Last night it was the UK’s turn on the cold tap, with their unemployment figures and central bank leading the charge:
UK unemployment rose by 129,000 in the three months to September to 2.62 million, as youth unemployment rose above a million.
The jobless total for 16 to 24-year-olds hit a record of 1.02 million in the quarter and female unemployment was at its highest for 23 years.
The Office for National Statistics (ONS) said the jobless rate hit 8.3%.
The number of people out of work and claiming Jobseeker’s Allowance rose by 5,300 to 1.6 million in October.
The news comes as the Bank of England’s governor Sir Mervyn King said Britain’s economy could stagnate until the middle of next year.
The Bank cut its 2011 and 2012 growth predictions to about 1%, warning the global economic outlook had “worsened”.
Back on the continent the major concern at the moment is obviously sovereign bonds. They took a bit of a breather earlier in the night but had retraced their steps back into uncomfortable territory by the time the markets closed. Tonight will be a big test with both Spanish and French auctions:
The Spanish 10yr rate is not looking very pretty in the lead up to the auction, and I am wondering if LCH.Clearnet will hike margins on spanish bonds in the same way it did Italy given the spreads:
In Greece the temporary leader, Lucas Papademos, won a confidence vote:
The government of Prime Minister Lucas Papademos, a former vice president of the European Central Bank, secured 255 votes in the 300-seat Parliament. In a poll conducted by roll call, 38 voted against and seven deputies were absent. Only three members in the three party coalition — two from the outgoing Socialist administration, Pasok, and one from the conservative New Democracy — voted against the government.
and in Italy Mario Monti has finally put together his interim cabinet seemingly without using any politicians:
Seventeen is an unlucky number in Italy but that’s how many ministers there are. The last Berlusconi administration had twenty-three. Five ministries have gone. Twelve have portfolio responsibilities – including the economy, held by Mario Monti as caretaker – and five do not. Three women hold key posts (justice, employment and the interior) whereas there were six with Berlusconi. There are also seven academics, five doctors, a lawyer and a university lawyer. A banker, an ambassador, an admiral and a health law specialist are also on the list but no politicians.
So is it possible for Italy re-engineer its economy away from debt dependency? Certainly the lack of politicking will help even though I take issue with the lack of democracy in the entire process. I have previously explained that Italy’s public sector debt is not the only problem and I note this morning that the ECB’s Weidmann once again understated the issues facing Italy:
Weidmann feels that these interventions are completely unnecessary. Italy, unlike Greece, is not bankrupt, he says. On the contrary, the country is very prosperous and could easily raise money by, for example, increasing taxes.
The issue with that statement is that Italy in its current form is only prosperous while it continually takes on debt, the balance of trade figures show that the economy has an ever growing dependency on borrowing in order to support it:
What is actually required is an adjustment in competitiveness and production to re-adjust the economy away from its dependency on local private sector debt issuance and foreign borrowings. The standard IMF/EU ideology on this is exactly what Mr Weidmann stated. You simply raise taxes, cut government spending and the problem should be solved. But it is actually much more difficult than that as Greece has proven. By raising taxes and/or cutting government spending before making positive adjustments to the productivity and competitiveness leads to private sector deflation because the additional burden on top of existing debt servicing leads to unemployment. In a country where there was a private sector savings buffer this may not be so pronounced but Italy is not one of those countries. Once unemployment rises it creates a deflationary cycle that leads to falling industrial production taking the country further away from its required goal. That is, the debts still exists but the output of the country falls.
I would hope that the new Italian parliament has taken a look at Greece, Spain and Portugal and understands this outcome and therefore attempts to resist the temptation to destroy their own economy by implementing a regime of self-hurt. The fact that existing members of the ECB are deluded about the issue doesn’t fill me with much hope as any credible plan can’t be implemented overnight and will therefore require their support. The fact that Mario Monti himself is also a banker is also a worry because, in my opinion, any plan that is actually going to work needs to start with a cleansing of the banking system.
Mr Wiedmann’s delusion about Italian solvency is made even worse by the fact that Italy’s largest bank is now knocking on the ECB’s discount window asking if the bank’s China collection is acceptable as repo collateral:
The head of UniCredit (CRDI.MI) has urged the European Central Bank to increase access to ECB borrowing for Italian banks, a source close to the bank said, highlighting funding concerns among the country’s lenders.
The bank’s CEO Federico Ghizzoni and other European top bankers met ECB officials in Frankfurt but declined to comment on the content of the talks.
“What is important is to restore confidence,” Ghizzoni told Reuters after the meeting, adding that policymakers and financial markets both needed to work toward this end.
Earlier, the Corriere della Sera newspaper quoted Ghizzoni as saying he would ask the ECB “to extend the access to ECB liquidity by widening the type of collateral offered”. The request would also be on behalf of smaller Italian banks.
Italy does still have a large manufacturing base and it is therefore possible, if done correctly, to save the country. The real problem in my opinion is France. As the contagion spreads towards that country the calls for the ECB to do something “big” will grow louder and louder.
That is exactly what equities markets seem to be betting on.