9/26/12 – Europe Troubles Continue to Cook

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 26, 2012 10:22:05 AM

and tagged Europe, Yesterday's News

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Even though it is not on the front pages in the U.S., Europe continues to simmer and deserves an update. Spain did make the front page of the Financial Times (FT) with “Catalonian push for independence piles pressure on Spanish premier,” highlighting the problems the regions are creating for any bailout of the country. Not only that, but existing deals are also starting to show cracks; “Deal over bank bailout thrown into doubt” (FT, p. 2) discusses how Germany, Holland, and Finland are backing away from components of the bank bailout deal for Spain and Ireland that they were thought to have agreed on. Nothing solid yet, but a troubling sign.

That troubles are hitting the general population is shown not only in the recent protests in Catalonia, but also in “Protesters Take to the Street in Madrid” on page A4 of the New York Times (NYT), which references the regional protests. The Spanish government is attempting to address the issue, per “Spanish Leader Outlines Fresh Overhauls” on page A12 of the Wall Street Journal (WSJ), but markets are not convinced, as seen in “Debt Auction Shows Unease Over Spain’s Prospects” (NYT, p. B2). Spain is the bellwether here, and Hurricane Spain continues to spin.

Don’t forget about Greece either—the WSJ article “Greek Debt Odyssey Returns to the Fore” (p. C14) has a good summary of how Greece has not met its commitments, and how negotiations to do so are pretty much deadlocked. While Greece is seeking an extension, and France supports it, Germany, Holland, and Finland—as mentioned above—are very unwilling to put more money in the pot. We really are now getting to the point where some very hard decisions have to be made.

The hardest part will be either federalizing the budget, which will require a huge loss of sovereignty for every nation involved—“Euro Zone Considers Central Budget to Fix Cracks” (WSJ, p. A12)—or some form of breakup. A Greek exit remains the most probable, but a potential German exit is getting more attention, as discussed in an op-ed in the FT, “Why exit is an option for Germany” (p. 11). The author, Martin Wolf, is an excellent and respected commentator, and if he is writing about it, others are thinking it.

Right now, the markets continue to price in an assumption that European troubles are contained. That might be the case, but with the continuing troubles in Greece and Spain—among others—and the waning patience of the electorates in Germany and particularly Finland, it does not seem like that is a guaranteed outcome.

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