Global Agenda: New year, old crisis

Say “Hi” to 2012 – you’ll soon look back on 2011 as “the good old days.”

By PINCHAS LANDAU
Euro symbol near European flags 311 (photo credit: REUTERS/Francois Lenoir)
Euro symbol near European flags 311
(photo credit: REUTERS/Francois Lenoir)
Here we are, a few days into 2012, and it’s safe to say that although the dateline has changed, nothing else has. What have the opening days of the new year brought? In the markets, the euro had a happy tenth birthday on the first day of the year, when it rose smartly – only to immediately fall back to, and through, the level at which it ended 2011 and then carried on downwards.
Interestingly, at least for those many people who are looking for some alternative(s) to the euro, there was indeed some difference in the way various European currencies behaved. The sterling was much stronger than the euro, at least at first, but it couldn’t maintain that relative strength. The Swiss franc at no time diverged from the euro, either to the upside or the downside. The Swedish and Norwegian kroner, on the other hand, did display relative strength versus the euro; their economies are indeed in much better shape than their southern neighbors and their banks are far more robust. But this was a very relative distinction, because all the European currencies were weak versus the dollar, so that the differences were ultimately minor.
But these differences are nevertheless important, and they become far more prominent in the market for sovereign bonds – which, because of the façade of unity imposed by the single currency, has now become the primary vehicles for assessing the relative merits and demerits of each country within the euro zone. Thus, Italy once again returned to center-stage as the yield on its bonds sank. But its negative prominence was challenged by France, because the deterioration in the standing of French government bonds was more rapid (this week) than that of Italy.
The differences showed through strongly in the stock markets, too. This is quite a recent phenomenon, because until the crisis became acute, the European stock markets would largely move in tandem – if upwards, then they all moved up at much the same clip, and similarly to the downside. Now, however, the same differences that are so painfully apparent in the bond market are showing through in the equity markets. Thus, the German market rose strongly and fell little over the last few days, whereas the French market rose by much less when the trend was up and fell much more when it switched to down. As for Italy and Spain, they have been relatively weak – even versus other European markets – for some months, and they resumed this pattern immediately once the markets reopened after the holidays.
The fact that stock market indices are now displaying the same differences as sovereign bond yields is in no way surprising. Underlying the weakness in both markets is the threat –expectation is probably a better term by now – that major banks are on the verge of collapse. The Italian banks are the most vulnerable and trading in their stocks is frequently halted on the Milan exchange. Spanish banks are also very wobbly, and French banks less so. The same holds true for insurers and, given the relative weight of the financial sector in most of the European bourses, explains why equity markets are now mirror images of bond markets not just in terms of the direction they go, but also in terms of relative strengths and weaknesses of different countries.
The markets are thus a measuring instrument for the health of their underlying financial systems and of the wider economies that each one represents. It is easy to forget this in the face of the massive volatility we have witnessed in recent months, but when you examine the relative performances of the various stock and bond markets over a longer period – a year, say – that reality becomes very apparent. It is true not just for the obvious cases of the weakest countries – such as Portugal, Spain and Italy – but applies to seemingly strong economies as well.
For example, over the past five months, since the market crash of July-August, the direction of the stock markets of Denmark and Austria has been completely different – despite the fact that both countries are viewed as strong economies in the greater German sphere of influence. The Danish stock market has been trying hard to go up, while the Austrian one has been consistently weak and has made repeated new lows. The explanation lies in the relative states of each country’s banking systems – specifically, the fatal exposure of Austria’s banks to Hungary. When one adds the fact that the big Austrian banks are owned in part or in whole by Italian banks, another piece of the jigsaw puzzle falls into place.
Meanwhile, in the political sphere, more meetings, summits and conferences are on the agenda. And, to confirm that really nothing at all of importance has changed, the Greeks are still incapable of either paying their debts or of implementing the austerity program(s) that they have committed themselves too – so that the deadline for deciding whether to go ahead with the aid package granted them last summer has been pushed off for three months. Fudge, extend and pretend still rule the European roost, while confidence sinks ever lower. If you were away, you didn’t miss anything, so welcome back and say “Hi” to 2012 – you’ll soon look back on 2011 as “the good old days.”
landaup@netvision.net.il