Eurozone: Not Yet Dead

13/01/2012 at 2:20 pm 1 comment

Yesterday, the ECB announced that it was keeping eurozone interest rates on hold at 1%. ECB President Mario Draghi made the remark at the following press conference that “there are tentative signs of stabilization of economic activity at low levels”.

The language was cautious, and Draghi also noted that the economy continued to face serious risks from the debt crisis. But there were another two bright spots of news this morning to suggest that his heavily guarded optimism is justified.

Firstly, Italy sold €4.75bn worth of government bonds, the maximum required, on top of the €12bn of one year financing she raised in the money markets yesterday. The bulk of this – €3bn – came from a reopening of the 6% 2014 at a yield of 4.83%, down from the 5.62% paid on the same bond in December and much lower than the 7.89% paid on issue the month before. This blog has long highlighted the importance of the question of whether or not bond and money markets remain open to Italy (and others). That they are open at levels which have become significantly more affordable is a bonus.

The ECB may be able to take some credit for this. Its programme of 3-year lending to banks, which saw almost half a trillion euros of interest when it began just before Christmas, has given them the incentive and the firepower to increase their bond market exposure substantially.

Be that as it may, it can certainly take credit for today’s second bright spot: the 3.9% increase in eurozone exports which saw November’s seasonally-adjusted trade surplus for the region jump to €6.1bn, a 7½ year high. Eurozone interest rates may only have fallen by 0.5% over the last two months but the 4% fall in the value of the trade weighted euro this brought with it is proving to be as welcome as might have been hoped.

As ever, we should note that there are reasons to be gloomy. After Germany reported a small contraction in output for the fourth quarter, it is certain that European growth stalled into the end of the year and further weakness this quarter could see the eurozone experience a technical recession. Agreement on restructuring Greek debt has yet to be reached, and the ratings companies have already warned of further sovereign downgrades to come. Outside of Europe too, the economic picture remains mixed and markets morose amid a slew of finance sector profit warnings and redundancies.

Nonetheless, predictions of out and out disaster for the eurozone are looking increasingly stretched. It is far from being in the best of health, but reports of its death are an exaggeration.


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Not So Jobless Recovery Bump In The Road

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  • 1. Bump In The Road « The Blog @ Vigilant Financial  |  27/01/2012 at 1:31 pm

    […] that as it may: if the eurozone is not yet finished, neither are we. Last year began in similar circumstances with a -0.5% fall in GDP reported for Q4 […]

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