Epsilon Capital Management’s First Quarter European Economic Round Up/blogger
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PRLog (Press Release) - May 03, 2012 -
This is Epsilon Capital Management’s 4 Part Series on the European Economy for the first quarter of 2012.
Here we will cover the general sentiment of the European markets and look in-depth at Germany.
The first quarter of 2012 witnessed several comforting developments in Europe. Greece fulfilled the pre-condition for securing its second bailout by convincing its private creditors to accept a 53.5% write-off on its debt. The deal eased concerns about a disorderly default by Greece on its sovereign debt. Following up on the liquidity-infusing program it introduced late last year, the European Central Bank (ECB) carried out another round of its Long-Term Refinancing Operation (LTRO), this time handing out to about 800 banks a total of €529.5 billion in 3-year loans at a very low interest rate of 1%.
The move reduced not just the possibility of a financial contagion from Europe in the event of a sovereign default, but also the volatility in the continent’s bond market. Many of the banks that took the cheap ECB loans promptly increased their purchases of higher-yielding government bonds, which brought down, albeit temporarily, the borrowing costs of highly indebted countries such as Spain and Italy. The Euro-zone rescue fund also received a boost during the first quarter. To remain equipped to handle any future bailouts, finance ministers of the single-currency bloc raised the total value of their financial firewall from the current €500 billion to €700 billion.
On the political front, 25 of the 27 European Union (EU) members signed a treaty or “fiscal compact” in early March to enhance the level of budget discipline within the economic bloc. Since the U.K. and the Czech Republic stayed away, the accord took the shape of an inter-governmental agreement and not an EU treaty. The fiscal compact, which must be ratified by 12 Euro-zone member states to take effect, aims to improve confidence in the euro by facilitating budget coordination among members as well as by imposing penalties on those who break fiscal rules.
These positive developments did cause brief spells of optimism but failed to assuage the global financial community completely as investors seemed to sense new threats on the horizon toward the end of the quarter. Their concerns shifted from Greece to other highly indebted countries in the region — chiefly Spain and others such as Italy and Ireland. Although its record-high unemployment rate and the weakness in its banking system are well-documented, Spain triggered a new wave of worries after announcing its budget for this year.
Spain’s budget contained a slew of measures to save €27 billion and turned out to be what the BBC described as one of the harshest austerity drives in the country’s history. But far from impressing, it sparked off worries that such frequent and stringent austerity steps may crimp not just growth but also the government’s ability to reduce its debt, and eventually force the country to seek a bailout.
According to several newspaper articles published in early April, the bigger question on investors’ minds seemed to be whether the Euro-zone was capable of bailing out an economy as big as Spain.
Meanwhile, the economic statistics that were reported from the Euro-zone during the review period, especially from some of its weakest member states, had very little to cheer about. According to Eurostat, the region’s latest unemployment rate increased from 10.7% in January to 10.8% in February. Similarly, the financial information services firm Markit has said that its manufacturing purchasing managers’ index (PMI) for the Euro-zone slid from 49.0 in February to 47.7 in March, the eighth consecutive month of a sub-50 reading, which signifies a contraction in activity.
Germany: Exports hold up, but manufacturing weakens
Data released between January and early April painted a mixed picture of how the German economy fared during the first quarter of 2012. Some of the reported figures, such as those related to industrial output and manufacturing activity, indicated that Europe’s largest economy may have lost steam during the first three months of this year due to an unusually cold winter, rising oil prices, as well as weaker demand for its exports from Euro-zone trading partners and China.
However, other statistics, like trade balance, gave a more optimistic view and hinted that the country likely averted “technical recession” in the first quarter. Germany’s GDP contracted 0.2% in the fourth quarter of 2011 compared to the previous quarter. If the first quarter of 2012 too reports a fall in GDP, the two consecutive quarterly declines will mean Germany is now in “technical recession.”
Whether or not Germany avoided recession in the January-March period is a key topic of discussion for economists and the financial media, at least until the actual GDP figures for the period are reported later this quarter. This is because the country, which remains the primary driver of the Euro-zone economy, had, until December 2011, showed several signs of resilience despite the slowdown in the region. Unfortunately for Germany, some of those signs do not look as encouraging now.