Evercore Pan Asset

The market crisis in Italian bonds and Greek state finances seems to have stemmed from the political situation. The decision of the Greek Prime Minister to seek a referendum led to his humiliating U turn as the EU’s leaders explained to him their unwillingness to accept that, swiftly followed by his loss of office. The Italian Prime Minister seemed to be questioning the Euro area leadership, and his fate too was settled. The withdrawal of EU support through the media helped unsettle the market in Italian debt. Mr Berlusconi lost his job quickly after that.
 
The Euro area leadership will be happy with their work. They have seen Greece appoint Mr Papademos, a former ECB Vice President, as Prime Minister. In Italy Mario Monti, a former EU Commissioner has the title of PM. These are people the EU and Euro leaders will feel they can deal with more easily. We should expect a brief period when the EU spin machine seeks to reassure markets that the Italian and Greek crises are over. We will be told the new management has matters in hand.  Cuts will continue. The Italian banks will be told they need to buy more Italian bonds to enable Italy to refinance itself for a bit. The European Central Bank may continue to lend a hand by buying more Italian and Spanish bonds in the secondary market, to keep yields down a bit.
 
Meanwhile the underlying battles carry on.  Will the ECB be allowed to print more and buy up more bonds on a scale likely to succeed for a year or so? Germany still remains very reluctant. Will France and Germany drop plans to have ready an inner core Euro for a limited number of countries, who will enter an effective political union together? Further public talk of that just destabilises the outlying Euro countries. Will Germany continue to refuse requests to route more of her money around the currency union, to ease the growing unemployment and trade imbalances?

The longer term problems for the Euro zone remain. Many of the countries in the scheme are uncompetitive. They have high unemployment, are being asked to take more spending cuts, pension cuts and wage cuts. The countries with high deficits are promising to cut them, but if output slumps and tax revenues fall they may not hit the new targets. There are weak banks in the system. People may still think it prudent to withdraw their money from Greek and Italian banks, just in case there is more talk of default or withdrawal from the Euro. The 440bn Euros EFSF money to buttress the system has still not been raised, nor has the 106bn of new bank capital they say they need.
 
Elsewhere in the world there are early signs of a shift from retrenchment to a little more expansion. Brazil has started cutting interest rates from very high levels. China’s inflation is falling back, and the authorities are doing a little gentle bank credit easing. If Euroland spin holds the line for a little on the Euro crisis, these markets might be able to make a bit of progress. They look cheap on anything other than a world meltdown scenario.