France surrenders its austerity plans
THE French markets took a tumble yesterday on fears of a Greek exit from the Eurozone – the Paris Bourse index, the Cac 40, was already looking vulnerable with the fears that socialist President Francois Hollande would scratch the country’s signature from the European fiscal compact and abandon France’s attempts to take a grip of its fiscal deficit, which EU chiefs last week projected would run to €24bn in 2013. It fell by 2.3 per cent, with the Dax also falling close to two per cent.
The week has kicked of with nigh-on unmitigated woe for the Eurozone – Greece appears to be on the brink of being the first of the currency union to exit the euro, the French have said “non” to curtailing spending, Spanish bonds are still widening and a slowdown in Chinese industrial demand threatens the European economy.
Euro-dollar basis swaps are running to four-month lows, indicating a failure of the Long-Term Refinancing Operation (LTRO). Rather than a form of quantitative easing, the LTRO was designed to ease credit contraction. As the swaps market seems to be demonstrating, a second half a trillion euro move by the European Central Bank has not achieved that aim, with many arguing that the “stigma trade”, where short sellers target those banks that made use of the swap lines, has caused more damage to European financials than the LTRO did good.
But despite all of this, markets have “dipped”, rather than “fallen off the cliff into the financial abyss”. As David Buik, markets commentator for BGC Partners, points out, the financial markets have shown ability over the last ten years to deal with both good and bad news with aplomb. Rather than good news or bad news, it is uncertain news that sends the markets into an agnostic dumping of stocks. With this in mind, traders should not expect a change in political direction from Hollande. The French have elected anti-austerity presidents since 1848 and their 24th president has not bucked that trend. The new head of state will increase spending. It is highly likely that he will renege on European fiscal compact agreements. The important thing for the markets and for those trading them is the clarity of the information conveyed. The markets can, in the short term, digest increased French public spending. They can also, in the short term, digest a €400bn Greek exit. But it is uncertainty that will turn the stomachs of investors and trigger an almighty dumping of European stocks.