Optimism pervades on many stock markets today, which is odd really. The huge hole in European finance has not gone away. It’s just that investors tire occasionally of being glum all the time, and like to relive the emotions of the boom. During the lifetimes of many or most, stock markets have only risen, going back to 1974, up to 2007, when they peaked. How can it be possible for the situation to be so bad that normal cannot return?
Yet it is the expectations of the vast majority of the current baby boom generation that could be about to take the hit. A generation that was born in the years after the war ended have seen nothing but growth and increasing wealth levels on a scale never before witnessed throughout history. For these folks, which includes me incidentally (born 1954), the idea that an era of wealth reduction could occur seems almost impossible to conceive.
That is why, at a time, when not only many banks but many countries are teetering on the edge of insolvency and default, stock markets can still have days when prices shoot on upwards. The good times must surely roll again, once these little local difficulties are tidied up.
The problem is the scale of the problems. The WSJ is often more open and honest reporting Europe’s financial troubles than Europe’s own journals. The same that is said about many peripheral (and not so peripheral) European countries could be said about many of the States that comprise the USA. Debts are so high, and property prices so inflated, that the inevitable result is going to be default, and loss for many millions.
The latest data from central banks underline how negative sentiment toward some European banks has become: Banks in Portugal, Ireland, Greece and—most of all—Spain increased their borrowings from the ECB to record levels in June as more institutions found their access to wholesale money markets barred.
“The reality of the situation is that a growing number of institutions have failed the market’s own stress test,” said Lena Komileva, head of market economics for the Group of Seven leading industrialized nations at Tullett Prebon.
Global banks have been reluctant to lend to banks in the euro area’s weaker periphery all year. Figures published earlier Wednesday by the Bank for International Settlements showed that they reduced lending to Portugal, Ireland, Greece and Spain by $110 billion in the first quarter of the year. Another $81 billion was pulled from Italy.
But alarm bells really started ringing in May, when the ECB had to stem a general rout in southern European bond markets by buying tens of billions of euros of government debt. Wholesale money markets, where banks make up the difference between their loans to customers on the one side and their deposits and capital reserves on the other, have been effectively closed to many southern European and Irish institutions since then.
As such, ECB lending to the banking systems of Portugal, Ireland, Greece and Spain rose by €126 billion ($162.45 billion) in the first half of the year, accounting for almost all of an overall increase of €141 billion. Overall ECB lending volumes have fallen since June, with the repayment of €442 billion in 12-month funds. But by the end of June, these four countries accounted for 42% of the ECB’s total lending of €870 billion, up from 33% at the start of the year. By contrast, those countries contribute only 13% of the ECB’s capital.
To some degree, that development reflects a fear of country risk, rather than bank-specific risks. The public-debt dynamics of Greece and Portugal in particular have convinced many that a default or restructuring will be necessary before long. But it also reflects the fear that even sovereigns themselves won’t be strong enough to save and recapitalize national banking systems that have suffered huge losses as real-estate bubbles exploded in their countries.
You’d have thought that this information would have a sobering effect on the bulls’ never-ending party. Politicians should make the most of it. Cameron and his team are rushing out their policy platform while people are still not yet able to see the troubles which are on the way. Once the storm hits, it will become far harder to project the necessary confidence to launch vital reforms in every field of government. A year from now, this time will be remembered as the politically ‘easy times’ when hope still outweighed fear.
Today’s Marketwatch on European Purchasing Manager’s Index –
July’s rise in the euro-zone composite PMI suggests that, for now at least, the region is, perhaps surprisingly, evading the threat of a double dip apparently facing the U.S. and U.K.,” said Ben May, European economist at Capital Economics.
But there are still reasons to remain cautious, May said, noting that the rise was driven largely by a sharp rise in German PMI, which jumped to its highest level since February 2007.
While a full breakdown isn’t yet available, peripheral indexes are likely to have weakened again, highlighting divergences in the region, he said.
Economists said troubling signs were also found in the data.
Markit’s Williamson noted that inflows of new orders are growing at a pace well below the peak seen in April, partly due to signs export growth is slowing as global trade flows cool, while service providers offered the most downbeat assessment of future activity for eight months.
Looking backwards is not a great guide to the future. You see what you want to see.
Comment from COnservativehome today –
Mike Thomas said in reply to Sally Roberts…
This is very true, most of my friends are apolitical (a few did admit voting for Blair but never again for the Labour Party), some are Tories. They are largely disinterested with the comings and goings of daily Parliamentary life.
The vast majority have said that they like ideas coming from the coalition and they like what they are doing.
My advice to the coalition is get the pain out there now, do the really tough things now whilst there is a sentiment of goodwill.
People are not stupid, they know pain is coming, get it done with quickly and then people can adapt and get on with their lives.
Now is the moment. Do it.