The following is a comprehensive list of key events to watch over the next several weeks – events that could have very significant bearing on how the euro sovereign debt crisis evolves.
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Europe took August off. Today, it is America's turn, as the country celebrates Labor day, although judging by recent trends in the new 'Part-time" normal, a phenomenon we have been writing about for years, and which even the NYT has finally latched on to, it would appear the holiday should really be Labor Half-Day. After today the time for doing nothing is over, and with less than one month left in the quarter, and trading volumes running 30% below normal which would guarantee bank earnings in Q3 are absolutely abysmal, the financial system is in dire need of volume, i.e. volatility. Luckily, things are finally heating up as the newsflow (sorry but rumors, insinuations, innuendo, and empty promises will no longer cut it) out of various central banks soars, coupled with key elections first in the Netherlands and then of course, in the US, not to mention the whole debt-ceiling/ fiscal cliff 'thing' to follow before 2012 is over. So for those who still care about events and news, here is the most comprehensive summary of the key catalysts over the next week and month, which are merely an appetizer for even more volatile newsflow in October and into the end of the year.
We fear that the data given to us by Europe is erroneous. The resident institutions in the world where one thinks that accurate data may be found for Europe are Eurostat and the Bank for International Settlements. Spain and her official admission of "dynamic provisioning" has raised all kinds of questions in our mind and has unsettled our belief in the data provided by Europe. It is now quite apparent that the numbers for all of the Spanish banks, are inaccurate. It may well be that the EU or the ECB could bury what may be found but it would be awfully tough for the IMF to hide any material breaches. Even when considering the IMF however, certain questions are raised. Their projections for Europe and each and every country in Europe have been wrong, dead wrong and far too optimistic. This then would explain why Europe is in such trouble because if the data is not truthful then the truth, as most often happens, leaks out from underneath that which is hidden and provides the outcomes that the Europeans have tried so hard to avoid. Whatever the real numbers are, they are providing the consequences that result from their actuality.
The data out from Spain this morning should be one serious wake-up call for anyone exposed to Europe. The fourth largest economy in the Eurozone is getting hammered and for anyone that has doubted that they will need a full scale bailout; think again. The numbers are a disaster. One year ago the Central Bank of Spain was borrowing $71.53 billion from the European Central Bank. In the last figures available, July, the Central Bank of Spain was borrowing $530.8 billion (an increase of 86.5%) from the ECB either directly or through the Target2 funding which impacts the Bundesbank and Germany quite directly. In other words Germany is now at a huge risk which is not just their 22% ownership of the ECB but a direct and full risk of impairment or default by Spain in the Target2 funding provided by the Bundesbank.
It may come as a surprise to some of our younger readers, that the Eurozone, and its associated currency, is merely the latest in a long series of failed attempts to create a European currency union and a common currency. Three of the most notable predecessors to the EUR include the Hapsburg Empire, the Soviet Union, and Yugoslavia. Obviously, these no longer exist. Just as obvious, all of these unions, having spent time, energy, money, and effort to change the culture and traditions of member countries and to perpetuate said unions, had no desire, just like Brussels nowadays, to see these unions implode. The question then is: what happened after these multi-nation currency unions fails. VOX kindly answers: "they all ended with disastrous hyperinflation."
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Russia and the southeast Asian countries are analogs for Greece, Spain, and Cyprus, with no particular association between their references within the timeline. The timeline runs through the Russian pain; things begin to turn around after the timeline ends. This is meant to serve as a reference point: In retrospect it was clear throughout the late-90s that Russia would default on its debt and spark financial pandemonium, yet there were cheers at many of the fake-out "solution" pivot points. The Russian issues were structural and therefore immune to halfhearted solutions--the Euro Crisis is no different. This timeline analog serves as a guide to illustrate to what extent world leaders can delay the inevitable and just how significant "black swan event" probabilities are in times of structural crisis. It seems that the next step in the unfolding Euro Crisis is for sovereigns to begin to default on their loan payments. To that effect, Greece must pay its next round of bond redemptions on August 20, and over the weekend the IMF stated that they are suspending Greece's future aid tranches due to lack of reform. August 20 might be the most important day of the entire summer and very well could turn into the credit event that breaks the camel's back.
Bulgaria speaks up in the euro fiasco. A balanced budget, growth, and an income tax rate of 10%?
- U.S drought wilts crops as officials pray for rain (Reuters)
- Obama backs aid for drought farmers (FT)
- Greek leaders identify two-thirds of spending cuts (FT)
- Central bankers eyeing whether Libor needs scrapping (Reuters)
- Markets Face a Life Sentence of Hard Libor (WSJ)
- World Bank chief warns no region immune to Europe crisis (Reuters)
- China big four banks' new loans double in early July (Reuters)
- Nokia Loss Widens as Smartphone Sales Slump (WSJ)
- Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)
In the US and Europe we have slowly come to the realization that traditional accommodative economic policies leave, and have left, the real economy limp. Wildly divided governments don't help, but beyond the fact that western decision making bodies are polarized, it is abundantly clear that the panacea for the global economy is not even on the table right now. The western world has been thrown into a bout of sovereign game theory, and by the constructs of game theory itself, one country will "win," while everyone else will lose to varying degrees. But that we are such a highly integrated global economy--the reason the whole world is heading towards recession right now--means that a solution must incorporate every economy around the world. The current game Europe is playing is bound to fail because if one country gets their way, others lose by definition.