It has been rightly said in the world of finance the real reasons are never the real reasons. While there is obsession about EUROPEAN debt that is retiring this year, but the real reason could lie some where else. Adding a few numbers will puzzle you. The total debt that is to be paid back is less than EURO 200 bn out of which 50 billion EUROs is what is under severe stress to be paid back (read Greece).
EUÂ obviouslyÂ over reactedÂ and slushed in one trillion dollars into the credit market. Markets are still not reacting to the bailout. Why? cause the real problem is not EU debt. Infact EU Debt is far lower than US and UK. Fiscal deficit of less than 6% even with Greece and PIIGS combined. Debt retiring of less than 1% of the GDP, hardly a problem which should not worry the markets.
This was never a credit problem but we have been made to believe that this isÂ sovereignÂ problem visible most likely in CDS spreads widening for some notable PIIGS countries and banks. But none of this takesÂ awayÂ the fact that the underlying problem of retiring debt is a far smaller problem than it is being made out to be. Outside of PIIGS, EUROZONE is a perfectly healthy economy infact even better than US economy. That begs the question if the real problem is the soverign risks in EU or are their other indicators which tell us a different story?
One of the best indicators to watch out for is the falling Shanghai index.
This diverges from the popular media blitz concerning EURO. The correlation between EURO and Shanghai is “eerily” high. The reasons are not very difficult to understand given that China surplus has steadily vanished with massive imports now overshadowing its exports industry. China has more or less led the recovery in US and EU begiing March 2009, a point at which EURO attached itself closely to Shanghai. In fact China started to corrected as US investors (Chanos and co) whoÂ startedÂ to raise concerns concerning China. Chinese government played its part in slowing down the domestic economy. All this began to accentuate EURO downfall in Jan 2010 beginning while the folks at FT and the likes at other firms began to take up a lesser known problem (EU Debt of 200 Billion EUROs) as the main reason.
On the other hand concerning eurozone, John Paulson, now managing $ 34 billion in assets has sounded out calm and said that the health of EU debt as “manageable”.
One then starts analyzing the whole situation from very different angle, vis-vis China. Unless we see Shanghai resume it rise, we may not be able to see a sustainable rise in EURO strength. Bailouts dont matter and governments as usual have not understood the problem.
Tagged with: china, euro, shanghai