Thursday, February 4, 2010

Fears Of 'Lehman-Style' Tsunami As Crisis Hits Spain And Portugal

Fears Of 'Lehman-Style' Tsunami As Crisis Hits Spain And Portugal
Markets In Turmoil As Euro Fears Spiral
Greece Crisis: There But For The Grace Of God Goes Britain
Why Southern Europe's Debt Crisis Is A Buying Opportunity For Gold Lovers

By Ambrose Evans-Pritchard | 4 February 2010

Spain is going through a "deep crisis" in its housing sector. Photo: AFP

The Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words. Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. "If not contained, this could result in a `Lehman-style' tsunami spreading across much of the EU."

Credit default swaps (CDS) measuring bankruptcy risk on Portuguese debt surged 28 basis points on Thursday to a record 222 on reports that Jose Socrates was about to resign as prime minister after failing to secure enough votes in parliament to carry out austerity measures. Parliament minister Jorge Lacao said the political dispute has raised fears that the country is no longer governable. "What is at stake is the credibility of the Portuguese state," he said.

Portugal has been in political crisis since the Maoist-Trotskyist Bloco won 10% of the vote last year. This is rapidly turning into a market crisis as well as investors digest a revised budget deficit of 9.3% of GDP for 2009, much higher than thought. A €500m debt auction failed on Wednesday. The yield spread on 10-year Portuguese bonds has risen to 155 basis points over German bunds.

Daniel Gross from the Centre for European Policy Studies said Portgual and Greece need to cut consumption by 10% to clean house, but such draconian measures risk street protests. "This is what is making the markets so nervous," he said. In Spain, default insurance surged 16 basis points after Nobel economist Paul Krugman said that "the biggest trouble spot isn't Greece, it's Spain".

He blamed EMU's one-size-fits-all monetary system, which has left the country with no defence against an adverse shock. The Madrid's IBEX index fell 6%. Finance minister Elena Salgado said Professor Krugman did not "understand" the eurozone, but reserved her full wrath for the EU economics commissioner, Joaquin Almunia, who helped trigger the panic flight from Iberian debt by blurting out that Spain and Portugal were in much the same mess as Greece.

Mrs Salgado called the comparison simplistic and imprudent. "In Spain we have time for measures to overcome the crisis," she said. It is precisely this assumption that is now in doubt. The budget deficit exploded to 11.4% last year, yet the economy is still contracting.

Jacques Cailloux, Europe economist at RBS, said markets want the EU to spell out exactly how it is going to shore up Club Med states. "They are working on a different time-horizon from the EU. They don't think words are enough: they want action now. They are basically testing the solidarity of monetary union. That is why contagion risk is growing," he said.

"In my view they underestimate the political cohesion of the EMU Project. What the Commission did this week in calling for surveillance of Greece has never been done before," he said. Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of "brinkmanship". The core issue is that EMU's credit bubble has left southern Europe with huge foreign liabilities: Spain at 91% of GDP (€950bn); Portugal 108% (€177bn).

This compares with 87% for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.

Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months. Mr Trichet said euro members drew down their benefits in advance— "ex ante"— when they joined EMU and enjoyed "very easy financing" for their current account deficits. They cannot expect "ex post" help if they get into trouble later. These are the rules of the club.


Markets In Turmoil As Euro Fears Spiral

By Jonathan Sibun | 4 February 2010

The health of the global economy lurched from "bad to worse" yesterday, battering stock markets and forcing investors into safe haven stocks and currencies. The pound fell to its lowest level against the dollar since mid-October, the euro hit an eight month low against the greenback and the FTSE closed down 2.2% at 5138.31. Fears of a sovereign debt crisis among Europe's economically weaker nations and disappointing jobless and service sector data in the US hit stock markets on both sides of the Atlantic. The Dow Jones index fell 207 to 10063.55 as investors all but ignored the release of positive retail sales data in the US.

Gold traded 2.4% lower at $1,082.88 per ounce while crude oil was down as much as 5.4% to $72.86 a barrel. Fears that the Greek debt crisis had spread to Spain and Portugal prompted Julian Callow, European economist at Barclays Capital, to warn that a failure to stamp out the contagion could lead to a "'Lehman-style' tsunami spreading across much of the EU". Investors bought safe haven currencies to protect themselves.

"The market is coming to grips with the fact that things are going from bad to worse, so we're seeing flight-to-quality trades— out of euros and into the dollar and yen," said Steven Butler, director of FX trading at Scotia Capital. European shares fell by the most in 10 weeks, with Spanish banks in the eye of the storm amid fears over their financial strength. Santander fell 9.4%, while the pan-European FTSEurofirst 300— an index of top European shares— was down 2.8%, its lowest close since November.

In the US, government data showed first-time unemployment benefit claims rose by 8,000 to 480,000 last week, against forecasts of a 10,000 fall. The data came ahead of today's much-anticipated non-farm payroll numbers for January. The pound fell to $1.576 against the dollar, with the euro down at $1.375. The sterling-euro rate was broadly flat.


Greece Crisis: There But For The Grace Of God Goes Britain

By Edmund Conway | 4 February 2010

Should markets pass the same verdict on Britain as on Greece, the results would be almost identical— and just as disastrous. It was one of those moments that can only happen in a place like Davos. There I was last week, having a coffee and minding my own business, when from a nearby table I heard a desperate voice. I assumed it belonged to a beleaguered bank executive, or a stricken hedge fund manager. "We are doing everything we can," he said, "but the markets don't care."

