Less than two weeks ago, the leaders of the eurozone were looking forward to sunning themselves on the beach this month after they concluded a deal that was supposed to resolve once and for all the debt crisis on the fringes of the single currency.
On Tuesday, the euphoria was a distant memory as the financial markets threatened two of the big beasts of the monetary union — Italy and Spain.
As bond yields in both countries rose to levels not seen since monetary union was created more than a decade ago, Spanish Prime Minister Jose Luis Rodriguez Zapatero said he was postponing his three-week vacation to monitor economic developments. Italian Minister of Economy and Finance Giulio Tremonti called an emergency meeting to discuss how his country, which has the biggest national debt of any eurozone nation bar Greece, could cope with the speculative attacks.
Traditionally, Europe closes for business this month unless there is a good reason policymakers should be shackled to their desks. This year there is.
When the heads of the 17 eurozone governments met in Brussels on July 21, they agreed not just to bail out Greece for a second time, but to put together a war chest that would enable them to take pre-emptive action in countries seen as vulnerable to attack. The message to the markets was clear — monetary union will be protected come what may, so think twice before turning on Italy and Spain.
However, it did not take long for the financial markets to unpick the Brussels agreement. They quickly discovered that while there was the promise of more money for the European financial stability facility, it would take months for the funds to arrive and then only if national parliaments agreed to pony up the cash. What looked on the surface a once-and-for-all solution was exposed as a naked attempt to buy time.
Events in the US over the past week mean the respite has been short. The threat that even the world’s biggest economy might welsh on its debts has reignited concerns about the weaker members of the single currency. Dismal growth figures from the US have made matters worse, since the chances of countries like Spain and Italy growing their way out of trouble will be impaired if the recovery in the global economy stalls. That now looks much more probable than it did a fortnight ago.
Nick Parsons, head of strategy at National Australia Bank, said: “Europe’s leaders probably thought they had bought themselves three months. I thought they would get six weeks at best. It now doesn’t look as if they will get as long as that.”
“There is a growing sense of crisis enveloping markets in the northern hemisphere. Thus far, asset markets in Asia have been holding up relatively well and currencies have moved in an orderly fashion. With increasing doubts about the forward momentum of the global economy, we will need to watch these Asian markets very closely for any signs of contagion. The month of August has got off to a very nervous start,” he said.
In their different ways, Italy and Spain exemplify the difficulties in making the eurozone work. Deprived of the ability to devalue its currency, Italy has struggled to remain competitive with Germany and growth has been sluggish. Spain, by contrast, had excessively strong growth in all the wrong parts of the economy courtesy of a one-size-fits-all interest rate. Cheap borrowing costs led to soaring asset prices, an unsustainable construction boom and a widening current account deficit.
Bond markets are now flashing warning signs about both countries. As Europe’s sovereign debt crisis has unfolded over the past 15 months, markets have sensed a country is in trouble when the yield (interest rate) on its 10-year bonds has risen above 6 percent. The trigger for a bailout has been when yields have topped 7 percent. In Spain, the peak for yields on Tuesday was 6.45 percent — in Italy it was 6.14 percent.
“We are on the brink of a major sovereign debt crisis,” Danny Gabay of Fathom Consulting said.
He added that there were similarities between Europe this summer and the US mortgage meltdown four years ago. Greece and Portugal were akin to US sub-prime borrowers, who were the first to run into problems, but subsequently the crisis spread to borrowers with slightly better prospects. In the context of Europe, that was Italy and Spain, with Italy’s national debt of 130 percent of GDP making it a more pressing problem.
Servicing that debt is impossible when growth is low and interest rates are 6 percent-plus and rising, which is why markets are now wondering how long it will be before Italian Prime Minister Silvio Berlusconi’s government seeks help from the EU and the IMF.
Jerry del Missier, the co-head of Barclays Capital, the investment banking arm of Barclays Bank PLC, urged European policymakers to act quickly.
“Markets don’t always get it right, particularly in the summer months when volumes are low and there is a temporary loss of confidence. We need a much more engaged response,” del Missier said.
With talks between Italy and the eurozone ongoing, David Owen, managing director at Jefferies Fixed Income, said there were a number of key events that could bring the crisis to a head — including a Spanish bond auction and the release of data for Italian growth and US jobs.
The suspicion in the markets was that Zapatero’s three-week vacation could turn into a weekend break. At best.
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
Since the Russian invasion of Ukraine in February 2022, people have been asking if Taiwan is the next Ukraine. At a G7 meeting of national leaders in January, Japanese Prime Minister Fumio Kishida warned that Taiwan “could be the next Ukraine” if Chinese aggression is not checked. NATO Secretary-General Jens Stoltenberg has said that if Russia is not defeated, then “today, it’s Ukraine, tomorrow it can be Taiwan.” China does not like this rhetoric. Its diplomats ask people to stop saying “Ukraine today, Taiwan tomorrow.” However, the rhetoric and stated ambition of Chinese President Xi Jinping (習近平) on Taiwan shows strong parallels with