All Eyes Are On The European Union Now. By Nicholas Hastings
The European Union needs to step up to the plate.
If it doesn't and the contagion among peripheral euro-zone countries continues, the threat of another more serious global financial crisis will grow rapidly. And, the euro will suffer even more.
See the euro's fall against the dollar since the start of the year:
After the debt problems of Greece, Spain and Portugal, which will damage the performance of Northern European banks, there are the deficit funding shortfalls faced by California and even the U.K. if credit conditions start to tighten again.
Even Japan, which is having little luck in kick-starting its economy, could well be in line to tumble if the dominoes start to fall.
For the European Union, last week was a watershed.
Up until that point, financial markets appeared convinced that reassurances from Brussels over the Greek budget would be enough to keep the investment community sweet.
But those reassurances weren't enough.
Greek plans to reduce the country's budget deficit were being seen as unworkable, even before Greek unions waded in with massive strike plans for later this month.
And, instead of just pulling back from Greece, investors are now pulling back from Spain and Portugal as well. These two other debt-riddled countries could have an even more difficult time than Greece in curbing their debts, given the spending power in the hands of regional councils.
As the cost of insurance against a default by these three countries soars to new record highs, the outlook for their creditors--largely banks in Germany--grows more ugly.
"With the escalation of the peripheral crisis, the equity needs of European banks will increase by the day," warned Hans Redeker, head of foreign exchange strategy at BNP Paribas in London.
The net result would lower bank lending and see a return to credit crunch conditions that make the threat of global contagion even worse.
So, all eyes will be on the EU to essentially stop the rot.
Last week's statement of reassurance hasn't worked, so Brussels will have escalate its efforts to prevent the spread of risk aversion even further.
"Ultimately, we do not expect the EU to stand idle," said Jacques Cailloux, a currency strategist with The Royal bank of Scotland.
"We think (EU efforts) would take the form of financial help should contagion escalate across the region and impact the financial system," Cailloux added.
Anyone expecting the G7 finance ministers meeting in Canada over the weekend to come up with some rescue plan will have been sorely disappointed, with ministers failing to say anything new.
Add to this the disappointment over last Friday's U.S. payrolls, which suggested unemployment has been much higher than initially estimated, and risk aversion is likely to dominate sentiment.
However, as European trading got underway Monday there has been a slight rebound.
At 0745 GMT, the euro was up at $1.3678 from $1.3663 late Friday in New York, according to EBS. The dollar was up at Y89.50 from Y89.38, while the single currency was up at Y122.39 from Y122.14.
If it doesn't and the contagion among peripheral euro-zone countries continues, the threat of another more serious global financial crisis will grow rapidly. And, the euro will suffer even more.
See the euro's fall against the dollar since the start of the year:
After the debt problems of Greece, Spain and Portugal, which will damage the performance of Northern European banks, there are the deficit funding shortfalls faced by California and even the U.K. if credit conditions start to tighten again.
Even Japan, which is having little luck in kick-starting its economy, could well be in line to tumble if the dominoes start to fall.
For the European Union, last week was a watershed.
Up until that point, financial markets appeared convinced that reassurances from Brussels over the Greek budget would be enough to keep the investment community sweet.
But those reassurances weren't enough.
Greek plans to reduce the country's budget deficit were being seen as unworkable, even before Greek unions waded in with massive strike plans for later this month.
And, instead of just pulling back from Greece, investors are now pulling back from Spain and Portugal as well. These two other debt-riddled countries could have an even more difficult time than Greece in curbing their debts, given the spending power in the hands of regional councils.
As the cost of insurance against a default by these three countries soars to new record highs, the outlook for their creditors--largely banks in Germany--grows more ugly.
"With the escalation of the peripheral crisis, the equity needs of European banks will increase by the day," warned Hans Redeker, head of foreign exchange strategy at BNP Paribas in London.
The net result would lower bank lending and see a return to credit crunch conditions that make the threat of global contagion even worse.
So, all eyes will be on the EU to essentially stop the rot.
Last week's statement of reassurance hasn't worked, so Brussels will have escalate its efforts to prevent the spread of risk aversion even further.
"Ultimately, we do not expect the EU to stand idle," said Jacques Cailloux, a currency strategist with The Royal bank of Scotland.
"We think (EU efforts) would take the form of financial help should contagion escalate across the region and impact the financial system," Cailloux added.
Anyone expecting the G7 finance ministers meeting in Canada over the weekend to come up with some rescue plan will have been sorely disappointed, with ministers failing to say anything new.
Add to this the disappointment over last Friday's U.S. payrolls, which suggested unemployment has been much higher than initially estimated, and risk aversion is likely to dominate sentiment.
However, as European trading got underway Monday there has been a slight rebound.
At 0745 GMT, the euro was up at $1.3678 from $1.3663 late Friday in New York, according to EBS. The dollar was up at Y89.50 from Y89.38, while the single currency was up at Y122.39 from Y122.14.
- 8 February |
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