09 August 2011
Don’t Panic, Pike!
By Andrew Montlake - www.corecogroup.co.uk - Published: 05.08.11
Just when you thought it was safe to go back in the financial markets…!
The news headlines are screaming from this morning papers that all is not well, traders are pictured with head-in-hands alongside graphs dropping off a cliff and Mr Peston is everywhere again – sounds like a preview of Credit Crunch 2 – Revenge of the Markets?
Looking back at the blog postings that were written during the heady days of the 1st crises there are many similarities. Back then the speculation went from bank to bank until the pressure became too much and one by one banks were rescued. There was then a brief lull, some began to believe we were out of the woods and then there was Lehman’s.
The question is are we now seeing the same in the Eurozone? Speculation has heaped enormous pressures on the “outlying” Euro countries and one by one they have been bailed out, but this cannot go on indefinitely. So which country will emerge as the Lehman’s’ of this crises?
The European Central Bank seems to be spinning round in ever decreasing circles, last month raising interest rates and this month buying bonds, or rather saying it is buying bonds, but rumours abound that they are not showing their faith in the crucial countries of Italy & Spain. As the interest rates of those nations bonds edge towards the 7% level, the need for a bailout of almost unfathomable proportions draws nearer.
As each country totters closer to the edge so the financial pressure intensifies on the big two, France and Germany, and it seems their citizens are not prepared to finance their European partners indefinitely.
What they are seeing are other nations accepting their dosh whilst the politicians struggle to push through the reforms needed to ease the pressure, through a combination of public backlash, political infighting and just plain incompetence.
The very future of the Euro is on a knife-edge and swaying in a Force 9 gale.
But there is perhaps a more serious issue from across the pond. The USA is struggling and is on the brink of dropping back into a recession that threatens to drag the rest of the world with it. Again, party politics is playing its part with a group of extremists known as the Tea Party wreaking havoc.
If the US proves to be the Lehman’s’ , well, things will get tough for a while!
You could say that all of this is the markets revenge. Revenge for not being allowed to run its natural course and wreak even more havoc, stemmed by bailouts, handouts and the printing of lots of money.
As the irrepressible Robert Peston writes in his blog, “The overall volume of indebtedness in the economy is … still with us – although it has been shuffled from financial sector to public sector. And if you took the view four years ago that the quantum of debt in the system was unsustainably large, then you would argue that by propping up the banks, the day of reckoning was being postponed, not cancelled.”
As an excellent Newsnight debate last night all agreed, “the problem is the politics”. They have to get involved, they have to do something, but their very actions have a resultant effect.
So whilst many fear a credit crunch emerging out of Southern Europe the issue is whether this spreads across the globe once more. Whether or not we dip into recession again is hardly the main issue as for the average person it feels like we have never come out of it, but if banks do start to clam up again, more so than now, it will hurt.
The big difference this time is that Libor rates have barely moved. This is a good sign, as a rise in Libor can be seen as a key indication that something is very wrong.
So whilst it is not time to panic just yet, it is time for politicians’ to stop the “politics” – a big ask I know.
Meanwhile property prices in the UK continue to strengthen according to today’s report by Halifax, with bricks and mortar looking to be a somewhat safe haven in the current storm. Although banking shares are being battered once more, UK lenders still seem keen to lend and whilst mortgage rates are at an all time low, well, you can draw your own conclusions.
Now, where’s that Gordon Brown when you need him?