August has a history of being a boring month for news and controversy. The U.S. Congress is in its summer recess until early September, as are many governments elsewhere.
In Europe, government officials habitually disappear for August vacations regardless of any pressing problems. The seriousness of the euro-zone crisis did not interfere with that tradition this year. They made a number of positive comments and promises that reduced concerns about ‘will they or won’t they’ rescue the euro-zone, and off they went.
They’re now beginning to come back, and unfortunately so far they seem to be bringing the uncertainties back with them.
Prime Minister Samaras of Greece is trying to back away from Greece’s bailout agreement, requesting a two-year delay before Greece must meet the deficit targets, and implement the financial reforms it agreed to for its latest bailout.
German Finance Minister Schaeuble immediately responded that granting Greece more time or money will not help Greece overcome its problems.
Greek Prime Minister Samaras then set up a meeting with German Chancellor Merkel on Friday, and French President Hollande on Saturday to lobby them for the extra time.
Merkel and Hollande met prior to their individual meetings with Samaras, and after the meeting, Merkel said “It’s important that we all stand by our agreements.” Hollande said, “We want Greece to remain in the euro-zone. It’s up to the Greeks to make responsible efforts to achieve this objective.”
So the debates are back on as to whether Greece will remain in the euro-zone, will be booted out, or should exit on its own, and what the result of each scenario would likely be.
Meanwhile, Spain, an even larger problem for the euro-zone, accepted a direct bailout for its banks a month ago, and was expected to take the next step of officially requesting a bailout of its government debt, required before the EU can come to its rescue. But it has not done so, and has said it would want the ECB to commit to unlimited bond-buying, and needs to know what requirements and restrictions would come with a bailout, before deciding.
Instead, it is drawing up new rules that would allow it to intervene in its banking system and close down troubled banks, which is raising questions since the whole purpose of the bailout of its banks was so they could continue to operate.
Meanwhile, help is obviously needed.
Economic reports this week show the euro-zone remains mired firmly in recession. Even the United Kingdom, which is a member of the European Union, but not the euro-zone, saw its economy still in recessionary contraction. Its GDP has fallen in five of the last seven quarters.
And investors were disappointed this week by reports from China showing its manufacturing activity and exports declined again in August, once again raising concerns that its economy is coming down for a much harder landing than has been expected.
Here also hopes have been high for many months that China’s government will come to the rescue with dramatic stimulus efforts. But so far it hasn’t happened. China has cut interest rates several times, and has pumped some money into its economy through higher spending on infrastructure and public works. But analysts expect any major stimulus measures will be put off until the new Communist Party leadership takes over later in the year.
And so it goes. Promises, hints, and hopes everywhere, but precious little agreement or action.
In the U.S. it’s been expected at each of the Federal Reserve’s recent FOMC meetings that additional stimulus measures would be announced. But it hasn’t happened, just continuing assurances that the Fed is concerned, monitoring conditions, and will take action “if needed”.
The release this week of the minutes of its last meeting created brief excitement when the minutes revealed that at that meeting three weeks ago members of the committee were more concerned about the economic slowdown and almost ready to take action.
That raised hopes briefly that the Fed will surely take action at its next meeting in September. But then it was realised that at that meeting three weeks ago members were saying more action would likely be needed if economic conditions did not begin to improve. And indeed since that meeting economic reports have improved significantly, including the surprisingly strong jobs report for July, unexpectedly positive housing reports, retail sales up 0.8% in July after declining 0.7% in June, industrial production rising 0.6% in July after rising only 0.1% in May and June, consumer confidence unexpectedly rising in August, and so on.
After being down several days in a row, the stock market got a lift Friday from European rumours that the ECB is considering setting yield-band targets in a new bond-buying program to help contain borrowing costs for Greece, Spain, and Italy, and the release of a letter Fed Chairman Bernanke had sent out a few days earlier. But in the letter virtually all he did was repeat that the Fed will provide “additional accommodation as needed.”
As Friday’s market reaction showed, markets are still willing to rally on hope at least briefly.
But after doing so since June, factoring into prices expectations of substantial and meaningful actions, they have reached the point where they need a lot more than just more hints, rumours, and stalled promises to prevent them from beginning to factor back out the expected actions that are still not taking place.
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