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Daily Archives: February 9, 2010

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Big test coming for Euro

David Rosenberg warns don't take Euro's longevity for granted:

Greece today may well be the touch-off point for market instability just as Thailand was back in July 1997 — who would have thought a Baht devaluation would have touched off a major Asian financial crisis. Then again, who thought the subprime mortgage market would unleash a broad credit collapse — certainly not the folks at the Federal Reserve. And, as for the Euroland, don’t take its longevity for granted either. Go back to the history books and read about how long other currency unions lasted in that part of the world in the past (like the Latin Monetary Union circa 1867 or the Scandinavian Monetary Union circa 1873).

Maybe it's too early to be too much worried about Euro, but be reminded that the fate of Euro had always been a jousting between two of my favorite economists, Milton Friedman and Bob Mundell. 

***Read this classic historical debate*** at University of Chicago between the two great minds.

Fogel on world economy in 2040

Robert Fogel, winner of Nobel prize in economics in 1993, predicts China will dominate the world economy by 2040 (see the table below).

 His prediction raised some heated debate in economics profession. In a recent NBER paper, he explained why he thinks:

1. China's future growth rate will be about 8% per year between 2000 and 2040;
2. EU-15 will only grow at 1.2% per year between 2000 and 2040;
3. The U.S. GDP between the same years will grow at 3.7% per year.

Betting against Euro

Traders are increasingly betting against Euro (source: FT):

Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis.

Figures from the Chicago Mercantile Exchange, which are often used as a proxy of hedge fund activity, showed investors had increased their positions against the euro to record levels in the week to February 2.

The build-up in net short positions represents more than 40,000 contracts traded against the euro, equivalent to $7.6bn. It suggests investors are losing confidence in the single currency’s ability to withstand any contagion from Greece’s budget problems to other European countries.

Amid growing nervousness in financial markets over whether countries including Spain and Portugal can repair their public finances, Madrid on Monday launched a PR offensive to try to assuage investors’ fears.

Elena Salgado, Spanish finance minister, and José Manuel Campa, her deputy, flew to London to meet bondholders.

They sought to allay doubts about Spain’s creditworthiness by repeating promises to cut its budget deficit to 3 per cent of gross domestic product by 2013 from 11.4 per cent last year. “We’ll make the adjustment that’s necessary,” Mr Campa said. But their disclosure that the treasury planned to raise a net €76.8bn through debt issuance this year unsettled markets further. The projected sum to be raised was lower than the €116.7bn of 2009 but higher than many investors had expected.

The news sent yields on Spanish government bonds, which have an inverse relationship with prices, sharply higher. The premium demanded by investors to hold the country’s debt over German bunds rose to 1 percentage point.

The Spanish government is convinced it is being unfairly treated by foreign investors and the media. José Blanco, Spain’s public works minister, hit out at “financial speculators” for attacking the euro and criticised “apocalyptic commentaries” about Spain’s finances.

Appealing for patriotism, Mr Blanco said in a radio interview: “Nothing that is happening in the world, including the editorials of foreign newspapers, is casual or innocent.”

The single currency fell to an eight-month low of $1.3583 on Friday but recovered a little on Monday to $1.3683. Analysts said sentiment towards the euro had soured because of the increasing concern over Greece’s fiscal problems.

Thomas Stolper, economist at Goldman Sachs, said: ” Behind this intense focus on Greece obviously is the long-standing unresolved issue of how to enforce fiscal discipline in a currency union of sovereign states.”