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LATEST ARTICLES
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It is time that authorities recognise that economic growth cannot be generated with macro-economics alone. Micro-economics, especially the encouragement of innovative entrepreneurship is also an essential component.
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The fall on gold, China’s downgrade and an unexpected result of Japan’s ultra-loose monetary policy are all adjustments to the 'new normal'.
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After five years of waiting for a return to normal economic and market behaviour, let us recognise that “normal” will not return any time soon and needs redefining.
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The Cypriot bank bail-out has implications well beyond Cyprus, especially concerning the protection of depositors. The loss of banking trust may have a silver lining.
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Some ideas are so stupid that even their proponents will back down. Such is Cyprus bank deposit confiscation. See also the key points of a bridport/Hunt conference.
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The Italians are not alone in protesting against excessive austerity. Everywhere, traditional political parties are being disavowed and unconventional parties growing, some explicitly committed to euro or EU withdrawal.
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The Italians have mightily protested against excessive austerity, and they are not the only ones. Maybe some good will come out of what most see as a bad election result. Maybe not.
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Consider whether there are sufficient good signs in Europe to see this month as the “end of the beginning” (Churchill 1942).
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Is the US economy really in better shape than Europe’s?
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Some specific issues related to the primary market may be additional signs of a credit bubble.
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The outcome of the Japanese experiment is only one question unanswerable except with the passage of time. This week we have three more to consider.
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Japan is undertaking an experiment in inducing inflation. Whether the experiment works or not, it will provide many lessons.
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Is the current market optimism justified? We look at the USA, EU, the UK and Japan and inclined to “yes, but”. And we ask whether safe havens are dangerous?
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We present summaries of the two opposing views of the US economy without hiding our own. We cannot claim Europe is in any better shape.
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Good returns on bond portfolios in 2012 have been very dependent on the narrowing of spreads. That is unlikely to continue in 2013, just when yields will scarcely match inflation.
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As the euro zone moves slowly federalisation, the question is how to fiscal achieve discipline for each member country. Decentralised à la USA, or centralised à la Germany.
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Sadly, our hopes that QE would be ended soon in the UK and USA have been dashed as both King and Bernanke say they are open to continuing their programmes
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For many, quantitative easing is good news. We would see its ending as far better news. When might that be? Who might be first?
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This week we have challenged ourselves. We have highlighted the positive news which may help the economy in the future! While October revealed a lot of bad news, behind those, there are some long-term trends which developed. Of course, it will take time to solve all fundamental issues and investors need to be patient.
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A “phoney war” is underway on both sides of the Atlantic. Like its predecessor in 39/40 all hell will break out quite soon. With the Fiscal Cliff?
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Despite low coupon rates, bonds have provided respectable returns based on spreads narrowing. The same seems unlikely for next year and the danger of interest rate increases remains.
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Severe austerity is not working, so the time has come to consider alternative routes to regain sustainability. Reconsider the attraction of inflation and of good micro-economics.
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Indecision by politicians is now knocking on to corporations, who are obliged to withhold investment until the economic uncertainties are resolved.
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Stagnation or slow growth everywhere in the West, but a little optimism about UK employment may be justified. How can jobs grow by the GDP stagnate? Mystery!
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In June we saw only headwinds. Now everything seems resolved. Is it really the case?
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Rejoice that hope has returned to the euro zone, but keep your eyes on whether and how reforms are pursued, and be worried that printing money has become universal.
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Draghi has acted where politicians hold back, giving Europe the break so needed to continue its move to a federal structure for the euro zone.
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The banking supervisory role of the ECB and its bond-buying plan may be necessary but lack democratic support. Draghi the politician strikes while European leaders argue.
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The August calm has given way to a mood of relative optimism; positive signs are present in the USA and Europe but in the context of a world still cooling.
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While markets and commentators are focusing on euro break up, the European functionaries and politicians, if they are working at all, are drawing up rules for the banking union.
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Draghi is proving a great political maneuverer: “This is what we all agree is needed to save the euro, now, Germans, stop us if you dare”.
