Swinging back towards Greece

The European Central Bank
The European Central Bank

In the summertime when the weather is fine euro leaders take their break so after six months during which the unwelcome financial spotlight had shone on Spain, it swung in late August back towards Greece. It was not that investors no longer had any concerns about Spain, more that they find it difficult to panic about more than one thing at a time. With most of Europe – and most European political leaders – on their summer holidays investors recognised that there could be no realistic expectation of anybody doing anything to move the situation forward until September.

Mario Draghi, the president of the European Central Bank, did his best to improve things in late July. At a speech in London he said the ECB would do “whatever it takes” to preserve the euro, “and believe me, it will be enough”. A week later he reiterated his position after the monthly meeting of the ECB governing council. The Bank and the EU bailout funds would, together, apply their theoretically unlimited spending power to support the price of Euroland sovereign bonds, thereby lowering borrowing costs for Spain and Italy.

Investors were quite impressed by the strategy and the euro strengthened in early August. In the space of little more than a week it rose by nearly three cents against the pound and by a cent and a half against the US dollar. But then it all went cold. In the following fortnight the euro made no further ground against the dollar and it fell back by two cents against the pound. In late August the euro was a cent and a half higher against the pound and two and a half cents higher against the dollar than its position a month earlier. Compared with its levels at the beginning of June the euro was unchanged against the dollar and two cents weaker against the pound.

As they have during most of the last couple of years, investors are paying more attention to the political manoeuvrings in the euro area than they are to the minutiae of economic data. As long as the figures announced are within shouting distance of analysts’ forecasts they tend not to make waves. Only a handful of times have off-base ecostats sent currencies adrift.

On one occasion Germany and France reported better than expected figures for economic growth in the second quarter of the year. Investors became excited that Euroland as a whole might avoid a negative reading but it was not to be; euro area gross domestic product shrank by -0.2% in Q2.

At another time, Britain managed to deliver, on successive days, three sets of economic data that exceeded analysts’ forecasts. Inflation, unemployment and retail sales were all more positive than expected for the pound. Sterling went up on the news but was unable to hang onto its gains. Latest news also confirmed that the UK was far from recovering as UK disappointed with the release of data on public finances and factory orders. Unexpectedly public sector net borrowing went up by .6bn so the UK wants its people to spend more!! Not sure where the money is going to come from particularly when you consider UK banks are considering charging you for the “benefits” you get with your UK bank account.

So investors spend their time watching Brussels, Madrid, Frankfurt, Berlin and Athens for hints of what might – or might not – be coming next. In the immediate future they will be keen to find out whether Prime Minister Antonis Samaras can persuade Euroland’s movers and shakers to relax the repayment terms for Greece’s bailout borrowings.

The next scheduled big deal is the ECB governing council meeting in Frankfurt on 6 September. Having been wound up to expect overwhelming force from the ECB in support of Spanish and Italian government bonds, they will be looking for something serious. Experience suggests they will probably not get it, and that Sig Draghi will simply restate his master plan with a warning that national politicians must get on with their budget reforms and banking union. That same experience also suggests a meek response from investors, who have become accustomed to living on a diet of jam tomorrow.


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