The Next Dubai
The spotlight has shifted to Greece and Ireland. Global bond investors are demanding higher yields over German bonds until credible plans for reining in outsized fiscal deficits have been delivered and adequately executed. Since Greece’s fiscal deficit as a share of GDP is not that much larger than the U.K. or U.S. deficits, professional investors are also probing these governments’ bond markets as possible next fault lines.
If we follow the financial balance approach that Dr. Kurt Richebacher employed, then we have to anticipate Greece and Ireland will face challenges on two fronts.
First, the strength of the euro is making it more difficult for nations in the eurozone to run trade surpluses. Indeed, on a trailing 12-month basis, the improvement in the U.S. trade balance has been a detriment to Europe… What was once a $150 billion leakage of income out of the United States into Europe is now closer to a $70 billion flow. Those are only the direct effects — no doubt they are multiplied through foreign economies, as businesses in the tradable goods sector have faced weaker revenues and weaker profits…
Second, in the case of the so-called peripheral states in the eurozone (Spain, Italy, Ireland, Greece and Portugal), we must add the increasing pressures to rein in fiscal deficits on top of the weaker trade balances. Unlike the United States and the United Kingdom, none of these states has a sovereign currency. They cannot use currency depreciation to regain global market share. None of these states has an independent monetary policy. They are beholden to the decisions made at the European Central Bank, which will reflect the political compromises judged adequate for the region as a whole…
We see a recipe for increasing social conflict and political instability to arise in the peripheral states of the eurozone. This is not something we state lightly, but the only other way we can see out of the quandary is if global growth takes off in early 2010 and lifts some of the pressure.
Comments: