Blame the speculators

Blame the speculators. The easy bit for finance ministers the world over is to blame the dreaded speculators, and so it has been in Europe with the $US1 trillion prop-up for the Euro. The harder bit is to do the things that have to be done to change the fundamentals that prompt the speculators to speculate. That aspect, where the finance ministers of countries that have been living beyond their means drastically reduce the standard of living, is yet to come.

The initial reaction to the European rescue plan was clearly one of relief, with stock exchange indexes rallying and the Euro strengthening on foreign exchange markets.

Now the purpose of the exercise was not to strengthen the Euro, but it does provide a measure of the confidence markets have in whether the bold attempt to stop this latest financial crisis spreading beyond Greece will succeed. And on this score it has to be said that reservations are now becoming apparent, with the USD/EUR rate this morning well down from yesterday’s peak.

Another troubling sign. Nor is what is happening in Europe the only indication that the world’s financial troubles are not at an end. From the United States comes news that more than 11.2 million, or 24%, of all residential properties with mortgages were in negative equity at the end of the first quarter of 2010, down slightly from 11.3 million and 24% from the fourth quarter of 2009. An additional 2.3 million borrowers had less than 5% equity. Together, negative equity and near-negative equity mortgages accounted for over 28% of all residential properties with a mortgage nationwide.

The report from First American CoreLogic says negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70% of all of its mortgaged properties underwater, followed by Arizona (51%), Florida (48%), Michigan (39%) and California (34%). Las Vegas remains the top ranked CBSA with 75% of mortgaged properties being underwater, followed by Stockton (65%), Modesto (62%), Vallejo-Fairfield (60%) and Phoenix (58%). Phoenix had more than 550,000 underwater borrowers — the most households of any metropolitan market in the country. Riverside (463,000), Los Angeles (406,000) Atlanta (399,000) and Chicago (365,000) round out the top five markets.

Have some sympathy for Wayne. With background information like that about the world around us we should have some sympathy for the task Wayne Swan has had in drawing up a budget capable of winning an election. It cannot have been easy and it is no wonder the Treasurer in his previews is insisting that there will be no pre-election sweeteners.

Following the polls. The market has certainly reacted to the successive opinion polls showing a drop in Labor’s support. The Crikey Election Indicator now has Labor down to only a 66% chance of winning the next election.