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Spain Bailout - Global Economics Weekly

Spain Bailout -

Global Economics Weekly Brief

As the European Championship got under way in Poland and Ukraine, reigning champions Spain announced that it will formally request help for its banking sector. The amount could total up to 100 billion euros but unlike Greece, Ireland and Portugal there will not be any new demands for austerity and structural reform. Spain is already targeting hefty spending cuts and is moving to reform its economy. So is this money for nothing? Not quite.

The bailout is borrowed funds and Spain’s government debt will rise accordingly. And will it bring the crisis to a halt? This is highly unlikely. Markets have re-acted positively but this is likely just a brief ‘relief rally’. There is still the Greece election this coming weekend and beyond this no shortage of concerns and areas of vulnerability throughout the Eurozone. This crisis will rumble on. Italy and France will follow for help this year!

UK Monetary Policy Committee (MPC) left policy unchanged in June. The question now is, for how long? The ongoing Eurozone crisis continues to increase the downside risks to the global economy. With this background it is likely that sentiment will have moved towards some more quantitative easing, though not quite enough to take the plunge just yet. It could be that the committee wants to keep its powder dry in case of more problems in the Eurozone, or it wants more evidence that inflation is retreating. Whatever it is, we should expect the minutes to reveal more votes for policy easing.

The European Central Bank also stuck. Despite increased downside risks to the Eurozone economy the ECB also kept its policy stance unchanged, but the vote was not unanimous. It’s clear that the lack of progress by Eurozone leaders to resolve the crisis is causing frustration. President Draghi made this abundantly clear, noting that it would not be right for monetary policy to compensate for other institutions’ lack of action. What will happen next? Watch this space!

In the US there were no signs of imminent policy easing either. The Fed Chairman, Ben Bernanke, gave no signs that there would be any change to US monetary policy in the short term, despite the continuing drags from the labour and housing markets. In the US the issue is the ‘fiscal cliff.’ This is legislation that could bring in big cuts in government spending and tax rises in early 2013. Chairman Bernanke warned that if this is allowed to occur, it could “pose a significant threat to the recovery." More unemployment on its way!

But China’s central bank bucked the trend.
In contrast to the ECB and Bank of England, the Chinese central bank cut its benchmark interest rate by 25 bps – the first cut since 2008. This will help shore up growth in the near-term. Far more important for the long-term is the fact that more flexibility is being given to banks to set their own deposit rates. China’s controlled interest rate environment has been one of the key factors behind its investment and export-led growth over the past 35 years. This step will ultimately help China rebalance toward an economy driven more by consumption. China is at present stagnating!

Continuing softness in Chinese data. China’s export growth picked up during May, helped by the US and the rest of Asia. But retail sales, investment and industrial production continued to point to a softening of growth momentum. This softening, coupled with inflation falling to the lowest level in two years, justifies the central bank’s move to loosen policy. China needs more global customers to fit their growth pattern!

UK services posted good growth in May. After the fall in the manufacturing PMI (Purchasing Managers’ Index) last week, the result of the services survey was awaited with trepidation. Happily the index was unchanged at 53.3 in May, indicating solid, albeit unspectacular growth in the sector. The breakdown was encouraging too, as ‘incoming new business’ increased to a four month high and further falls in input costs will help margins. This is good news and could mean the UK edges out of recession in Q2. But be cautious - there have been big differences between survey and official data over recent quarters. Is this data correct?

The US service sector also had a decent May. The non-manufacturing ISM survey increased to 53.7 in May from 53.5. Like the UK, this suggests continued expansion at a modest pace. It also showed an increase in new business, but the employment component slipped to its lowest level this year. Overall US data continue to paint a picture of an economy that has lost some of its momentum this year. Borrowing more money again!

Plus, the banks globally are still stashing cash at the highest levels ever recorded, why? We all know why, don`t we! Will we see a run on the banks soon?

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland followed by France who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? Then who will follow? What future as the Euro? Watch this space!

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

Spain Bailout

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