Portugal was the second country (after Greece) to ratify the fiscal compact treaty (together with the ESM). The fiscal compact will be implemented under the auspices of the European Court of Justice which will monitor the national rule’s compliance with the treaty. Some key elements of the fiscal treaty are effectively already in force since […]
Restoring confidence in the eurozone (EZ) rests on its ability to generate growth and reduce the competitiveness gap in the periphery. As fiscal austerity is bound to deepen the recession, the possibility of debt restructurings, exits and the eventual breakup of the EZ must be taken into account. The financial crisis has exposed the institutional […]
Merkel and Sarkozy agreed to automatic sanctions and a fiscal balanced budget rule with a 3% deficit limit written in the national legislation/constitution of each EZ country. In order not to infringe sovereignty too much, the European Court of Justice would receive powers to determine whether the fiscal rule is implemented properly, but it would […]
Portugal’s financing needs can easily be covered by the existing umbrella of official resources, effectively amounting to about €470 billion-520 billion (comprising €255 billion from the AAA-country-backed European Financial Stability Facility (EFSF) or €288 based on 17.7/27=0.65 Irish loan-to-financing ratio + €60 billion from the European Financial Stability Mechanism (EFSM), as well as 50% of the aggregate EFSF/EFSM amount from the IMF), but everybody is well aware that the focus would immediately turn to Spain, for which the existing resources would be insufficient over three years, particularly if the banks’ unsecured short-term and maturing liabilities are included as well.
The release of the December PMIs point to stronger-than-expected regional performance in Q4 at around 0.5% q/q (2% SAAR and 2.2% y/y), mainly driven by reaccelerating manufacturing activity on the back of increased export orders. December services PMIs have stabilized or slowed due to local weather-related disruptions.
The capturing of true EZ bank exposures requires a new round of stress tests starting February 2011, as announced on December 7 by EU Commissioner Olli Rehn. Those tests will be “based on new financial architecture,” i.e. under the remit of the new European Banking Authority. Moreover, the example of the two largest Irish banks, […]
Contagion has taken hold of Spain, with respect to both the sovereign and the banking system, in the wake of Ireland’s financial troubles and bailout application. In contrast with Greece, where the key vulnerabilities are in the public sector, both Spain and Ireland have run up large private sector imbalances following real estate booms and busts. In “Comparing Spain With Ireland and Other PIIGS: Better in Some Ways, More at Risk in Others,” available exclusively to clients, we shed light on Spain’s balance sheet vulnerabilities to assess liquidity and solvency risks in comparison with Ireland and the other PIIGS (Italy, Greece and Portugal).
Contagion is spreading from Ireland to Spain, which shares some key vulnerabilities in the wake of its real estate boom/bust and large non-performing loan overhang in the banking sector. A house price comparison shows that the housing bubble in Spain was more pronounced than in the United States but less pronounced than in Ireland.
Since 2000, the U.S. dollar has experienced two broad instances of real exchange rate depreciation. One was during the dot-com recession and the second was during the global boom phase from 2005 until the financial crisis triggered a sizable flight to safety and an unwinding of the yen-carry trade. The chart below shows that on both occasions, the eurozone bore a sizable share of the adjustment (the ULC-based REER series show a similar picture for all economies but data for China is unavailable). China’s U.S. dollar peg was loosened somewhat in 2006-7 but the re-pegging in 2008 led it to share in the flight to safety surge of the dollar. Within the single currency bloc, Germany was better able to keep its ground in contrast to the periphery countries, which resulted in the widening of intra-EMU imbalances.
Though the eurozone’s recovery from recession has been better than we initially envisaged, we see a set of external and domestic pressures—some persistent, some new—as potential threats to 2011 growth. As we discuss in the September update to our 2010 Global Economic Outlook, the standout performance of the core and Northern European economies, particularly Germany, alongside renewed weakness in the periphery is giving rise to a multispeed recovery. This adds a new set of risks—such as the implications of one-size-fits-all monetary policy—to the existing list.