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You have to look very hard to find any positive developments on either side of the Atlantic. How strange that the USA’s currency and sovereign bonds have become havens for investors despite the chronic problems of the world’s largest economy in terms of internal and external deficits, political stagnation as well as chronically underfunded future pension and health care costs. The reason, of course, is that confidence in the euro and in the survival of the euro zone is so low that even the dismal outlook of the US economy looks good by comparison.
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'Worry is the interest paid by those who borrow trouble’
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What looks good can have unintended consequences, witness LTRO the low interest rates of the ECB and the entire “Target2” intra EMU settlement system
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So the vision of a fiscal union is being slowly backed into via a nascent banking union, thereby lightening the mood in financial markets. How durably?
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The EC has come up with a vision for future Europe. Now it will be seen if first the politicians then the voters sing up to it.
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Bailing out banks is a necessity, but let us examine the real purpose (the depositors, the “system”, as well as the conditions and the price paid by creditors and shareholders.
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If a federal system for the euro zone comes about, it is worth considering Merkel’s seven “neins” to see which will yield in what order, precipitated by Spain’s banks.
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The threat of Greece “walking away” from the euro should add some realism to Hollande/Merkel talks and give a push towards Germany taking its responsibility.
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How interesting to see if, how and when Merkel and Schäuble react to a widespread rebellion against an excess of austerity and a desire for a serious growth programme.
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The French must now choose between the Hopeless and the Horrible. If it is the former, say goodbye to European cohesion and competitiveness. Maybe the Horrible is the lesser evil!
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The debt crisis cannot be solved by pretending it is not there. Yet the leaders in at least two major countries have their heads in the sand.
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Is the SNB’s policy stance sustainable in the medium term?
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We try to define the real problems on both sides of the Atlantic to see if political leaders are actually addressing them. It is not encouraging.
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The recovery is weak but enough to cause a rise in the yields of those government bonds considered safe-haven. Consider the impact on corporate bond yields.
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When risk is “on”, serious analysis is “off”, allowing many unknown companies, from all over the world, to tap the corporate bond market
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We see this as a major reassertion of sovereignty and democracy. It will not be the last “rebellion”.
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To explain the lack of bid liquidity in European corporate bond markets, we hypothesis the existence of a yield barrier below which buyers refuse to go.
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An unusual mixture of rising markets in both equities and corporate bonds allows cleaning up of fixed-interest portfolios ready for a long period of little economic expansion.
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A benign atmosphere has set in, we hope for a few months. What a pity the underlying barriers to sustainable growth remain in place, thanks mainly to political inaction.
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Europe seems to have joined the USA in showing a few silver linings in the dark economic clouds. The ECB’s massive bank lending may be thanked. For increased liquidity.
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Rejoice in the improved employment situation in the USA, but do not confuse breathing space provided by cheap money with a real solution to economic weakness based on rebalancing.
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What is in Merkel’s mind as principal decider for the euro crisis? She is too smart for her ludicrous description of political union to be anything but a political ploy.
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“Federalisation or bust!” should be the slogan of the euro politicians and bankers now meeting.The ghost of Alexander Hamilton must be wryly smiling. Is Sarko a latter-day Hamilton?
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At the moment, bond market yields are being driven not by economic fundamentals, but by mass psychology and political issues. How long can this continue?
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With the departure of two Prime Ministers, some breathing space has been given to the euro zone to find permanent solutions, and to fixed-income investors to adjust their banking portfolios.
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As panic gives way to reflection on Papandreou’s referendum call, there may be good results from this after all, such as a more decisive rescue and federalisation with democratic underpinning.
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There may be lessons from the Swiss national Banks’ negative repo rate and the failure of Dexia. Both reflect aspects of how the euro crisis has become a banking crisis.
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The main features of the euro rescue plan are now appearing and there is hope that they will crystallise at the G20 meetings, including an outline of the “federal” structure.
