Strategic Briefing | 4.18.12 | Is Euro Risk On The Rise Again?

Debate Grows as Europe Fears Return of a Crisis
New York Times | April 17
The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth. Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.

IMF Raises Global Forecast for First Time Since Early 2011
Bloomberg | April 17
The International Monetary Fund raised its global growth forecast for the first time in more than a year, with the U.S. boosting the outlook while recent improvements remain “very fragile.” The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said today in its World Economic Outlook. It sees growth of 4.1 percent in 2013, up from 4.0 percent. It raised its forecasts for the U.S. to gains of 2.1 percent this year and 2.4 percent in 2013. The report reflects the IMF’s view that the euro area, while still facing an economic downturn and the “hard to quantify” potential risk of a country’s default, has stabilized since last year. The euro area economy is projected to decline by 0.3 percent in 2012, an improvement from the 0.5 percent in the IMF’s previous forecast. China is projected to grow 8.2 percent and Japan 2 percent this year.
Soros warns euro crisis could destroy the EU
Reuters | April 16
Billionaire George Soros warned on Monday that the euro crisis is growing deeper, tearing at the fabric of European Union cohesion, because policymakers are prescribing the wrong remedies. “I’m afraid that the euro crisis is getting worse. It’s not over yet, and it is going in the wrong direction,” Soros said in discussion with Denmark’s economics minister hosted by the daily newspaper Politiken.
Too early to sound the alarm
Manfred J. M. Neumann, Deutsche Bundesbank (Vox) | April 17
Debt finance of public consumption has clearly gone too far in several countries, reaching the borderline of sustainability. Have austerity measures now gone too far as well? This column argues it seems too early to sound the alarm. First, the global economy is likely to grow by 3.3 % this year, and second, reversing the fiscal stance or exiting the euro are worse options than austerity.
Paulson goes short on German Bunds
Financial Times | April 17
John Paulson, the billionaire hedge fund manager who foresaw the collapse of the US housing market, is shorting German government bonds in a wager that the eurozone debt crisis will significantly deepen in the coming months. Mr Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the eurozone deteriorating severely, said a person familiar with Mr Paulson’s strategy.
Germany sells two-year bonds at record-low yield
Reuters | April 18
Germany sold new two-year debt at a record low cost on Wednesday as investors nervous over Spain bought 4.2 billion euros of the low-risk bonds at auction.
The ECB’s Lethal Inhibition
Barry Eichengreen, University of California at Berkeley (Project Syndicate) | April 12
Last December, with Europe’s financial system on the brink of disaster, the European Central Bank stunned the markets with an unprecedented intervention, offering banks across the eurozone essentially unlimited liquidity against any and all collateral for an exceptional period of three years. The ECB’s surprise liquidity operation put the continent’s crisis on hold. But now, just fourth months later, matters are again coming to a head. The big southern European countries, Spain and Italy, battered by austerity, are spiraling into recession. The deterioration of economic conditions is casting doubt on their governments’ budgetary arithmetic, undermining political support for structural reform, and reopening seemingly closed questions about the stability of banking systems. Once again, the eurozone appears to be on the verge of unraveling. So, will it be once more into the breach for the ECB?
Italy Puts Back Balanced Budget Goal by a Year
CNBC | April 18
Italy will delay by a year its plan to balance the budget in 2013 due to a weakening economic outlook, according to a draft document due to be approved by the cabinet of Prime Minister Mario Monti on Wednesday…. Italy’s budget deficit is already one of the lowest in the euro zone as a proportion of output and many economists say its chronically weak growth is more of a concern than fiscal slippage.
Spain Slides Further into Crisis
Spiegel Online | April 16
The situation on the financial markets is getting tougher for Spain. The interest rates the country must pay on longer-term, 10-year bonds rose on Monday to over 6 percent for the first time this year. The government in Madrid is also warning that Spain has fallen back into recession.