Gloom and doom pervades the Euro Zone

As expected, Mr Hollande lead in the 1st round of elections. He gained 28.6% of the votes, with Mr Sarkozy on 27.1. The surprise was Ms Le Pen’s 18.1%, a record for her party and above forecasts. The 2nd round is due on 6th May and current polls suggest that Mr Hollande will win by 56% to Sarkozys 44%. Given Mr Hollande’s rhetoric and the favours he owes, for example, to the French Unions, it’s going to be difficult for him to back off completely from his promises. The market reaction to a number of Mr Hollande’s proposals will become particularly important, but it’s going to get even rockier in due course;

It looks as if Holland will have to call another election, probably in September (though a number of parties are suggesting that earlier elections are possible) as Mr Wilder, leader of the ultra right wing Freedom Party withdrew support for the coalition who were trying to agree to further spending cuts to bring the Dutch budget back down to 3.0% in 2013. However, forget all the nonsense about Holland exiting the Euro, as advocated by the Freedom Party. They wont. Indeed, current forecasts suggest that the Freedom Party is likely to lose support next time around and the current PM (Mark Rutte) reelected, having marginally increased his party’s seats in Parliament, resulting in them being the largest party, once again. As to the proposed budget cuts – the Dutch are unlikely to be able to meet their 3.0% budget deficit target for 2013 targets, especially as any election will result in a coalition with more left leaning parties (who are not all that enamoured with further spending cuts) and Holland is in recession at present, with unemployment ever rising and personal debt at record levels. However, the current finance minister Mr De Jager stated that “The Netherlands, in every circumstance, will maintain disciplined budgetary policy”. With Holland unable to take major decisions until after the next elections, a crisis in the EZ (very likely) is going to be even more problematical. In addition, there must be doubt as to whether Holland will be able to retain its AAA rating – personally, I believe it’s unlikely. Having said all that, Holland will get it’s act together in time – it is certainly no Greece, Portugal or Spain;

Euro are services and manufacturing declined for the 3rd month in April – the composite index fell to 47.4, a 5 month low, from 49.1 in March and much lower than the 49.3 expected. Manufacturing dropped to
46 in April, a 34 month low, from 47.7 in March. Services declined to a 5 month low of 47.9, from 49.2. A definite whoops.
French flash manufacturing PMI came in at 47.3, up from 46.7 in March.
However services PMI came in at 46.4, down from 50.1 in March.
Manufacturing sentiment was lower at 95 in April from 98 in March German April flash manufacturing PMI came in at 46.3, well below March’s 48.4 (wow, a real disappointment), the largest contraction since July 2009 – cant reconcile these numbers with the IFO numbers.
April services PMI was higher at 52.6, from March’s 52.1;

Italian April consumer morale declined to 89, from 96.5 – talk about falling off a cliff;

That’s not all.

Spain’s 1st Q 2012 GDP contracted by -0.4% Q/Q (-0.3% in the 4th Q 2011), which means that Spain in in recession for the 2nd time since 2009. The Spanish authorities also confirmed that the budget deficit was indeed -8.5% of GDP in 2011;

The EZ’s 2011 budget deficit was -4.1% of GDP, lower than the -6.2% in 2010, with Ireland the worst at -13.1%. However, if you exclude the cost of rescuing the banks, Ireland’s budget deficit was -9.4%, well below the target of -10.6% set by the Troika (EU/ECB/IMF).
Interestingly Greece marginally beat it’s 2011 budget deficit forecast
– it came in at -9.1%, as opposed to the -9.3% forecast. However debt to GDP rose to 165.3%, up from 145% in 2010; EZ debt to GDP rose to 87.2% in 2011, from 85.3% in 2010;

At the recent IMF meeting, representatives of the ECB stated on numerous occasions that they had done enough and that it was the time for politicians to act. The ECB rejected the IMF’s views that they should cut rates and introduce ease further. Oh yeah. Whilst it is certainly true that the ECB has done a lot recently, it will have to do more, quite likely much, much more;

None of the above should have come as a surprise, but EZ markets ran for the hills – even Germany was down -3.36%, worse than France , which was down -2.83%. Italy was the worst being down -3.83%, with Spain -2.76% weaker.

A sea of red in European markets today – no surprise given the above.
Some of the key issues, as I see it, are.
Austerity without growth does not work – maybe someone at the Bundesbank/Berlin is finally getting it; A lot more chaos in the EZ in coming months is inevitable; The ECB will ease much further – forget Mr Weidmann and the Bundesbank
– they will be outvoted time and again – indeed, Mr Weidmann looks set to become increasingly marginalised; The EZ, as usual, will only respond in a half hearted manner and only when embroiled in a crisis – and one looks as if it’s coming, pretty soon; The situation in the EZ will get (much?) worse, with a serious threat of civil disorder; The cost of the ultimate rescue will be much much higher than would be the case if the EZ had acted sensibly and sooner; The EZ does not have any action plan.

Basically, the same old chaos and nonsense in the EZ.

The Euro was indeed lower, but by not as much as I had expected – currently US$1.3135.

Short note today – have been tied up on, well you guessed it – the Euro Zone.

Kiron Sarkar

23rd April 2012

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