Spain, Ireland `Thrown to the Wolves' After ECB Move

Discussion in 'Wall St. News' started by makloda, Jul 4, 2008.

  1. It seems to me that Weber succeeded in convincing Trichet that they can reduce headline inflation (commodity and energy input costs) to their fantasy target of 2.0% by inducing a European wide recession. Good luck to them.

    A recent picture of Trichet & Weber, here as King Theoden and Wormtongue in Lord of the Rings

    July 4 (Bloomberg) -- Jose Mauricio Rodriguez Montalvo rents a room from his sister to help her afford her basement flat in Madrid as mortgage costs soar.

    ``She's crying over the Euribor,'' the 12-month money- market rate used to set Spanish mortgages, Montalvo, 28, said in an interview. ``We're just praying it won't keep going up.''

    For homeowners in Spain and in Ireland, struggling to stay afloat amid the wreckage of a decade-long real-estate boom, those prayers are going unanswered. The European Central Bank yesterday increased its benchmark rate to 4.25 percent to fight inflation, pushing both economies a step closer to recession.

    The two countries are particularly vulnerable to higher lending costs because their housing industries account for about 10 percent of their economies, twice the EU average. Montalvo's family has seen its monthly mortgage payment leap 50 percent to 2,080 euros since the ECB began raising rates in December 2005.

    ``They have been thrown to the wolves,'' said Stuart Thomson, who helps manage $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. `It's much easier to bring inflation lower if you're willing to have a recession in economies like Spain, Italy and Ireland.''

    The Irish economy contracted for the first time in more than a decade in the first quarter. Growth in Spain was the slowest in 13 years in the period, and economists surveyed by Bloomberg News see a 45 percent probability of a recession, or two consecutive quarterly contractions, within the next year.

    Balancing Act

    The ECB has more than doubled its key rate in less than two years under its mandate to control prices. Euro-region inflation accelerated to 4 percent last month, the fastest in 16 years, on soaring food and oil costs, even with growth slowing.

    Trichet yesterday signaled further rate increases weren't imminent as he strikes a balance between taming inflation and not choking economic growth. Still, while he acknowledged some countries will be harder hit than others by the rate increase, he said the bank must serve the entire euro region just as the Federal Reserve sets policy for all 50 U.S. states.

    ``If you concentrate on California or Florida, it is not at all like Massachusetts or Alaska,'' he said in an interview with Ireland's RTE radio. ``It is the same in our case and we have to make a judgment what is good for the full body of the 320 million people'' in the euro area.

    Fraction of Germany

    Spain and Ireland make up less than 15 percent of the region's economy and their economies together are about half the size of Germany's. Growth in Europe's biggest economy accelerated in the first quarter to the fastest pace in 12 years and manufacturing was still expanding in June. Spanish industry contracted by the most on record.

    Spanish Prime Minister Jose Luis Rodriguez Zapatero has called on the ECB to be ``flexible'' in setting monetary policy.

    The Euribor has risen almost 30 basis points since June 5 when Trichet first signaled higher rates. That made new mortgages more expensive and will make existing ones costlier as 98 percent of Spanish home loans are on a variable rate. The jump in costs has sapped demand for housing.

    Home starts in Spain plunged 70 percent in March from a year ago and dropped around 60 percent in Ireland. The slowdown prompted Dublin-based realtor Lisney to lower salaries by 10 percent for its 170 workers. The Irish unit of CB Richard Ellis plans to cut around a 10th of its workforce.

    ``Transactions have dried up,'' said Guy Hollis, managing director of CBRE in Ireland. ``It's not going to last forever, but we have to be prudent.''

    Job Creation

    The building boom going bust is tarnishing a decade of gains. Ireland's economy has grown the most in the euro area since monetary union in 1999, while Spain created more than a third of new jobs in the region.

    After years of ``inappropriately low'' interest rates, Spain and Ireland are now feeling the ``hangover,'' said Alan Ahearne, a lecturer at Ireland's National University and a former economist at the Fed.

