1. Quick Hits: Europe Outlook February 6, 2013
Summary – Will Empty Promises Fade?
In August last year, European Central Bank chief Mario Draghi famously stated that he would do “whatever
it takes” to support the euro. Since then, we’ve had nary a peep of super-negative news out of the region
and the currency has risen nearly ten percent.
Equally important, though, is the fact the central bank hasn’t really done anything to back up the famous
promise. Instead, this has been a powerful demonstration of the power of perception. If speculators
believe you will cause them pain, they will shy away.
But does any of this solve the real problems in Europe? Of course not.
Lately, two revelations have come to light that are again working against confidence in the region.
First, it has been alleged that Spanish Prime Minister Mariano Rajoy accepted illegal cash payments resulting
from recent bailouts. Rajoy’s efforts since coming to power 14 months ago have instilled some bit of
confidence in market players. An ousting would put all of those gains at risk.
Second, former Italian PM Silvio Berlusconi is gaining support prior to parliamentary elections later this
month, even as he stands criminal trial for sex with a minor and appeals a prison sentence for tax fraud.
These are not the attributes that promote confidence in the bond markets.
Additionally, Greece remains in trouble and should they – or any other – country get booted from the
currency union, the sharks will circle and likely eventually sink the euro’s grand experiment.
What’s Important…
Corruption allegations are rocking the current prime minister of
Political challenges threaten recent calm.
Spain and the potential future prime minister of Italy. When countries need to refinance debt – as all euro-
nations need to do on a regular basis – there is no substitute for market confidence. Though the region has
experienced six months of calm, most risk averse investors are staying away and this recent turmoil is not
likely to reverse that trend.
Perhaps to the detriment of
Strong European nations want to instill pain on senior bondholders of failing banks.
their own credit, Germany, the Netherlands and Finland want to speed up European Union plans to force
losses on bondholders of failing banks. The three AAA-rated countries believe that the EU needs so-called
“bail-in” powers to ensure the region’s taxpayers and existing bailout funds will be able to continue funding
potential recovery in the region.