More eurozone downgrade warnings after the close on Friday
Posted on 17 December 2011 with 3 comments from readers
The slow motion train accident that is the eurozone sovereign debt crisis moved a step closer to the edge last night with Fitch warning of a near-term downgrade for Italy, Spain, Ireland, Belgium, Slovenia and Cyprus. And Moody’s downgraded Belgium by two notches.
Talks between the IMF and Hungary have broken down and private bondholders have walked out of talks with Greece. The downward spiral continues. Air freight and Suez Canal movements indicate global trade is already contracting.
Fitch’s warning
Fitch said the ‘crisis will persist and likely be punctuated by episodes of severe financial volatility’ and that its main concern was the ‘absence of a credible financial backstop in the eurozone’.
European politicians continue to be behind the curve. Yes Italy’s PM Mario Monti won a vote of confidence and Mrs Merkel headed off a rebellion against the European Stability Mechanism. But the slide towards disaster is still palpable.
Observers are of course getting very weary of the long eurozone saga. Its volatility is highly damaging to investors who mistime these politically inspired lurches up and down.
Last week the gold market even plunged, partly as a consequence of funds shifting into the safe haven of the dollar but there were also rumors of central bank gold leasing to raise urgently required funds.
Still the bargain hunters emerged for precious metal snapping up gold below $1,600 and silver under $29. Gold skeptics again spoke too soon.
The history of major financial crises is awash with examples where gold ultimately benefits as the only currency without a counterparty, with silver outperforming gold. There seems little reason to think it will be any different this time.
No different
What we really don’t know about the current crisis is how long it will take to reach the bottom. We can surely see where it is heading and that the negative news continues to outweigh belated positive though insufficient actions.
The seminal book ‘This Time is Different’ by Professors Reinhart and Rogoff examines a huge number of financial crises and notes this common feature. Namely that events in such crises jog along slowly until a sudden stop is reached, but timing that stop is impossible.
The only logical thing for investors to do is therefore not to be sat on the train when it goes over the cliff.
3 Comments posted by readers:
Here’s an interesting video about the situation in Europe that might offset your negative bias towards EMU:
http://www.goldmoney.com/video/hellmeyer-turk-interview.html
Also, now with the 3-year LTRO which is a massive stealth QE the banks might have the chance to recapitalize and the states to fund themselves for a few more years. I wouldn’t discount the idea of the crisis shifting focus to the US again before going back to the EMU – or perhaps blow up in the US/Japan first (in an optimistic scenario for the EMU).
Jim Rickards, just laid out a fascinating and convincing scenario in his latest tutorial on currency wars at KWN, saying that the Euro zone is going to come through this bumpy ride ‘OK’ and describes how the fed is shorting USD, by accepting SDR’s in a loan guarantee from the IMF. He says the fed still has another 35% dollar depreciation yet to go, against the yuan, before their target is met, and that the Euro breaking 130 USD will instantly trigger QE3 by the fed. ECB will print at the first sign of deflation says Rickards.
It looks to me, as Faber says, that the Von Misses crackup boom cycle will play out eventually and we still are just warming up. This phenomena has never occurred before on a world wide scale. The politicos, the bankers and the sovereigns will all kick the can, again and again and with each kick, gold will bounce higher. I feel this is going to go on for a long time. Finally, the lunatic phase will end it. That’s where the road stops. Its the only thing that can end it – loss of confidence. I speculate that all of us reading this website will be in a safe place by then. We’re among the tiny, tiny ratio of people trying to get our heads around this mess. Where will the majority be in 3 years? Looking desperately at gold, or even silver for the first time? Maybe so, but a much more likely scenario, is the majority having trouble just trying to keep a roof overhead and feed themselves. The forward looking among us are already prepared for the worst. The infinitely rich have bomb shelters with power and food for six months. I think we’ve got a long way to go yet.
while i am big jim rickards follower and while the UK was the only EU member to say ‘no’ now to the new treaty……. sweden,finland, hungary did not say yes and most likely won’t…especially sweden….and the czechs said they’d consider it only….80% of swedes would vote NO now.(from mish shedlock)
this goes to the heart of the problem.
rickards is alittle currency fixated in the short run but correct in the long run.
politically it is going to take more than a 1.28 euro to get QE3….that will be the dow at 9400 as faber states, in late feb-march as it becomes obvious the new EU treaty will not get all 17votes…….this is not like the US senate needing just a majority or even 60% to override a veto.
employment is wayyy to lagging a statistic relative to currency to effect an election 6 mos later…..12 months later maybe.
gold hits 1490 in the last-best chance to get in….in late jan…..1695 minimum between now n then in a ’slow’ snapback from last weeks year end liquidating to pump up other losses by the hedgies and woe is us deflationary fears.