European leaders have claimed the currency zone has moved out of crisis umpteen times in the past, only to be proven wrong later. The situation can be compared to a volcano that has lied dormant for a while only to become active all of a sudden, says Michael Hewson of CMC Markets. About a year ago European Central Bank President Mario Draghi had said he would do whatever “it takes” to preserve the euro. The markets are getting to a point where he might have to put the money where his mouth is, Mike said.
Asked if an annual declaration similar to last year’s could be expected, Mike said he doesn’t think it will suffice anymore. At some point, the markets are likely to test the efficacy of the OMT program (Outright Monetary Transaction program). The recent spike in Portuguese bonds, following the political turmoil in Lisbon, also indicates to an austerity fatigue in Europe. But an exit route (from the prolonged austerity program) is still not in sight because the debt levels are still unsustainable.
Both Portugal and Greece are struggling with high levels of debt. The International Monetary Fund, which is one of the constituents of the so-called troika, has a policy wherein it doesn’t participate in a rescue program if the debt levels are high. Portuguese debt is supposed to come down to 125 percent of GDP by 2015, but clearly even that’s not sustainable. So the IMF is most likely to refuse to participate in any bailout program again, Mike observed.
Asked if the Bank of England will announce any increase in its assets purchase program, Mike answered in the negative. Newly appointed BoE Governor Mark Carney’s reputation as a lucky central banker is quite apt because all the economic data suddenly came in really good when he took over.
The latest quarter posted a 0.3 percent GDP growth and looks like the second quarter is on the way to register a even higher 0.5 percent growth. However, Carney’s biggest challenge would be keeping bond yields down, which have shot up recently to about 2.4 percent (10-year British Gilts) due to the turmoil in Portugal and Ben Bernanke’s comments, he added.
Asked if investors are ready to cope with the turmoil being created by Bernanke’s tapering statements, Mike said it’s difficult for the markets to digest such news. However, even the Fed is in a tight spot because it doesn’t want borrowing costs to go up.
All the central banks across the world are facing the same problem if anything; they all want to keep borrowing costs lower. The ECB’s biggest challenge now is to keep interest rates down in the peripheral nations because Europe is starting to show some resemblance to some sort of a recovery. The latest Spanish manufacturing PMI data, which came in higher than Germany’s, is a good indicator of that, he concluded.
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