    Irish banks including Allied Irish Banks Plc had their 2008 earnings estimates cut by Merrion Stockbrokers yesterday because of expectations for deteriorating credit quality.

    The decade-long expansion does leave Spain and Ireland with resources to ease the pain of the slowdown. Zapatero's government will use a budget surplus of 2.2 percent of gross domestic product to finance 18 billion euros of measures to prevent defaults and aid unemployed construction workers.

    Ireland, with the second-lowest government debt in the euro area after Luxembourg, will maintain a 184 billion-euro infrastructure investment plan.

    That may not be enough to buffer the hard landing. The Spanish downturn destroyed 75,000 jobs in the first quarter when the unemployment rate jumped the most in three years to almost 10 percent. Ireland's jobless rate has risen to a nine-year high of 5.4 percent.

    ``Central banks are paid to cause a recession now and then,'' said Fortis Investments Chief Investment Officer William De Vijlder. ``Maybe it's a shock to put it like that, but that's reality.''
  2. cvds16


    I don't feel much pity for those people: stupid homeowners speculating and taking on too much dept in a stupid way (= no fixed rates) trying to be clever. Hey, no one feels any pity when I lose money trading SIF's it's just the same thing in another way. What I want is the inflation in my country, Belgium, to go down, it's no allready over 5% a year, so yes thank you to the ECB for their sanity to install stability.
  3. Yes thank you ECB for the (in)sanity of trying to combat crude oil price increases by inducing a European recession. The YoY % Change in headline inflation is by definition strongly correlated to the change in energy prices.

    Who knows, maybe the ECB doesn't have any other choice than increasing unemployment drastically over the next 2-3 years because Europe is so heavily unionized. Soon enough workers will try to enforce 6, 7 or 8% increases in wages in order to pay for higher food and energy costs, possibly setting in motion a self-feeding cycle of higher wage costs.

    Once the unions start their thing (over their paranoia over higher food and energy costs), I don't see how unemployment can do anything but skyrocket in Europe. Not a shallow increase, but another 1991-93 style recession.

  4. noparole


    Trichet announced his intentions to raise rates to combat inflation,oil made new highs soon after.

    ECB actually raises and...................oil still going up.

    How are they helping fight inflation in any way,shape or form?Yet their actions are hurting others even more.

    ECB=European Clueless Bank
  5. cvds16


    I guess you guys haven't even started in macro-economics 101 otherwise you wouldn't be saying this nonsense. If you want to stop inflation you got to raise rates, you can't expect to take see the effect of this a few hours later. Most americans would want something like the ECB instead of the weak FED.
  6. Please explain to me how the ECB single-handedly will influence EU headline inflation (including global energy and grain commodity costs) with their rate hike? Thank you.
  7. cvds16


    inflation is not just oil and commodities, it's the sum of several things, the ECB doesnt't focus on just those two things it's on the total of all prices. Economics 101: How do you slow down inflation ? By slowing down the economy ! How do you slow down economy ? By raising rates !
    How you do not know this as a trader is beyond me ! ! ! :eek: :eek: :eek:
  8. It looks like you are the one that ought to take macroeconomics 101, not me. You understand there is a core inflation rate and a headline inflation rate?

    Headline inflation jumped to 4.0% annualized last month while core inflation in the Eurozone has actually fallen from 1.9% to 1.7% over the last year as energy bills squeeze out other forms of spending (see

    Now please explain to me - using your macroeconomic acumen - how the ECB's hikes and future hikes have any impact whatsoever on headline inflation (energy and food costs, which are driven by global supply and demand)?
  9. noparole


    Is this the same economic theory that if you want to stop a housing market collapse,you cut rates sharply?How's that working out?This 1/4 point rate raise is a big waste of time and will do more harm than good.
  10. "Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries should equal the ratio of the two countries' price level of a fixed basket of goods and services. When a country's domestic price level is increasing (i.e., a country experiences inflation), that country's exchange rate must [be] depreciated in order to return to PPP."

    see charts, currently Euro is + 30% and until the US raises rates
    the Euros are stuck where they are
    #10     Jul 4, 2008