It’s hard to know where to start this morning.
The global financial system is a rickety old machine. Every time one of our clever central bankers thinks they’ve got one bit patched up, another bit blows a gasket. The Federal Reserve pumps another $600bn into its war on deflation, just as the rest of the world starts to realise that inflation is the real danger.
In the West, our own Bank of England (BoE) now clearly has no idea where prices are heading. And in the East, China revealed earlier this week that consumer prices jumped by 4.4% year-on-year. That’s not crazy by emerging market standards. But it’s a lot higher than the 4% economists had expected.
Now it looks like we could see another rate hike in China, perhaps as early as this weekend. The Chinese markets tanked this morning, and the rest of the world is following.
Meanwhile, the situation in Europe is following the script of the Greek crisis earlier this year, almost to the letter.
The Irish bond market panic is now hitting Europe
The Fed’s flood of cheap money looks to be hitting the global economy just as everyone else is trying to tighten up. On the one hand, we have Chinese inflation picking up rapidly. The country raised rates last month for the first time in three years. Now the talk is that they could raise them again this weekend. That gave markets one extra thing to worry about.
But the crisis spotlight remains focused on Ireland. The panic in Irish bond markets is now starting to have the same impact on the rest of Europe as the Greek crisis did. “Signs of contagion” are “spreading throughout the debt markets of the single currency bloc”, writes the FT this morning. Compared to Germany (the eurozone ‘risk-free’ rate), Italy and Spain are now paying the highest levels to borrow since 1999.
It’s the usual story. A spasm of fear rocks a small corner of the financial markets (sub-prime, say, or Ireland). All the ‘sensible’ pundits tut at the irrationality of it all. “It’ll be contained”, they say. Anyone who says otherwise is a hysteric. But sensible or not, these pundits are usually wrong. That might be because markets themselves are not especially rational. But I suspect that it might be because markets are actually only now coming to their senses.
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Italy has to pay a lot more than Germany to borrow money. So what? What’s irrational about that? One is a manufacturing powerhouse with reasonably sound public finances (they’re still not brilliant by any means but we’re talking relative terms here). The other is a heavily indebted country with hugely dysfunctional politics. The only madness in the markets was that Greece, Italy and the rest were ever considered to be as creditworthy as Germany.
It looks like the Greek crisis all over again
Just as happened in the Greek crisis, Europe’s leaders are making noises to try to calm things down, making out that markets have somehow ‘misunderstood’ the situation. The big fear at the moment is that bondholders might actually have to shoulder some of the risk involved in lending to dodgy countries at rock-bottom rates. That’s exactly as it should be of course, but investors these days are used to free rides on the back of the taxpayer. They don’t like the rules being changed mid-game.
Bloomberg reports that Europe’s finance ministers are trying to emphasise that “any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements.” And Irish bond yields have fallen a little this morning (indicating increased confidence) as a result.
But as we saw when Greece started wobbling, talk is cheap. Reassurances might have a temporary effect, but no one’s going to trust the eurocrats until they see the money on the table.
Merkel has hit the nail on the head
Particularly when you have German chancellor Angela Merkel – who I’m getting to like more and more by the day – saying things like this: “Let me put it quite simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world. We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”
Merkel has hit the nail on the head. What seemed like an unstoppable force – the obscene self-interest and lobbying might of the financial sector – is on the point of colliding with an immovable object – a group of politicians who don’t want to lose their jobs. Taxpayers might have grinned and bore it when the initial bail-outs went through amid the panic and fear of a total financial collapse. But now, rightly or wrongly, they can’t see what’s in it for them anymore. The rejection of Barack Obama at the US mid-terms has at least as much to do with his failure to hold Wall Street to account, as it is to do with healthcare or any other issues.
It’s ironic that the threat of democracy in action is proving most effective in Europe, perhaps the least accountable democracy in the Western world. But it just shows you that you should never take the power to “throw the bums out” for granted.
This spasm of panic over Europe may end the same way as that over Greece – with more bail-outs. But we’re getting ever closer to the point where some hard decisions have to be made about who’s going to remain part of the club. Until the next emergency package is on the table, we can probably expect the euro to keep falling.
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