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Though euro crisis is not yet over, the banks are being made to recapitalise in readiness for Greek debt restructuring.
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Little from Jackson Hole, but opinion is changing in favour of recognition that the West faces years of slow growth and that central banks can do no more to help
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The objective of the Chinese Government is first to implement Renminbi internationalization, then convertibility. To be considered as a international currency, China should development its financial markets. In this context, bond markets is gradually opening to international investors.
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Will the politicians save the euro before Greece defaults? What are the Chinese doing? Already the RMB is bond issuing and Asian trading currency. Reserve currency next?
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Flattening the yield curve, clearly the objective of the Fed at least, sounds like a good idea to improve borrowing. Unfortunately it ignores the problems created for banks.
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Bridport Investor Services thought the Federal Reserve's Ben Bernanke would announce a third round of quantative easing, however the lack of announcements at Jackson Hole has been hailed as a disappointment
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“True economic governance”? What a fudge! We ask whether the weak announcement from Sarkozy and Merkel is a measure of poor leadership of political realism.
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The best hope now is that the ECB stop gap measures work, that federalisation of the euro zone advances and that the recession is “L-shaped”, not a double-dip “W”.
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Now that the Congressional brinkmanship is over, markets clearly see the inadequacies of the US budget plan as well as the chronic structural problems of the euro zone.
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Palliative measures to economic malaise are being proposed on both sides of the Atlantic, with little attention to underlying problems of budget deficits and a needed monetary union.
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In view of the public disapproval of banks, it might be thought that banks would be wiser to acquiesce to proposals to separate retail from investment banking
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Trichet agrees with us that federalisation is the answer, too! The movement is underway but with opposition in both the rich North and the poor South of the EU.
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A temporary solution to the euro zone’s problems is on the cards, along with federalisation as a longer-term outlook. Meanwhile the situation in the USA is not improving.
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Whether the EUR or USD is “stinkier” is debateable, but it is clear that political considerations are taking precedence over economic both for possible QE3 and defence of the euro.
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Prevarication is the order of the day: postpone the day of reckoning for the Federal debt ceiling to August 2nd and delay proper resolution of Greek’s problems by extending maturities.
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Consider the parallel between the USA and China today and the USA and UK of yesteryear. Massive indebtedness of one country another implies ceding much power to the creditor nation.
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The USA is in an economic and political impasse. Economically Bin Laden's demise my not matter much, but politically it is crucial, giving newfound authority of President Obama
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The EUR has problems, the USD falling, gold and silver soaring -- can this be a full-blown monetary crisis, or a controlled change in the world monetary system?
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S&P has now followed the Chinese Dagong in questioning the AA rating of Treasury debt, another step in the loss of the “exorbitant privilege” of owning the reserve/trading currency.
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Many months ago, when we first suspected that the USA could not face up to austerity, we reckoned it would be forced upon the nation by the market.
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The US economy is recovering, but only because of cheap money. In contrast, Europe appears to on a path to normalisation of bond markets and central bank policy.
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Two major riddles: when will inflation hit the US economy and will quantitative easing be extended beyond June? We suspect QE extension but the inflation issue is a full mystery.
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Japanese rebuilding, the Arab Awakening and China’s “Lewis turning point” all point to good news for Western economies wanting to increase exports, but bad for T-Bonds and interest rates.
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Every central bank has tightened or expects to, except the Fed. Inflation lets debt decline. Is someone whispering as much in Bernanke’s ear? Does that mean a QE3 come June?
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Which way now? So many dilemmas. For Bernanke, to print money or tighten. Has the USD lost its shine? Safety or yield for investors?
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Three great dangers to the world economy have become more apparent in the wake of the Libyan uprising. The G20 meetings achieves little on the issue of monetary reserves.
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A falling dollar, rising commodity prices, and inflation in Asia threaten the standard of living in the West and especially in the USA, and undermine the reserve currency system.
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Back to the future: the return of the securitised asset-backed bond, issued this time by banks for their own needs. This plus Irish shenanigans on bank debt.
