The Moody’s ratings group has raised the stakes about the eurozone and the European Central Bank’s plan to buy bonds of troubled countries by putting the EU’s rating on credit watch negative. The news came late Monday night in Europe (this morning in Australia). The move will put extra pressure on the ECB and the core countries such as Germany ahead of the widely expected plan to support the bonds of troubled countries such as Spain and Italy.
Any cut in the ratings of the EU and countries such as Germany could lift the cost of funding the bond-buying via the European Stability Mechanism, which will be the key funding vehicle for any move. The move won’t hurt in the short term because of the high demand for safe bonds, like those issued by Germany, the UK and even Holland and France.
Moody’s said the negative outlook was due to its move in July to put the Aaa ratings of the four largest contributors to the EU’s budget: Germany, France, the UK and the Netherlands on a negative outlook. Moody’s July move followed its decision earlier this year to put the Aaa ratings of the UK and France on negative outlook.
In its statement, Moody’s said it needed to adjust the outlook on the broader EU due to “the likelihood that the large Aaa-rated member states would likely not prioritise their commitment to backstop the EU debt obligations over servicing their own debt obligations.” In other words, Moody’s reckons the core countries in Europe will put their own funding and other domestic needs first before those of the ESM, meaning the risks for the ECB bond plan will rise. That will worry eurozone members ahead of Thursday’s ECB meeting, but despite that, something needs to be done, especially in Spain, which is looking weaker by the day.
Overnight, another Spanish province, Andalusia, the country’s most populated region, asked to be bailed out. That’s now four provinces asking for help. Spain doesn’t have the money to do that and meet other demands to come. Anadalusia wants a €1 billion loan right away, which while not as much as last week’s €5 billion demand from bigger Catalonia, is another sign of the shape of the bailout for the country that is surely coming. But that’s for Thursday night. Last Friday’s move to advance nearly €5 billion in bailout money to Bankia, Spain’s major savings bank, is a sign of the increasing pressure on the country. Watch France where the government has been forced to bail out a non-bank mortgage lender to the tune of €20 billion of loans and guarantees.
The most recent pan-European survey conducted by Markit showed more weak demand for manufacturing products and labour in August and for coming months. Business conditions worsened in a majority of the national manufacturing sectors covered by the survey. An exception was the UK, where PMI improved in August to 49.5, just below expansion, suggesting the rotten second quarter has passed and the tentative growth in the economy is back. But it is hardly strong and economists reckon they can see a further fall negative growth.
Ahead of our second quarter GDP figures tomorrow, the quality of the economic data here is becoming poor, as it is in our major markets of China, Japan and South Korea. China’s soft landing is getting harder, Japanese industrial production is falling and exports and imports are weak. It’s a similar story in South Korea. Together they take the bulk of our exports of iron ore, coking and thermal coal and other commodities. The final PMI for China for August from HSBC/Markit confirmed the slide reported in last week’s “flash” report. It was the worst reading for this survey since March 2009 and followed the release last Saturday of the official government survey which also showed a dip into the contractionary phase. HSBC’s PMI fell to 47.6 in August from July’s 49.3, marking the 10th straight month-on-month fall.
The final result also marked a downward revision from an initial 47.8 reading, and was down sharply from July’s 49.3 level. The main drivers of the fall were drops in new export orders and input costs sub-indexes at their weakest readings since March 2009. Production figures were also weaker. HSBC economist Hongbin Qu said in a note accompanying the report that it confirmed China’s economy is facing “intensifying downward pressure.”
All of that will mean more news for us like yesterday’s weaker-than-expected retail sales yesterday, falling job ads last month, weakening credit growth and poor housing data.
So, rate cuts looms this afternoon? The data is unlikely to force the Reserve Bank’s hand today, but if there are no early signs of an improvement, especially in China, the time is approaching when it will be forced to give us another rate cut. This Thursday will see employment data for August, which will give us a much more up-to-date snapshot of the economy than tomorrow’s GDP.
On the plus side, the Aussie dollar continues to ease, slowly, trading under $US1.0240 this morning: it is down more than 3½ cents from the highs of well above $US1.05 early last month. Weakening iron ore prices and the falling terms of trade are finally starting to register. The Reserve Bank said yesterday that its commodity price index fell 4.3% in Australian dollar terms in August and is now down more than 18% in the past year. A deal from the European Central Bank on Thursday night on supporting the bonds of countries such as Spain, Italy and even France could see the dollar’s slide accelerate as market tensions ease. The prospect of further interest rate cuts here will place some more downward pressure on the currency as well.
But we’re all hostage to the European depression and the urgent need for the Europeans to turn things around. It is pushing the world growth path lower by cutting demand for goods produced in Japan, China, the rest of Asia and the US. We’re already seeing the immediate impacts in falling iron ore prices. There’ll be more to come.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.