Here's my summary of the key news overnight in (slightly more) than 90 seconds at 9 am, including news the European Central Bank (ECB) has finally unveiled its 'Big Bazooka' plan to try to solve the Euro-zone crisis.
ECB President Mario Draghi said the bank had agreed to his plan for unlimited buying of government bonds from those governments that sign up to 'strict conditionality' bailout plans. The ECB would then 'sterilise' the money printed to buy the bonds, addressing the concerns of those worried the programme known as 'Outright Monetary Transactions' would be inflationary.
This didn't stop Bundesbank President Jens Weidmann releasing a separate statement after the ECB decision saying he objected to the plan because it was "tantamount to financing governments by printing banknotes". However, the ECB essentially over-rode the Bundesbank's concerns, sidelining the biggest central bank in the Euro-zone. German Chancellor Angela Merkel had separately supported the plan. Germany's 'Die Welt' newspaper reported that: 'Financial Markets cheer the Death of the Bundesbank'
European stocks rose more than 3% and US stocks rose 2% to a fresh four year high. Gold rose to over US$1,700/oz and the New Zealand dollar rose in line with other 'risky' assets to be over 80.2 USc in morning trade. See more at Bloomberg.
See more on the ECB's plan here at Reuters, here at Bloomberg, here at The Telegraph and here at SpiegelOnline.
The ECB's plan is designed to lower bond yields for the likes of Spain and Italy and make their debts more sustainable. However, for the plan to go ahead, Spain or Italy have to ask for a bailout and agree to Greek-style austerity measures, including new tax increases and spending cuts.
This raises the risk that Southern Europe remains mired in a deleveraging spiral where governments cutting spending and increasing taxes succeed only in driving their economies deeper into recession, which increases the relative debt loads. It may avoid the immediate risk of a Euro-zone break up and financial meltdown, but sentences Europe to years of grinding austerity and perma-recession.
The ECB itself reinforced this outlook by forecasting a contraction in the Euro-zone economy in 2012, but also an increase in inflation as various nations push through increases in their sales taxes or GST rates to meet austerity targets.
So what does it mean for New Zealand?
A reduced risk of a Euro-zone financial crisis in the short term appears to improves the outlook for global growth. But Europe looks to be mired for longer in slow growth and there remains the eventual risk that Spain and Italy slide into a deleveraging spiral similar to Greece. Perma-recession in Europe extends the outlook for low interest rates globally, particularly if the ECB is effectively forcing Euro-zone interest rates lower in a strategy some describe as 'Financial Repression', where interest rates are artificially repressed below inflation rates to inflate away debt burdens.
Ultimately, politics will decide what happens in Europe. Elections, changes of government and social disruptions will be the key factors, particularly as unemployment rates soar and the populace revolts against yet more European Union-driven austerity.
Also, it's worth noting the Euro-zone is China's largest trading partner and China's outlook is more important for New Zealand and Australia directly than the Euro-zone. China's economy is slowing sharply at the moment, at least in part because of weak demand for its exports from Southern Europe. Chinese exports to Italy and Spain have fallen 40% in recent months.
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