Continued from Part One.
It is widely believed by many, and even openly discussed in Brussels, that Greece could be the first to go. If it does, Portugal may well follow. It seems untenable that Italy could fail, but without collective support, it’s just as hard to see how it can stay.
Italy has Ã¢â€šÂ¬33 billion of debt coming due in the final week of January and a further Ã¢â€šÂ¬48 billion in the last week of February. Germany failed to get away a Ã¢â€šÂ¬6-billion sale last week (admittedly at miserly yields) — does Italy have a chance, and if they did, at what rate? Already it is paying over 7 percent while it sees those outside the single currency paying 2-3 percent; how much of their future will they be willing to sacrifice? The moment the first country leaves the single currency, interbank finance will stop. No one will know how to value a debt or who to trust as remaining solvent. As loans to firms and individuals turn bad, bank finance will become even more scarce than it already is.
Those at the eye of this particular banking storm will be the French banks, as this graph from the Economist illustrates.
The next major opportunity (maybe the last major opportunity this year) is the EU summit on Dec. 9. Previous summits came and went without agreement, but half the world watches and thinks Germany will change its mind at the last minute, agreeing to collectivization of debts via euro bonds or some similar mechanism in return for control of the peripheral states’ fiscal sovereignty.
The other half of the world is taking Germany’s stance to date: that they will not take on what they see as profligate states’ responsibilities; and that all that is needed is fiscal rigor in the form of cutting debts, raising taxes and selling assets to set the world to rights. Which side proves to be right is, in true European style, unlikely to be clear-cut. Further fudging, procrastination and delay is almost certainly going to be the outcome.
In the meantime, metal markets have continued to slide in the face of fear — fear of the impending European recession, fear of a sovereign default and also fear of a slowing China resulting in a hard landing for Asia. Neither of the first two factors are, on the face of it, likely to be resolved satisfactorily in the next few months; the probability is that prices could slide further.
Certainly the expected rally in metals for which a relatively tight supply market should be providing support (like copper or like aluminum where production costs are above metal prices for many producers) is looking less and less likely. Unfortunately, with Europe’s future the cause of so much uncertainty and fear, it could get worse before it gets better.