In the US yesterday, the US Federal Reserve said that the economic recovery was proceeding more slowly than it had expected. It also cut its forecast for US growth to between 2.7% and 2.9%, down from 3.1%-3.3% in April.
They gave no indication of any further stimulus plans – the QE3 that is widely expected to be announced at some point. QE3 is not a new cruise liner, by the way, but the third round of quantitative easing.
In Europe, meanwhile, things are getting critical, and now it’s so obvious, even the President of the European Central Bank has noticed – hurrah! Jean-Claude Trichet has now said that the risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks. As a friend of mine asked this morning,
“Why didn’t they notice them flashing orange all this time??”
According to the Bloomberg article,
“The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,388 basis points today, up from 1,317 at the beginning of the month. Swaps on Greece rose 25 basis points to 2,012, signalling an 82 percent chance of default within five years, according to CMA.”
Which, scarily, adds further weight to the argument we started making here where I said in the second line that default by the Greeks is almost inevitable now.
Amazingly, the Greek PM did win a vote of confidence earlier this week, which does give him license now to push through austerity measures necessary to secure further financial aid. More is required, though, and part of the big meeting that’s going on now in Brussels is to “use a mixture of arm-twisting and moral support” to force Greece to adopt further reforms. Another major outcome is to persuade the markets and the rest of the world that the ECB and European leaders have a workable plan for Greece (which they don’t).
Ben Bernanke, head of the Federal Reserve, reckons any default by Greece will have a very small impact on the US. He could be right, though that would be unusual.
The impact is certainly going to be felt by European banks, though. Moodys have already said that BNP paribas, SocGen and Credit Agricole may all have their ratings cut as a result, and more are sure to be added to that list as this crisis continues to unfold.
For another take on the European, particularly Greek, sovereign debt crisis, here’s an interesting interview with the Chief Economist at IHS, Nariman Behravesh.
The same friend who asked about the orange flashing lights above also made a comment this morning on how this crisis could impact on us here in the UK, and particularly on the property market. He believes there’s a mass de-leveraging due to start shortly as banks start to urgently shift toxic debts and assets off their balance sheets. This is not because they want to start lending again (we should be so lucky!) but because they are preparing for the sovereign defaults to come.
Banks off-loading could mean a glut of properties hitting the market, driving prices down further, which would be good for buyers with cash, bad for investors with properties and mortgages as it could push many more into the dreaded negative equity scenario.