global community to feel that the Euro had come through the worst.
Life across the English Channel has not been that much better this week as at various stages both Prime Minister and Chancellor of Exchequer have laid it on the line to voters just how serious the current economic mess in the UK is. True, it is in the interest of the Coalition to make things sound just about as bad as they can be and that the medicine required will not only be painful but also life changing. Wind people up to expect the worst and when crunch comes give them medicine that is perhaps ten percent less bad than they had feared and you should just get away with it. UK trade unions are ever watchful beast though and they are unlikely to take the prospect of jobless totals hitting maybe three million, wage cuts and other pressures that befit the times we now live in lying down. So do I expect riots in the UK similar to Greece and Spain following the budget day announcement on June 22nd? No I don’t though I do see some political unrest even if not nearly enough to please those that would have this coalition government in the UK brought to it knees.
