Monday, 21 May 2012

Positive news for oversold markets is scarce

Those following the discussion on the impact of a Greek exit from the eurozone are now probably convinced that it cannot be allowed. They will also have likely reached two other conclusions.

First, that the pace of fiscal adjustment towards budget deficit targets should be eased to allow some leeway for national fiscal policies to stimulate demand. This may be part of a growth pact.  

Second, that the acknowledgment from the Bundesbank that Germany might have ‘to tolerate higher inflation in the short to medium term for the sake of rebalancing within the eurozone’, might mean something more than just accommodating IG Metall’s 4.3 percent wage gain agreed this past weekend. This is the largest increase in twenty years and one likely to set a benchmark, as it has in the past, for wage growth in other sectors. More on this later.

As for a Greek exit from the eurozone, the outcome described by others is nothing short of alarming and that by Martin Wolf in last Friday’s Financial Times is a case in point – with a point – and worth outlining briefly.   

Drawing on an analysis by Mark Cliffe of ING, Mr Wolf suggests that, even with backstops in place to limit contagion – and leaving aside the loss of global economic output – the case of a solitary Greek exit might still prove disorderly and lead to bank runs elsewhere throughout the eurozone, and maybe beyond, thus putting equity markets under more pressure and sustaining the flight to safety.

However, the discussion goes further in suggesting that in the case of a break-up of the eurozone, the consequences are dire. Such a prospect would be associated with a failure to respond decisively on a number of fronts to the contagion released by a Greek exit. This is not just in requiring the ECB to respond assertively to stabilise the financial system but also in requiring political leaders to visibly demonstrate their commitment to keeping the rest of the eurozone together. On the latter, reinforcement through ‘... stronger forms of fiscal solidarity, probably eurobonds’ is the example he uses. More >

Mike Lenhoff
Chief Strategist

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