€uro view: Light at the end of the tunnel may be oncoming euro train
As this is being written, it feels as though we are on the edge of something unpleasant.
A tipping point appears to have been reached. Fabio Capello enjoys more confidence from the Football Association than the euro enjoys from the rest of the world.
To be fair, it is not just the euro. There are signs that the global recovery is already stalling and this time around there is far less in the global authorities’ coffers to help it.
"The risk barometers are flashing red," said David Oakley in the Financial Times. An index that measures future volatility in the S&P 500, the Vix, has surged of late but, as yet, is still some way off the levels that it reached in 2008.
"It feels like the summer of 2007...when interbank lending was just starting to freeze," says Jack Ablin of Harris Private Bank.
We tend to agree with Jack, as we have said in previous editions that the Greek debt crisis is very similar to the collapse of Bear Stearns – a big enough event in its own right but a precursor to bigger ones to follow.
The main concerns revolve around sovereign debt, the future of the euro, European banking solvency and a global "double-dip". One would be bad, but it is difficult to see how the existence of one would not lead to another and then the other.
Most commentators now seem to view the euro as a dead man walking. These are in many cases the same commentators that saw it as the new reserve currency for the world little more than 18 months ago, and who were reading the last rites for the US dollar. Don’t get us wrong, it is in trouble, but is it really imminently about to disappear? We’d say not.
Ted Scott of F&C Investments describes "act one" of the credit crunch as being "the explosion of debt and its associated derivative products that culminated in the collapse of Lehmans and the subsequent global recession... The response by governments... has been regarded as a success but one of the consequences of governments’ aggressive monetary stance is that debt has been transferred from the private to the public sector."
'Act two' of the credit crunch is now a fear over the solvency of countries and their ability to service their debt, rather than the solvency of the banks. Yet this isn’t the whole picture because the solvency of the European banks is interwoven with the risk of sovereign default.
According to the Bank of International Settlements, British-based banks have £158bn tied up in Ireland and £103bn in Spain. German, French and other European banks have far more exposed to Greece, Spain and Portugal. This causes suspicion between the banks themselves and a freezing of lending at the very time that it is needed in order to oil the recovery. A projection of this behaviour leads inevitably to deflation, the effects of which we have all seen in Japan over the past 20 years.
