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Sunday, 13 May 2012

Greece is Exiting The Euro Zone?

(Image by antwerpenR via Flickr)
The tail of the European crisis is stinging again. A default of Greece is possible and the euro could sell-off against the majors. J.P. Morgan loss could create a panic wave across the markets. Stocks should decline, but the U.S. economy has still the capacity to improve over the year.

Greece is at a dead end?
In Greece, the political scenario is more fragmented than ever. Forming a functional government will be a great challenge. The new elected parties have addressed the electorate with promises they cannot maintain. A default of the country is now a clear possibility. It will create a precedent in Europe, but also put an end to the huge out-flow of money. In Italy, Mario Monti is doing an amazing job. The challenge is nonetheless enormous. Italian debt is still large (120% of the GDP). Productivity is low and the labor law is overprotective. Political parties have supported Monti’s job so far. However, criticism is mounting. New political elections will be held in 2013 and politicians are already drumming their own political agenda, which does not contemplate more tightening.
In France, Mr. Holland’s victory was not as surprise. As opposed to Sarkozy, Hollande wants to re-discuss the fiscal compact adopted in December 9/12. He expects the E.C.B. to start issuing eurobonds to reduce Europe debt. Finally, he believes the E.C.B. should lend directly to governments instead of giving money to the banks. In reality, France cannot do anything unilaterally and needs to convince Germany to change current path of tight austerity measures. Recession is intensifying in Europe. Demand stays subdued. Funding conditions to the banking sector have improved. Nonetheless, the lending to the private sector is weak. Since 2010, it has fell from 2.8% to 0.6%, according to a recent analysis of M3 movement. Peripheral countries are showing again the worst results.  Government should now support growth.
Selling again?
In the U.S., J.P. Morgan huge loss should create a panic wave across the markets. Stocks should correct.  Nonetheless, U.S. economy has still a chance to improve in the coming months. In April, non-farm payroll rose a tiny 115,000 (145,000 expected), but initial claims fell 365,000 in the last week of April, eventually anticipating stronger results ahead. Consumer confidence is at the highest level in four years. Gasoline prices have receded from the highs and the decline should continue. Long speculative positions held by futures funds are at record high. Unusually, it is a good indicator of important turning points. As opposed to last year, when the CPI rose 4.4% in the first quarter, the Consumer Price Index should be around 1.5% in the first three months 2012.
Angelo Airaghi,
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