Buckle up, euro zone discord could take us back to 2008
It feels like August 2008 all over again. Thin markets, sharp movements in stock prices and credit markets. Europe’s leading bank shares slumping by up to 10 per cent. The world’s financial leaders on holiday.
Today was a rather remarkable day in global economics, when the question of who will buy southern Europe’s debts became wrapped into fears of a new Currency War.
1. Bank of Japan intervenes to bring down the value of the yen to help Japanese exporters.
2. European Commission President Barroso writes to EU leaders basically to implore them to massively expand the Eurozone bailout facility, the EFSF.
3. Italian Finance minister Tremonti publicly points out that Asian investors (ie China) have told him: “If your central bank doesn’t buy your bonds, why should we buy them?”
4. The European Central Bank restarts its “Special Markets Programme” to buy up troubled government debt.
5. But this programme does not include Italian or Spanish debt, only Portuguese and Irish.
6. It becomes clear that the Swiss National Bank’s efforts to get the Swiss franc to depreciate are not working despite a hefty effort yesterday.
7. Yet more evidence of a slowing US economy from confidence and jobs data, gives rise to talk of QE3, a third round of Quantitative Easing that would be seen as a backdoor devaluation elsewhere.
So is this 2008 all over again.
In one important respect the position is much better. The world’s banking system is better capitalised, for example. But in another it is much worse.
The G20 spirit of global economic cooperation seems to be ebbing away. Under extreme domestic pressure, sovereign nations could be going their own way, intervening in currency markets, without the usual consultations.
Clearly this is seen most acutely within the euro zone. The ECB Governing Board did not unanimously agree today’s special bond purchases, which might explain their rather tentative nature.
German and Dutch finance ministries moved to slap down Barroso’s barely concealed plea for a trillion euro-plus EFSF.
So a lack of harmony in the euro zone is spooky enough. If this sort of discord is echoed across the globe, then get your seatbelts on.