EU Pushes for a More Perfect Fiscal Union
The news wires are all about Europe again this morning. The euro (EUR) has picked up some of the ground it lost versus the US dollar last week on speculation European leaders will be able to agree to take some additional steps to stem the region’s debt crisis. German Finance Minister Wolfgang Schaeuble pushed for changes to the EU treaty which will tighten fiscal requirements. I really don’t think the EU will need to make any changes to the treaty, but should simply push countries to adhere to the fiscal standards required in the existing EU treaty.
Frank Trotter showed me a slide Friday afternoon which he is going to be presenting this week at the San Francisco Hard Assets conference. I wish I could include the slide in this morning’s Pfennig, but I will describe it instead. The Maastricht treaty set a limit of 60% for Government debt as a Percentage of GDP. As of May, 2011 only 4 of the 17 countries in the Euro-zone are below this requirement. The worst violators of the debt limit requirements are probably obvious: Greece at 157.7%, Italy at 120.3%, Ireland at 112%, Portugal at 101.7%, and Belgium at 97%. (By the way, Belgium debt was downgraded on Friday following downgrades of Portugal and Hungary.)
But readers will probably be surprised by the next two countries which are currently above the Maastricht limit: France currently has 84.7% debt to GDP and Germany is close behind with 82.4%. Both of the two ‘fiscal leaders’ of Europe have a worse debt to GDP than Spain which is three places better than Germany at 68.1%!
The only countries which currently adhere to the Maastrict treaty limit for debt to GDP are Finland, Slovakia, Slovenia, and Luxembourg, certainly not what most investors would consider the leaders in Europe! The average Euro-zone debt limit as of last May is 87.7%, over 25 percentage points above the required limit. I have gone on a bit too long about this, but the slide really brings home the fact that the treaties of the EU don’t need to be tightened, but instead the adherence to these treaties need to be strengthened. Leaders can talk about new requirements all they want, but what good is this talk if no-one is going to adhere to these new requirements anyway?
But the markets were looking for a reason for the euro to recover, and the talk of a tighter fiscal union was good enough to push the euro up a couple of cents in early morning trading.
Another reason the euro was able to recover a bit this morning was good news on holiday shopping numbers here in the US. Early estimates for the big shopping weekend here in the US show holiday spending was up 16% from last year and will likely set a record. I guess consumers just couldn’t resist all of the bargains out there. Shoppers on average spent $398.62 versus $365.34 a year earlier. Web sales had the largest increases, surging 18% on Thanksgiving day and 26% on Black Friday.
This was good news for the markets, as the US consumer still drives the global economy, and a good holiday shopping season is just what the global economy needs right now. But I still question just how long US consumers are going to be able to keep this spending up. Perhaps they have just shifted all of their spending into the first four days of the shopping season. Unemployment continues to remain near double digits, and consumer confidence is near record lows, so can these shoppers keep it up? I doubt it.
But the markets are all about the here and now, so the higher sales are good news and many investors left the ‘safe haven’ of US treasuries and ventured back into some of the risk currencies. The South African rand (ZAR), Australian dollar (AUD), New Zealand dollar (NZD), and Brazilian real (BRL) are all up over 2% versus the US dollar over the past two trading days.
The kiwi was helped by the results of elections in which Prime Minister John Key was re-elected with a the largest mandate in 60 years. Key’s National Party won 48% of the vote on November 26 up from 45% three years ago. This will pave the way for Key to expand policies aimed at reducing government spending and put New Zealand’s fiscal house back in order. The New Zealand government had to spend more than they would have liked to recover from last year’s deadly earthquake and to deal with the global financial crisis.
With this mandate Prime Minister Key should be able to get the New Zealand economy back on track, and the kiwi will likely benefit from this political stability.
Then there was this. A good friend and former colleague Jack Stapleton sent me a note last Friday which I found pretty amusing. It was a slow trading day on the desk, and Jack read a story which reminded him just how volatile trading can be on these slow days. Jack worked with Vince Cignarella (the author) for many years on a trading desk and was actually in the trading room when the call went out that ‘the carrier was lost’. Here is the story, which Jack pulled off of Dow Jones and forwarded to me last week:
NEW YORK (Dow Jones) — So I’m sitting at my desk this morning, winding up for the day ahead. There’s a guest on CNBC. I have no idea who he is. The sound is off on the TV, as it would be in most trading floors around Wall Street when no policymaker is speaking.
But then I almost fell off my chair. The headline on the CNBC scroll read “Sarkozy Says Collapse in Three Months”
Instinctively, my first thought was “sell something.” But I am no longer in a dealing room. I’m in a newsroom, and my reporter colleagues are bemused, baffled. Could the French President, Nicolas Sarkozy, have said something so extreme about the fate of the euro zone? Where? When? How? And, of course, why? Emails go around the world: Where is Sarkozy speaking? Anyone else have this?
Thankfully, relief quickly comes from a colleague in Canada, who does have the sound up. CNBC is interviewing Olivier Sarkozy, the half-brother to the French president. A sigh of relief. We can all stand down.
Surely there’s a lesson in this for CNBC. It was not the clearest of news flashes and it highlights the headline risk traders are dealing with as the European crisis descends into a new level of panic-inducing madness. Some friendly advice to the news channel: when a person has the same last name as a key policymaker, add his first name, or at least his company affiliation. Olivier Sarkozy works for the Carlyle Group, by the way. So I suppose his opinions do matter, at least more than, say, if Bill Clinton’s loose-cannon half brother, Roger, had been quoted, last-name-only, making drastic predictions in the 1990s.
After almost 30 years trading currencies, I can’t help but think at such times about how dealers react — and it’s always “shoot first, ask questions later.” I’m reminded of a moment during the Falklands War in 1982, when a news headline, or so everyone thought, flashed across the bottom of a Telerate price quote screen: “Carrier Lost.” It appeared that the puny Argentine navy had sunk one of Her Majesty’s aircraft carriers. The sterling dealer shouted “get me calls!” Time to sell the pound.
The dealing room went on auto-pilot. Coffee was spilled, cigarettes put out, and everyone including me, the new assistant to the dollar-swiss trader, grabbed a phone and began shouting out prices to the GBP dealer. Telex operators pounded out requests on typing machines: “Chemical bank: Cable in 5 please?” (For the uninitiated, “cable” is sterling-dollar.) In a vacuum of buy orders, GBP rates came in hundreds of pips lower, as the pound gapped. But then, suddenly, someone shouted “stop.” It was all a mistake.
The two words at the bottom of the screen had nothing to with a downed ship. Rather, the carrier that fed news from Dow Jones reporters to Telerate had gone down.
So back to work we went, scrambling to buy back pounds. Thousands of P&L had changed hands, some up, some down. It was an early lesson in the power of news…and the importance of clarity. Context matters. A carrier was down 29 years ago, but not THAT carrier. Sarkozy did make dire predictions Wednesday. But not THAT Sarkozy.
Thanks again to Jack for sending this to me, it does illustrate just how dangerously volatile thin markets can be. It also served as great pfiller for today’s late Pfennig!
To recap. European leaders are pushing for a more perfect fiscal union, perhaps they should enforce the current requirements instead. Black Friday shoppers were out in force, giving global investors a bit more confidence in the recovery. This confidence had investors moving back into the commodity currencies. New Zealand re-elected PM Key helping to boost the kiwi. And a story that occurred 30 years ago reminds us just how volatile the markets can be.