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World Week Ahead: Germany's discontent

Monday 12th September 2011 1 Comment

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As a sign of skepticism that policymakers can get ahead of the curve, President Barack Obama’s near half a trillion dollar proposed boost to the U.S. economy was dismissed almost as soon as he finished speaking.

By Friday’s close, the focus was squarely on the euro zone’s debt situation, in the wake of the resignation of the chief economist of the European Central Bank and renewed chatter that Greece was poised to default.

French banks are reportedly bracing for a round of credit downgrades by Moody’s Investors Service. And International Monetary Fund chief Christine Lagarde, who last week urged banks to reassess their capital positions, was on Sunday downplaying a draft IMF document showing a US$273 billion in European banks’ capital.

"There has been misreporting about the 200 billion euros, this number is tentative," Lagarde told a news conference after G7 and G8 finance talks in the southern French city of Marseille.

Tentative is an appropriate word.

On Friday the Chicago Board Options Exchange volatility index surged 12% to 38.5. What a chart of the VIX shows is that volatility appears to be making itself at home.

The wave of negativity that washed through the markets on Friday, sent shares sharply lower in both Europe and on Wall Street.

“The market is very jittery,” Jason Hsu, who oversees US$83 billion as chief investment officer at Research Affiliates LLC in Newport Beach, California, told Bloomberg. “It’s hoping for good news, but it’s responding very quickly to anything that doesn’t indicate a path to recovery.”

According to Bloomberg data, the Standard & Poor’s 500 Index is now within 29 points of a bear market.

It’s not that everyone is shorting the market, or betting that stocks will fall lower. It’s that it’s hard to get any positive momentum.

With Obama’s new economic plan a case in point. Economists suggest it would be a positive boost to growth. The lack of any political will to reach a compromise has doused the likelihood of the plan proceeding with cold water.

The situation isn’t any better in Europe, where there are calls for a United States of Europe to emerge. Yet Juergen Stark’s decision to abruptly quit the ECB because of his reported discontent over the central bank’s decision to buy bonds of the euro zone members is being interpreted by some as a sign of a widening rift in Europe.

There’s a belief that Greece as well as Portugal, Ireland, Spain and Italy continue to drag their feet on cutting spending and reining in their deficits.

“If the ECB is hamstrung by a lack of consensus, that is the risk," said Jean Pisani-Ferry, director of the Bruegel economic think-tank in Brussels. “It looks as if these people can't even sit around the same table and work things out."

So perhaps the focus should be less on throwing Greece out of the euro zone. The easier solution may be for Germany to walk out the door or at least threaten to do so.

It will be another week yet until Federal Reserve Chairman Ben Bernanke and his colleagues meet and debate whether there is any point in beginning a third bond-buying program. That prospect may keep volatility somewhat in check the next five days.


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Comments from our readers

On 12 September 2011 at 2:55 pm walgert said:
I personally feel for the Germans, they must feel like the Milkcow of the EC. I wish Angela Merkel had the spin to threaten to walk out of this mess and go it alone.
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