EU/EMU Indices Continue Weak

The EU indices show continued weakness in the EU area. The slippage this month, however, was minor. Still, the overall EU index stands in the 22nd percentile of its historic rank. Consumer confidence stands in the 12th percentile. Service and retail confidence stand in the low twentieth percentile of their respective rankings. Construction is in the 34th percentile. Industrial confidence is still the relative strongest in the 51st percentile of its ranked history. These are very weak readings as weakening economic trends and debt events have taken their toll.

Weakness continues with variations - France, Italy and Portugal saw their overall economics sentiment numbers improve in October. The UK was flat. Germany continued lower, falling by 0.9% along with Spain that dropped by 0.8% and Greece that fell an outsized 4.4% in one month.

Troubled by country - The Greek reading stands at the bottom 0.4% of its queue. Portugal is in the lower 5% of its queue, Italy in the bottom 11%. These are some of the most troubled EMU borrowers. Spain is in the bottom 17% of its queue, still very weak but better than the EU’s UK at 13%. France ranks better in the 34Th percentile and Germany at the 61st percentile. The overall EMU standing for all members is in the 24.5th percentile of its queue – and that is elevated by the inclusion of Germany.

More yet to do - With the newly struck Euro-Greco debt deal we will see how much these indicators change next month. While the worst fears of euro-implosion may have been set aside, the new plan calls for banks to take large losses. They will have to be re-capitalized and that will be a factor in the economic outlook. And it is not clear how this will be done or where the capital will be sourced.

When the going gets tough the tough get opaque - Part of the plan is to leverage up the EFSF. To help do that a special purpose vehicle of some sort is being formed and China’s participation is being sought. There are a lot of moving parts in this deal that are not yet explained. Not the least of which is how Greece gets 50% debt forgiveness from the banks but avoids a judgment of default on its loans. This is yet to be established but the structure of the deal is trying to achieve that end using collateralized Zero coupon bonds as the replacement asset for bank loans. All of this is a lot of Houdini, Kabuki and certainly is not transparency. It makes the derivatives debacle and Bernie Madoff look like events of probity. One wonders where the goal of transparency has gone? Derivatives used statistics to lull us into complacency. Madoff cheated you fair and square in a Ponzi scheme. This one has its roots in some of accounting treatment that seems to use double entry book-keeping where the ledger does not balance but that is acceptable.

Sweet deal are made of these - If Greece did get a sweet deal and the banks have taken losses we can expect other troubled EMU borrowers to seek equal, or similar, treatment. I don’t buy the argument that this avoids default and therefore stops the domino process from progressing in Europe. The lesson is not that counties do not default but that even if they do not default ‘formally’ they can do some bad things to your bank’s balance sheet. The situation in Europe remains in flux and the weak and battered economies still have a lot of work to do. My best guess is that Europe just bought itself some time. How much is hard to tell. But I’d be surprised if it is more than five years before the same problems sprout again. Financing has not solved any problems. And as for Greece the politicians have passed some provisions for austerity but the people are not behind them. So how long does that last? Ask the same for Spain and Portugal and Italy, the latter where the politicians have not really gotten anything going