A fascinating article by Fortune Magazine! A full read is mandatory.
Given investors’ confidence in its sovereign debt, and its image as Germany’s principal partner in the sturdy, sensible “northern” eurozone, you’d think that France endures as the co-guardian of the endangered single currency. Indeed, the rate on France’s ten-year government bonds stands at just 2%, just a few ticks above Germany’s. From a quick look at the headline numbers, France doesn’t appear nearly as stressed as the derisively titled “PIIGS,” Portugal, Ireland, Italy, Greece and Spain. So far, the trajectory of its debts and deficits isn’t as distressing as the figures for the PIIGs, or even the U.K. and the U.S.
France’s vaunted role in the creation and initial success of the euro enhances its aura of solidity. It was President Francois Mitterrand who in 1989 persuaded Chancellor Helmut Kohl to back monetary union in exchange for France’s support for German reunification. In fact, France and Germany, along with the Netherlands, dramatized their commitment by effectively uniting the franc and deutschemark in a currency union that held their exchange rates in a narrow band, and heralded the euro’s birth in 1999. In the boom years of the mid-2000s, France virtually matched Germany as the twin growth engine of the thriving, 17-nation eurozone.
A deeper look shows that France is mired in no less than an economic crisis. The eurozone’s second-largest economy (2012 GDP: 2 trillion euros) is suffering more than any other member from a shocking deterioration in competitiveness. Put simply, France’s products — its cars, steel, clothing, electronics — cost far too much to produce compared with competing goods both from Asia and its European neighbors, including not just Germany but even Spain and Italy. That’s causing a sharp and accelerating fall in its exports, and a significant decline in manufacturing and the services that support it.
The virtual implosion of French industry is overlooked by analysts and pundits who claim that the eurozone had dodged disaster and entered a new, durable period of stability. In fact, it’s France — not Greece or Spain — that now poses the greatest threat to the euro’s survival. France epitomizes the real problem with the single currency: The inability of nations with high and rising production costs to adjust their currencies so that their products remain competitive in world markets.
So far, the worries over the euro have centered on dangerously rising debt and deficits. But those fiscal problems are primarily the result of a loss of competitiveness. When products cost too much to make, the economy stalls or actually declines, so that even modest increases in government spending swamp nations with big budget shortfalls and excessive borrowings. In this no-or-negative growth scenario, the picture is usually the same: The private economy shrinks while government keeps expanding.
That’s already happened in Italy, Spain and other troubled eurozone members. The difference is that those nations are adopting structural reforms to restore their competitiveness. France is doing nothing of the kind. Hence, its yawning competitiveness gap will soon create a fiscal crisis. It’s absolutely astonishing that an economy so large, and so widely respected, can be unraveling so quickly.
The world’s investors and the euro zone optimists should awaken to the danger posed by France. La crise est arivée.
You can read the full article here.
In Italy, Parmesan as Collateral for Bank Loans (NYTimes)
I guess now we all know why the world’s financial system is collapsing – bad cheese Amico!
Please refer to the story below:
Portugal will be the next Greece, predicts Mohamed El-Erian (The Guardian)
El-Erian, who is also co-chief investment officer of Pimco, said he expected Portugal’s first bailout package to be insufficient, prompting it to ask the EU and IMF for more money.
“Then there will be a big debate about how to split the burden between the EU, creditors, the IMF and the European Central Bank. And then financial markets will become nervous because they are worried about private sector participation,” he said.
Lets look at the unemployment rate in Greece and Portugal (thanks to Google, it is much easier). As a note, I am trusting Google data feed for now, but I plan to take a look into where the data is coming from for future analysis.
The unemployment numbers are minimized by Governments, and growth is usually exaggerated. Given the current polticial situation in the Euro Zone (aka Shit), it seems that Mohammad El Erian is correct in making that call for Portugal following Greece’s path. The next question is, what other countries will follow Portgual?
I found another fun “Debt” clock – thanks to The Economist. Check it out here. (The funny thing is that Greece has 141% debt to GDP ratio, Portugal: 94.6%, Spain: 78.4%, Italy: 121.6%, France: 92.5%, Germany 77.8%). As the debt increases for one country, then it has to be an asset (loan out by) another country, which will be Germany in most of the cases. Is the last card Germany?
The markets were hit hard last week on fears of Italy’s growing problem with the borrowing costs rising on their bonds. This lastest fear on Italy only adds to the fire of contagion and fear spread through the EU Region. Last week was the worst pre-Thanksgiving for our Stock Markets since 1932. Last weeks deep sell offs in commodities and stocks were driven by risk off trading aversion, due to the events in Italy and Greece.
The markets have been stuck in a pattern with bad news coming out of Greece and Italy, and other EU region countries sending the markets into a risk off mode. When the markets going into risk off mode, it leads to deep sell offs in our equity markets and commodity markets as well as hits markets around the world. Some fears of a China Slowdown, also rocked the markets last week. Worries that China is slowing down are fueling the fire that the Global Economy is on the brink of recession and headed for trouble.
This markets can turn though on a dime if the news and events improve overnight. It is now Sunday night, and the news out of Europe is that the IMF is preparing an emergency loan package for Italy in case things get really out of hand and they have the money they need to keep their country operating and to prevent a default on their debt.
This news is changing the market sentiment around the world, and is fueling a large surge in our equity futures. Our Equity Futures and commodities are rising on the news as traders go back on a risk on mentality with good news from this loan, and with a great sales number for our Retailers for Black Friday Sales.
I would urge traders to be cautious and to wait this out. One more piece of bad news out of Europe can send us right back into risk off mode and fuel another sell off.
For now it appears the market will go back and forth until there is either a huge effort that really stops the fears of the EU debt crisis such as a large Quantitative Easing program developed by the European Central Bank.
Until we get such a progam the markets will move in lockstep with what is going on out of Europe.
Beta Market Analyst