Now it's time to pay the piper

Outlook:

As we wrote Friday, this coming Friday we get US Q2 GDP, originally reported at 1.9% and now expected at 1.4%, according to the Bloomberg survey. Market News has 1.2%. The other data this week includes new home sales and factory orders. Leading up the FOMC next week, the stage is being set for some kind of Fed action, but nobody knows quite what. San Francisco Fed Pres Williams is featured on the front page of the FT, saying additional easing is needed to tamp unemployment down but what form it should take is uncertain. He seems to advocate the Fed buying mortgage-backed securities, hardly a new idea. “Mr Williams warned of “pretty significant” downside risks to the US economy from the eurozone crisis, the looming “fiscal cliff” of spending cuts and tax increases, and the dangers of a global slowdown.” He does not see much benefit in cutting the deposit rate on reserves or singling out banks for “funding for lending,” as in the UK. We have to assume he has better numbers and fancier analysis that we do, but it seems only sensible that banks would rather accumulate excess reserves at 0.25% than make loans when they know their ability to extend credit is poor. As for incentivizing lending, he says costs for banks are already low. Yeah, but banks are not lending at a pace that gooses job-creation.

We also get some important European data, including eurozone flash manufacturing and service PMI’s tomorrow and the German IFO business climate index on Wednesday (expected modestly lower). But economics, even German data, takes a backseat to the news about Europe falling apart at last. The shock comes from the German weekly, der Spiegel, a reputable news source and widely quoted this morning. It’s not just Germany that will decline to pony up additional cash (on top of the €130 billion scheduled), it’s the IMF. We recall IMF managing director Lagarde saying Greeks should stop whining and just pay their taxes, and while asset sales and budget cuts are important, too, we imagine the tax issue is really at the heart of the refusal to rescue Greece. As for Spain being indignant about the insult to national pride with yields at nosebleed levels, they still don’t get it. Quite apart from the real estate bubble, the Spanish government overspent and coddled the regions with largesse. Now it’s time to pay the piper. If that sounds hard-hearted, consider that the US is going to be wearing the same shoes come January. 

The real problem in Europe (and in Washington) is a lack of leadership. Several analysts point out today that no big shots are standing up to defend the eurozone in general or Spain in particular. Who would that be? Juncker, maybe. As Kissinger used to joke, when he wants to talk to Europe, who does he call? We can’t see a happy ending here, even if Spain manages to avoid asking for a sovereign bailout and somehow contagion to Italy is dampened. The euro is toast.