Despite the approved ESM the Euro is still under pressure
EU leaders managed to agree to set up the €500 billion European Stability Mechanism (ESM) fund overnight while pushing through the fiscal compact (despite the UK and the Czech Republic not ratifying the agreement), but there is still little sign of progress on the second Greek bailout. While finance ministers are supposed to have agreed a second bailout package by the end of this week, this has been lingering around since July with no final agreement. The EU and IMF are trying to ensure that Greek politicians sign up to austerity agenda in writing ahead of elections after Papademos’s interim government steps down. With 10-year Portuguese bond yield now above 17%, there is increasing concern that we will see a default elsewhere in the periphery, despite comments by the EU and IMF that Portuguese debt is ‘perfectly sustainable’. The key problem for European leaders remains the timetable with Greece running out of time to make debt repayments ahead of the 20th March deadline.
Although the Euro rallied over-night, France and Belgium set to hold auctions today a disappointing result could trigger such a change.
The rise in Spanish unemployment to just below 23%, with the number unemployed representing around one-third of total eurozone unemployment should see the eurozone unemployment rate tick up to 10.4%. Meanwhile, the number of German unemployed has fallen – the markets may view this as further evidence of the two speed Europe.
In the UK it seems that households have been retrenching their finances and are now happy to spend money, which should show up in stronger consumption and borrowing in the first quarter. The resilience of consumer confidence, which reached its highest level since June 2011 is another reason to be sceptical of the 0.2% fall in Q4 GDP.
The Case-Shiller index is likely to show a further fall in US house prices in November, but this will not hurt consumer confidence, which is expected to have risen on the back on falling gasoline prices and the New Year share rally.
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