Saturday, February 14, 2009
Danske Bank, one of the largest Danish banks, has released its most recent report on the current financial unpleasantness. According to Danske Bank, economist types around the world are no longer worried about "systemic risk in the financial sector" (i.e. the entire international economic system tanking à la the Great Depression) and are instead bracing themselves for the deepest global recession since the 1970s.
So 2009 won't be another Great Depression (not even close), but, nonetheless, for most of us the worst is still to come. As the damage seeps from the most exposed sectors (finance, banking, property, construction, etc.) and out into the real economy, national indicators generally are going to continue to slide. Bankruptcies, bail-outs, nationalisations, high-profile takeovers and rising unemployment will be the order of the day.
From the European perspective, though, the most interesting titbit in the report is this one:
"Intra-euroland spreads have exploded on the back of rating actions and an increased focus on economic imbalances. This has fuelled speculation that one or more countries may feel the need, or be forced, to default on their debt and/or leave the euro area."
Translated from economist-jargon: credit rating agencies have decided that some Euro-zone economies are looking a lot shakier than others. Italy, Portugal and Spain have emerged as definite problem countries. Italy, for example, has broken the EU's Growth and Stability Pact for several years in a row. This is a pact signed by EU countries and is a precondition to joining the Euro. It mandates that government deficit should be no more than 3% of GDP, and total government debt should be no more than 60% of GDP.
Italy's debt currently amounts to more than 100% of annual GDP.
The two Euro-zone economies most at risk, however, are definitely Greece and Ireland. Yields from these two countries are over two percentage points higher than baseline yields (measured by good old dependable German yields). In other words, investors and rating agencies have labelled Greece and Ireland as high-risk economies and sealed them up in their own special category labelled "do not invest!"
Danske Bank argues that "it seems highly unlikely that anyone would leave the euro, not least because the cost of doing so would be enormous. On the other hand, 2008 has taught us never to say never." Certainly, the President of the European Central Bank has, in recent interviews, had to rebuff the idea that the Euro-zone could be dismantled.
Personally, I'm not sure any countries will choose now to actually leave the Euro. From the perspective of national governments, there is too much economic uncertainty in the air to seriously consider exposing their currencies - better to wait until times are good again and they won't risk being blamed for tanking their economies.
I can't see the ECB ejecting countries either - it's always taken a "flexible" approach when it comes to the Growth and Stability Pact, and a global recession will probably just increase that flexibility. [EDIT: Thanks to Grahnlaw for pointing out that the Council (specifically EcoFin) is responsible for amending and monitoring the SGP, not the ECB]
Instead of countries leaving the Euro, much more likely is an increase in national discontent as public spending is scaled back (see the recent protests in Italy over cuts in education spending, for example).
Still, let's wait and see.