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Good news all round except for the sting in the tail that US GDP growth is mostly dependent on deficit household spending. When will the unsustainable end?
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Note well what King of the BoE is spelling it out, echoed by Trichet: an income squeeze in the West is unavoidable. No such recognition by Bernanke in the USA.
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Struggles are emerging between governments nurturing weak recoveries and central banks wishing to dampen inflation. Bond markets may encourage central banks in raising rates, the BoE first, ECB later.
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Europe’s bottom-up problems may be on their way to solution, contrasting with the USA where Federal budgetary deficits are spreading down to States and Municipalities, with rising yields for “munis”.
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We consider whether yield curves will steepen and overnight rates be raised, and reach a conclusion as to the likely order for four major currencies.
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Our faith that the EUR will somehow by held together by the efforts of European leaders is reinforced by the expanding role of the Chinese in buying European sovereign debt.
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Trust in governments is declining, not least because to bail out banks on the backs of tax-payers is creating a political backlash. Yield curves are steepening.
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It is back to normal in the USA: spend more, print money, collect fewer taxes and ignore market forces, which act far less severely on the USA than on Europe.
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In a panicky market, opportunities abound for the cool-headed. We remain sanguine that the ECB’s resolve will succeed in a short-term bail-out, but that the EMU must be revamped.
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The USA simply ignored the Dagong attack. Why spend energy battling the Chinese when there is quite enough conflict within the USA over QE2 and the competence of the Fed?
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The USA simply ignored the Dagong attack. Why spend energy battling the Chinese when there is quite enough conflict within the USA over QE2 and the competence of the Fed?
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Bond Outlook [by bridport & cie, November 10th 2010]
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Constipation may better describe the situation of the US economy than champagne cascades, and the risk investors face is that relief may come in too big a dose!
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For the moment this recommendation concerns only instruments in euros: cash or cash equivalents offer a return as high as 3-year corporates while allowing lengthening when long-term rates rise.
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The Chinese are turning their attention to bailing out the Euro Zone with profound consequences for the EUR and for interest rates: the “Beijing Committee to Harmonise Euro Interest Rates”.
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Economic management of encouraging M&A while ensuring SMEs have no access to capital is an excellent way to ensure little job creation, but can it really be what governments want?
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When their indebtedness becomes really unsustainable, governments will not default in any classic way, but practise “financial oppression”, particularly on bondholders and retirees. Inflation will be part of this.
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Whether or not Europe or the USA are in worse shape economically, their problems and therefore their solutions are quite different. Stimulus versus austerity.
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Whether or not Europe or the USA are in worse shape economically, their problems and therefore their solutions are quite different. Stimulus versus austerity.
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To suppose a flat economy in today’s world is to be optimistic. So be it, as we think the differences between the USA and Europe favour the latter.
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We believe the fears of a double dip to be exaggerated, which makes bond markets vulnerable to likely yield rises. China takes a new step toward RMB internationalization.
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The evidence is growing that the route taken by European governments in restoring confidence is proving more effective than the indecision and doubts across the Atlantic.
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Did European governments have any choice in opting for austerity? We think not, as confidence must be maintained not just in financial markets generally but in sovereign bonds as zero-risk.
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As the USA follows one path and Europe another, time will tell which is the better route to renewed prosperity. This is an experiment of historic import.
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Politicians might say recovery and retranchment can go together, but that is clearly not the case. Recovery might now be four years off.
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“Everyone” is into retrenchment, Europeans by political will, Americans under market forces. It remains to be seen whether sustainable growth lies the other side of the pain.
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Recession to the left and stagflation to the right. Good luck to government on that tightrope! Be grateful for a moderate calm in Europe with the creation of the EFSF.
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Look for two historic changes as a result of recent crises: the Euro zone will have more centralised influence on fiscality, and financial markets will never be as free again.
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Three emergency operations in a row – US subprime, euro debt and UK deficit – apparently controlled for the immediate future. But the longer term still demands action. Some action is appearing.