I looked up and realised the voice belonged to the Greek prime minister. His arms crossed defensively, George Papandreou was now listening as one of the world's top economists told him he thought his best bet was to seek an emergency bail-out from the International Monetary Fund. Greece is indeed buried deep in the financial mire.

At first gradually, and then with alarming speed, the country has lost credibility with investors to such a degree that it is now having to offer an interest rate of 7 per cent to persuade them to buy its debt, compared with 4.5 per cent a few months ago. Some, including Papandreou, characterise this as a speculative move aimed at splitting up the euro; others see it as a statement of economic disgust at a country whose public finances, always bad, have now dipped into no-hope territory.

There is some truth to both theories, but, more important, at least for both Gordon Brown and David Cameron, there is a broader lesson: the only thing that matters more than knowing what to do about the deficit is persuading the markets that you know what you're doing about the deficit. Because there but for the grace of God goes Britain [[or the U.S.: normxxx]]. There is no knowing how and when investors will lose their faith in a government, but when it's gone, there isn't much you can do to get it back.

Greece, in other words, is the fiscal Petri dish that reveals in gory detail what could happen in the UK if this Government— or the next— fails to maintain the confidence of investors. It is not merely that those interest rates are already inflicting an awful toll on borrowers in Athens and beyond. It is that they are sending the national government towards a full-blown debt spiral, in which the cost of its annual interest bill becomes so unmanageable that it can hardly afford to supply its citizens with basic services.

I have pointed out before that countries, like individuals, occasionally reach the point where they have borrowed so much that their debt simply becomes impossible to whittle away. Greece, the markets seem to think, has now passed that point. And an IMF bail-out would only layer new debt on top of the old. In the end, the only solution is to find some way to slash spending and raise taxes without a) sparking riots or revolution or b) critically damaging the economy.

Should markets pass the same verdict on Britain as on Greece, the results would be almost identical. In its Green Budget yesterday, the Institute for Fiscal Studies, with the help of Barclays Bank, attempted to map out what would happen if the Government failed to achieve the necessary cuts in its budget in the coming years. The verdict: a "very large, and fast-acting" impact on interest rates, pushing them even higher than Greek rates today.

Still, we are not there yet. And there are four reasons to be cautiously optimistic about Britain's chances. The first is that much of the population is already reconciled to some form of austerity. Both main parties want to cut the deficit sharply, and although the Tories talk a little tougher, in economic terms there is actually not that much clear water between their proposals and those already laid out by the Treasury.

Second, the UK started the crisis with national debt below 40 per cent of gross domestic product, compared with Greece, whose national debt was already close to the 100 per cent of GDP— near the tipping point for a debt spiral. Third, it is a little-appreciated quirk of the British market that, rather like a homeowner on a long fixed-rate mortgage, the Government has to roll over its debt far less regularly than other countries, so is significantly insulated from a Greek-style crisis. And fourth, unlike Greece, Britain has its own currency, which affords it more leeway to adjust.

But as Greece has shown, a credibility collapse can take place even when you least expect it. Despite George Osborne's pledge earlier this week to safeguard Britain's credit rating, some still reckon there is an 80 per cent chance of the UK losing its coveted triple-A status— something that could trigger an investor panic. So both main political parties should, as a matter of course, prepare detailed emergency plans saying what overnight cuts they would impose in the event of a similar crisis.

However, avoiding such a credibility collapse will not spare Britain from having to drag itself through an economic transformation with the same end: to reduce debt and to live within its means. For some countries, the financial crisis was painful because people suddenly started spending less. For Britain, it uncovered the fact that the nation had duped itself into believing it was more prosperous than it really was. We mistook a debt bubble and the proceeds of financial engineering for sustained and lasting growth. Time to get real.


Why Southern Europe's Debt Crisis Is A Buying Opportunity For Gold Lovers

By Garry White | 4 February 2010

As editor of the Questor column, I'm the Telegraph's share tipster, as well as its mining correspondent. I believe stock market investing is easy— all you have to do is look at trends in the world around you then employ common sense. I'm particularly interested in commodities and the effect population growth will have on demand for life's basics such as food and water over time.
The classic view of gold is that it outperforms in a crisis. Not so simple: it depends on the crisis. The current woes sweeping euroland are bad for the gold price, and if it gets worse, then last year's near-25% gain in the price is at risk. In fact, it's already started.

In the autumn of 2008, when the world stood on the brink of financial collapse, gold plunged. It fell to $712.30 an ounce on November 12 2008, as investors repatriated risky assets, prompting the dollar to rise. Rattled investors were also forced to sell their gold holdings to cover margins calls elsewhere.

If the debt crisis sweeping southern Europe deepens, then the dollar's good start to the year will get better. The US dollar index, a measure of the greenback'ss value against six other major currencies, is up 2.7% this year and hit a six-month high today. And the inverse relationship between the gold price and the dollar will hold.

Does this mean it's time to sell your gold positions before your gains are wiped away? The simple answer is no. Yes, the dollar will continue to benefit from the crisis and gold is likely to fall further. But this is a buying opportunity. The fiat US currency has structural problems and is likely to weaken in the longer term. Ask any American libertarian and they will tell you that the dollar is a depreciating asset. The US Budget deficit alone is forecast to hit a record $1.56 trillion this year.

Gold is a means of preserving wealth and this, above everything, means that the metal should be regarded as a currency and not merely a commodity. Gold shares will continue to slide until the eurozone situation becomes clearer— but any falls toward $1,000 an ounce should used to buy shares in major gold producers. Gold remains an essential part of an investor's portfolio.

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