Well the news for the Germans didn’t get any better after the horrible ZEW:
German business morale posted its steepest drop this month since the aftermath of the Lehman Brothers collapse in late 2008, raising fresh doubts about the broader European economy as it grapples with a crippling debt crisis.
The Munich-based Ifo think tank said on Wednesday its closely-watched business climate index, based on a monthly survey of some 7,000 firms, fell to 108.7 in August from 112.9 in July, well below a consensus forecast in a Reuters poll of 42 economists for a 111.0 reading. .
The last time the index fell so sharply was in November 2008, just after the collapse of Lehman Brothers when the German economy was in its deepest post-war recession. It was the lowest reading for the index since June of last year.
Ifo economist Klaus Abberger told Reuters that the slowdown of the U.S. economy and twin debt problems in the U.S. and Europe were the main reasons for the worsening outlook.
“The German economy has been infected,” Abberger said. “I wouldn’t speak of a recession at this moment. The companies still have a cushion of orders. And not every cooling results in a recession, but the recovery is slowing very significantly.”
Overall business confidence probably is being helped by the banks themselves who are now shedding staff almost as fast as they are shedding investor confidence:
UBS AG (UBSN)’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue.
UBS, Switzerland’s biggest bank, said yesterday it will eliminate 3,500 jobs, mainly from its investment bank. It follows HSBC Holdings Plc (HSBA), which announced 30,000 cuts on Aug. 1, Barclays Plc (BARC), which is cutting headcount by 3,000, and Royal Bank of Scotland Group Plc (RBS), which is eliminating 2,000 posts. Credit Suisse Group AG (CSGN) announced 2,000 reductions on July 28.
European banks are slashing jobs this year six times faster than their U.S. peers, according to data compiled by Bloomberg, as concerns about the creditworthiness of Italy, Spain and France roil financial markets and reduce income from fixed- income trading, stock and bond underwriting as well as mergers and acquisitions. Financial firms are also cutting costs as regulators force banks to hold more and better quality capital to withstand future shocks.
“It’s a bloodbath, and I expect things to get worse before they get better,” said Jonathan Evans, chairman of executive- search firm Sammons Associates in London. “I cannot see a lot of those who have lost their jobs getting re-employed. Regardless of how good someone is, no one wants to talk about hiring. Life will be very difficult for two or three years.”
The confusing messages about the future of the Euro continued overnight. We had the German President Christian Wulff questioning the legality of the European Central Bank’s bond-buying programme of periphery paper:
“I regard the massive acquisition of the bonds of individual states via the European Central Bank as legally questionable,” he said in the opening speech at an economists’ conference in Lindau, Germany.
Wulff cited an article in the European Union’s fundamental treaty, which prohibits the ECB from buying bonds directly from governments.
“This ban only makes sense if those responsible don’t circumvent it with comprehensive purchases on the secondary market,” he added.
And this was on top of yesterday’s call by German Labour Minister Ursula von der Leyen, stating that gold reserves and industrial holdings of periphery nations should be used as loan collateral:
Angelina Merkel has since come out and stated that she doesn’t support the use of gold as collateral, there isn’t going to be a Euro break-up, she still doesn’t support Euro-bonds and the only way forward is still for periphery nations to reduce their debts and increase their competitiveness. So nothing much has changed there, it just once again highlights the fact that Europe is in no way in agreement about what to do next and the in-fighting continues across the continent.
The result was a new run on Greek and Portugese debt and, as expected, the pressure on the banking system continues to increase:
The cost for banks to borrow short-term dollar funds from other banks rose to its highest level in a year Wednesday as large investors continued to pull back on making loans and fears over bank counterparty risk increased.
London interbank offered rates for three-month dollars increased to 0.31428, the highest rate since last August, up from 0.31178 on Tuesday.
The bank’s credit default swaps rose on Wednesday but remained under a record high reached briefly the previous day, as illiquidity in the corporate bond markets drove investors to buy protection on concern the bank may need to raise new capital, instead of selling their bonds.
This does not yet resemble Lehman. But it sure does resemble the Minsky moment that preceded it by twelve months or so. Only with aforethought, contagion can now move more quickly.