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Ad Hoc Commentary

Wednesday August 15th 2012

Wednesday, August 15th 2012
Beggars Becoming Choosers, Lenders Becoming Losers
This is a complex, interconnected global economy and even with the problems confronting Europe, right here, right now, we still take time to ponder and fret over Chinese or American data points. Today the worry will be over US Industrial Production. (More on that in moment).
European equities are tracking lower this morning as the worrying signals form the Euro Zone seem to arrive just one after the other. This is taking the shine off last weeks performance. The broad European Stoxx 600 has added 15% from the year low on June 4th on hopes that the ECB will actually step up to the plate and do something spectacular to reduce the stress on nations such as Italy and Spain.  Since Draghi's combative statements in London and at the ECB press conference it has appeared as though the equity markets are happy to range trade. That is most likely going to be the dominating theme for another 2 weeks until European financial centres return to full strength in September.
We have argued for a long time that the Kingdom of Spain was going to request a full scale sovereign bailout. Of course for many months PM Rajoy has said that such a step was not required. However, we hera today from European Economic and Monetary Affairs Commissioner, Olli Rehn that Spain is seriously considering such a request.
“...The Spanish government has an open mind on this issue, but no decision has been made...We stand ready to act if there is a request. ...”
We know that if ever the CB does get around to soaking up the debt of Spain it hopes to focus on the front end ...but already PM Rajoy has said that he would expect paper at the middle maturity mark to be similarly acquired.
It might be appropriate for someone of authority to lean on Spain and if it comes to it, Italy as well and remind these nations that if assistance is offered, it should be done so on the terms that are broadly determined by the party (s) that are providing the assistance. For Spain to start suggesting what elements of a rescue plan it wishes to choose implies that there is a menu on offer. There is not and as soon as any nation in need of financial assistance is told this home truth the sooner we stop having the tail wag the dog.
With that in mind we notice that it is being suggested that Greece is to request from France and Germany approval to gain a 2 year extension on the implementation of its latest austerity programme to improve growth chances.
The single nation that has occupied more summit time and news lines is wilting as GDP collapsed 6.2% last quarter. The coalition government are seriously floundering in their attempts to find EUR 11.5Bn in spending cuts that need to be implemented during 2013 and 2014 as per the under the current Troika bailout agreement that was signed last February.
The alteration to the plan is simply unbelievable.
What was agreed: Reduce the budget deficit to be cut annually by 2.5% of GDP.
Greece proposes: Reduce the deficit by 1.5% not annualy but over 4 years! This in effect means that Greece has need for additional funding through 2014 up to EUR 20bn. the government say this can be facilitate via an existing IMF loan, issuance of Treasury Bills and postponement of loan repayments.
If the Troika say yes to this...then before 2012 has run its course there will yet another request from Greece.
Something has to be said quite firmly to Greece, that something is "No! Please leave and shut the door on your way out of the Euro."
But it won't be said, the Euro Zone and all the worthies that claim to lead it it are scared witless as to what inflection vectors the shrapnel from a Greek would take.

In the US a report at 14:15 BT will show factory, mine and utility activity gained 0.5% during July following a 0.4% gain in June. This will follow the  "Empire State Manufacturing" release from the Federal Reserve Bank of New York at 13:30 BST that should report activity in New York State  in August at about the same pace as in the prior month.
Looking ahead in our connected world:
Sadly the general forecast for the rest of 2012 is slipped as GDP disappointment will appear from all the critcal economic regions. However, amid the political vacuums that will exist in the USA till November if not January and Italy until April one can expect that the central banks will look to be active and sek to use QE and bond market intervention engineer a small recovery towards year-end.
The US will chug along at +2.2% which is sub optimal but the bets we can count on and should herald QE3. The Euro Zone will stay mired in recession as regional GDP will contract 0.5% overall in 2012 and we fear the policies in France will begin to be questioned. If the market turn on France it will fall hard. China will find a way, but it is time the rest of the BRICS took their share of the strain. We now have 2 2 year periods where the eyes of the world will be firmly on Brazil and we need to see a tremendous upping of activity to create the infrastructure that will create the needed network for the economy. We also need to see the bureaucracy slashed so that Brazilian enterprise can flourish if and when the state becomes less top heavy.

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