“the euro crisis had a Christmas break, but it’s back”

With Portugal heading back to an increasingly reluctant bond market, the BBC’s Europe editor, Gavin Hewitt, notes that “White knuckles have re-emerged in Brussels and other vulnerable European capitals.”

Sometimes in Brussels I detect that the fight is less to save Portugal but more to ring-fence Spain. It’s the fourth-largest economy in the eurozone. If it needed rescuing the funds currently are probably not there. And then awkward questions would have to be asked – including whether Germans, in those circumstances, would commit further treasure towards what would be a giant bail-out.

Spain has made progress in reducing its deficit. Its target for 2010 was to get its deficit down to 9.3%. It says it has done “somewhat better” than that. It also says it is on target to have the deficit down to 6% by 2011.

They are also hoping to benefit from the warm embrace of China. The Chinese have been buying up Spanish sovereign debt. They may well now hold 10% of Spain’s national debt.

(In a future blog I will examine China’s growing influence in Europe.) But even with Beijing’s actions the cost of servicing Spanish debt is rising.

Read the whole thing.

And with the Portuguese government and the European Commission denying reports of bailout talks, all eyes, as ever, will be on Frau Bundeskanzerlin… 

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  • Last week, I read a report (cant remember which newspaper) which said that the Chinese were now investing heavily in the Eurozone. Apparently, this is because of fears of a falling US currency. Most of China’s reserves, running into trillions of dollars are tied up in US dollars.

    That leads me to question how healthy is the US economy and what would be the consequences of a fall in the dollar? If anything, it will make the Eurozone less competitive and slow down growth. Surely, that will put even more strain on the competititveness of the indebted eurozone countries such as Spain.

  • Seymour Major @ 3:21 pm is again asking the proper question about the key US economy.

    That was the precise topic that Stephanie Flanders focused upon for Newsnight last Friday. Her blog piece and the generally-well-informed debate (for a change) is worth a study.

    The spine-chiller:… if investors ever started to question America’s creditworthiness, or seriously sell the dollar, it could make the bailouts on the European periphery look like a tea party.

    Anyone with fingernails left to chew after that might have a nibble at the inevitable problems that will arise for the Chinese economy. First finger: energy supply and the environment. Middle finger: the shift to a market economy while maintaining central controls. Ring finger: growing inequalities, especially between urban and rural, and therefore regional (what’s the long-term prospects for the Maoist controls on population movement and growth?). Oh dear, down to the quick already.

    As the ancient Chinese curse (all the way from circa 1935 and the British Foreign Office) has it: may you live in interesting times.

  • Mack

    @Seymour Major

    It depends, the Eurozone core growth engine is possibly at least slightly insulated from dollar falls.

    Germany benefits from weaker Eurozone states being locked in a currency union (the PIGS – Portugal, Italy, Greece & Spain – not Ireland) let unit labour costs rise faster than productivity increases. Those markets are effectively captive German markets now.

    Germany also exports a lot of heavy machinery to the fast growing emerging economies. They’re on course to grow ferociously in the coming decade – although a weak US economy and dollar may cause that growth to slow.

    It also depends on how the weaker dollar impacts the USA, if inflation rises (and there is a political incentive to inflate debt away rather than engage in austerity – tax rises and the like to pay it down), then American labour may not become more competitive as import costs rise..

  • It’s clear that the bail-out facility doesn’t solve any of the underlying problems (after all, it’s just another lender). Unfortunately the proposed change to the Treaties just confirms the current facility and doesn’t go any further. After Portugal, it will be Spain – the facility hasn’t stopped the crisis spreading. There should be more open debate about Eurozone reforms if we’re to make real use of the breathing space that the facility provides: if there’s no consensus about where to go next when it hits Spain – or even Italy – then it might be too late to do anything about it.

  • Munsterview

    seymour,

    two interesting ‘black swans’ from ten listed in Capital and Energy for 2011 that may be of interest to you. You can find the remainder at the link listed. I had a good article on the dollar on the recent past, I will see if I can find it.

    2. Spain defaults

    High national debt, high inflation, high unemployment, plummeting housing prices, and a second round of bank failures coupled with political mismanagement sends Portugal into insolvency, followed quickly by Spain.
    This overwhelms the EU’s 440 Euro bail-out fund and sends U.S. Treasury yields into the negative as investors flee to safety.

    5. China clings to dollar, riots ensue

    China links its currency to the dollar. The dollar is in a state of decline as a policy move to inflate away U.S. debt.
    This means that everything in China is going up in price. The official rate in China is 5.1% for November — but food inflation is running at 11.7%. The last time food prices jumped in 2007, there were riots at supermarkets.

    http://www.energyandcapital.com/articles/10-black-swans-for-2011/1384

  • Munsterview

    seymour

    this is from Wealth Daily is a snap shot of how things appear Stateside. Still searching for that dollar article.

    As we say goodbye to 2010, here’s what the smart money seems to be betting on:

    Commodities will continue to explode. Gold will rally to $1,500. Silver will break $30… again. Copper will nail new highs. And oil could easily run amok above $100 a barrel again.

    Coal will spike higher. FBR Capital just upped 2011-2012 coal prices by about 9.5% and 5.8%. “Part of our steam-coal price forecast is tied to higher exports and raising our natural-gas price forecast to $5.50 per thousand cubic feet (Mcf),” they said. And there’s news of power plant coal shortages in China, which supports higher demand. Buy if you haven’t yet.

    Rare earth stocks will skyrocket on supply-demand issues. China is increasing tariffs, and there’s no end to low export quotas out of China… Molycorp (MCP), Rare Earth Elements (REE), the Rare Earth ETF (REMX), and our $1.50 Greenland stock will pick up momentum. Buy rare earths now.

    Housing will not recover — not until 2014 at the earliest. And banks will suffer. Mortgage troubles are rising as prices continue to fall in vulnerable markets; there aren’t enough buyers to pick up the overhang, declines, or coming foreclosures. Even RealtyTrac doesn’t see a recovery until 2014. And don’t forget that mortgage rates will rise again in 2011, dampening any demand and cutting back on affordability.

    The agflation threat will continue to increase your food bills, and send trades like Market Vectors Agribusiness ETF (MOO) to $60.

    Unemployment will not improve much.

    Dogs of the Dow stocks will put in another positive year.

    European countries have much to resolve. Countries cannot continue to be bailed out without economic support. If bailouts continue, the euro will come under further pressure.

    Let’s look at a couple of these in further detail.