Wednesday, August 03, 2011

Europe Update

by Bill McBride on 8/03/2011 09:22:00 PM

Also from CNBC: Japan Intervenes in FX Markets, Dollar Jumps Versus Yen; Finance Minister Holding Emergency Press Conference

From Floyd Norris at the NY Times: The Truth About Fundamentals

Herewith I offer a fundamental law about fundamentals:

If a government feels a need to proclaim that its economic fundamentals are strong, they are not.
And then he quotes Italian Prime Minister Silvio Berlusconi:
“Our economy is healthy. The country is economically and financially solid.”
Of course some people will also point to this comment by White House Spokesman Jay Carney today:

“We do not believe that there is a threat of a double-dip recession.”

I don't think there will be a double-dip in the U.S., but as Paul Krugman noted there is definitely a threat.

Back to Europe. As bond values fall, banks in Italy and Spain that hold many of their home country's bonds, are having funding problems. They are having to turn to the ECB for funding. Another key point from the NY Times: Europe’s Banks Struggle With Weak Bonds
[T]he European Financial Stability Fund, Europe’s so-called bazooka rescue fund that it endowed last month with the powers to recapitalize weak banks, will not be able to offer any such aid for at least two months.

According to a stability fund official, staff members there are working night and day to recast the entity, but do not expect to be finished until the end of August. At that point, it must be approved by the parliaments of the 17 countries that use the euro currency.
The markets may not wait.

Here is a graph of the 10 year spread (Italy to Germany) from Bloomberg. And for Spain to Germany. Although the spreads eased slightly today, if the spreads increase much more, Italy and Spain might be knocking on the bailout door.

Earlier:
ADP: Private Employment increased 114,000 in July
ISM Non-Manufacturing Index indicates slower expansion in July
CoreLogic: Home Price Index increased 0.7% in June