Tuesday, January 22, 2008

Europe’s “solid, sound fundamentals”

EU blames market turmoil on US policy

“The main reason [for the turbulence] is the risk of a recession in the US. It’s not about a global recession. It’s about a recession in the US, because big imbalances have built up over the years in the US economy – a big current account deficit, a big fiscal deficit and a lack of savings,” said Joaquín Almunia, the European Union’s monetary affairs commissioner. Mr Almunia contrasted imbalances in the US economy with what he described as Europe’s “solid, sound fundamentals”. “We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven’t got subprime mortgages in our financial systems,” Mr Almunia said.

Posted by happyrenterz @ 04:47 PM (966 views)
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7 thoughts on “Europe’s “solid, sound fundamentals”

  • Here’s the full article in case FT take it away

    EU blames market turmoil on US policy

    By Tony Barber in Brussels

    Published: January 22 2008 14:30 | Last updated: January 22 2008 14:30

    European policymakers on Tuesday blamed the turmoil in global equity markets on US economic and fiscal policy and said Europe’s economy was resilient enough to emerge more or less unscathed.

    “The main reason [for the turbulence] is the risk of a recession in the US. It’s not about a global recession. It’s about a recession in the US, because big imbalances have built up over the years in the US economy – a big current account deficit, a big fiscal deficit and a lack of savings,” said Joaquín Almunia, the European Union’s monetary affairs commissioner.

    He was speaking in Brussels as the US Federal Reserve announced an emergency interest rate cut of 0.75 percentage points, a step of a magnitude that no EU policymaker has suggested needs to be emulated by the European Central Bank.

    Mr Almunia contrasted imbalances in the US economy with what he described as Europe’s “solid, sound fundamentals”.

    “We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven’t got subprime mortgages in our financial systems,” Mr Almunia said.

    He denied, however, that he was gloating over the US economy’s troubles. “I’m not engaged in any criticism. I’ve simply described the situation,” he told reporters.

    Earlier, Jean-Claude Juncker, chairman of the 15-strong group of eurozone finance ministers, said Europeans could afford to be less concerned than Americans about the risks to their economies posed by the market turmoil.

    “We have to be concerned, but a lot less than the Americans, on whom the deficiencies against which we have warned repeatedly are taking bitter revenge,” Mr Juncker said.

    Mr Almunia and Mr Juncker were speaking on the margins of a meeting of all 27 EU finance ministers that was devoted in large part to the deteriorating economic outlook.

    The consensus at the meeting was that European economic growth would fall below its potential rate this year, Mr Almunia said. Growth in the eurozone reached 2.6 per cent in 2007, but most private sector forecasters estimate this year’s growth at 1.8 per cent or even lower.

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  • This ozzie chap was pretty scathing about Bernanke yesterday for not even mentioning monolines.

    “The latest fall was multiplied by the head of the US Federal Reserve Ben Bernanke, who not only foolishly predicted that there would be no US recession, but did not mention the monoline insurance disaster. This led markets to believe he had no idea what he was talking about.”

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  • japanese uncle says:

    Saint Bernard is helpless in economics, but helpful in the Apls carrying a flask full of cognag.

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  • Interesting – An Australian commentator predicting property falls. The vast majority of Australians consider themselves property investors virtue of Australian Taxation laws which encourages “gearing”. The loss or shortfall (costs) of a second investment property is essentially tax deductable, in some circumstances, the taxman allowing a near 50% deduction. The taxman essentially encourages debt. Therefore the majority of Aussies have a vested interest in keeping property values bubbling along nicely, hence my surprise at his comments.

    Our Antipodean freinds are not immune.

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  • I am a little surprised by the rhetoric of Joaquin Almunia “We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven’t got subprime mortgages in our financial systems,” – it will be interesting in the coming months to see how true this really is? Only a few months ago Crash and Darling were saying this was only an American thing and that the UK was based on fundementaly sound economics – we all know now and many well before that this was just garbage, but with WestLB already admitting being effected, how many more might begin to come clean and then we will see how clean the financial systems of the Eurozone really are. I do not doubt that some countries within the euro are cleaner than others, but look at Spain, Ireland etc where the housing booms have been as big as the UK if not bigger and the busts will be just as big. These growths couldn’t have come about from realistic/ standard and regulated product selling. Time will tell.

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  • @happyrenterz,
    thanks for this insightful article. I’m really glad this aspect is getting discussed at a high level.

    The US is really in a spin. Ambac (the second-largest bond insurer) posted a fourth-quarter net loss of $3.26 billion, today. It almost got lost in all the other traffic. Ambac lost it’s AAA rating, too. Others will follow. No wonder lenders aren’t keen to take other people’s debts…

    Will the dollar slide? Will the Chinese dump their dollars before it does?

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  • alan you are welcome. I found an interesting take article with a different view supporting Fed actions here.

    “The Fed isn’t panicking, nor is it trying to bail out investors—it’s in a fight with a bond market that’s refusing to cooperate. That’s where the panic is. Try to think of it from the Fed’s point of view. The central bank is ultimately here to protect the banking industry. The irony is that the Fed isn’t trying to bail out stock investors, it’s really catching up with a bond bubble, where people have made too much money.

    Before today’s cut, the five-year T-note was 160 points below where the Fed Funds is. If you were a bank, you have zero reason to generate new loans. Just plop all your money in a long-term bond fund and you’re fine. The Fed can’t let that happen.”

    I don’t understand bonds but it does make sense that if banks don’t lend anymore then the economy is doomed to a hard recession.

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