Category Archives: Euro

21/6/18: Weaker growth signals for the euro area


I have not updated Eurocoin dynamics and euro area growth forecasts for some time now, so here is the latests, from May data:

  • Eurocoin, leading growth indicator for the euro area, has fallen significantly from the local high of 0.96 in February (the highest growth forecast since June 2000) to 0.89 in March, followed by continued decline to 0.76 for April and 0.55 in May
  • May reading is the lowest since December 2016
  • Growth forecasts consistent with Eurocoin dynamics indicate that, assuming revised 1Q growth remains at 0.4 percent, 2Q 2018 growth is likely to come in somewhere in the range of 0.35-0.55 percent


Chart below shows improving outlook for HICP (inflation) over the last 12 months through May 2018, just as the economy beginning to slow down:


On balance, we now have three consecutive months of declining Eurocoin-implied forecasts for euro area growth. It will be interesting to see eurocoin print for June, coming up in about a week, as well as July (coming out prior to the Eurostat growth estimates for 2Q 2018).

4/6/18: Italy is a TBTF/TBTS Problem for ECB


In my previous post, I talked about the Too-Big-To-Fail Euro state, #Italy - a country with massive debt baggage that is systemic in nature.

Here is Project Syndicate view from Carmen Reinhart: https://www.project-syndicate.org/commentary/italy-sovereign-debt-restructuring-by-carmen-reinhart-2018-05.

An interesting graph, charting a combination of the official Government debt and Target 2 deficits accumulated by Italy:


Quote: "With many investors pulling out of Italian assets, capital flight in the more recent data is bound to show up as an even bigger Target2 hole. This debt, unlike pre-1999, pre-euro Italian debt, cannot be inflated away. In this regard, it is much like emerging markets’ dollar-denominated debts: it is either repaid or restructured."

The problem, of course, is the ECB position, as mentioned in my article linked above. It is more than a reputational issue. Restructuring central bank liabilities is easy and relatively painless when it comes to a one-off event within a large system, like the ECB. So no issue with simply ignoring these imbalances from the monetary policy perspective. However, the ECB is a creature of German comfort, and this makes any restructuring (or ignoring) of the Target 2 imbalances a tricky issue for ECB's ability to continue accumulating them vis-a-vis all other debtor states of the euro area. Should a new crisis emerge, the ECB needs stable (non-imploding) Target 2 balance sheet to continue making an argument for sustaining debtor nations. This means not ignoring Italian problem.

Here is the picture mapping out the problem:
Source: http://sdw.ecb.europa.eu/servlet/desis?node=1000004859

Reinhart warns, in my opinion correctly, "In the mildest of scenarios, only Italy’s official debt – held by other governments or international organizations – would be restructured, somewhat limiting the disruptions to financial markets. Yet restructuring official debt may not prove sufficient. Unlike Greece (post-2010), where official creditors held the lion’s share of the debt stock, domestic residents hold most of Italy’s public debt. This places a premium on a strategy that minimizes capital flight (which probably cannot be avoided altogether)."

In other words, as I noted years ago, Italy is a 'Too-Big-To-Fail' and a 'Too-Big-To-Save' or TBTF/TBTS problem for the euro area.