EYE ON EUROPE: Assessing “Health” as Interest Rates Reduced Today…

EYE ON EUROPE: Assessing “Health” as Interest Rates Reduced Today…

The European Central Bank and Bank of England cut their interest rates in a last-ditch effort to spur economic growth… now what?

Both the ECB and BOE cut their benchmark interest rates today by 50bps to 1.5% and 0.5% respectively. Economists unanimously agreed on a cut and the negative data points we’ve been highlighting over the last weeks made it pretty clear that ECB President Jean-Claude Trichet and BOE Governor Mervyn King would follow suit today.

The Eurozone looks nothing short of a disaster: unemployment is on the rise throughout the region (France reported today that Q4 ’08 unemployment rose to 8.2%); bond spreads between the stalwart German Bunds and Europe’s other nations continue to rise (France issued a 10-Year sale today and its spread against the German 10-Year was 67bps; last month Austria’s 10-Year bonds blew out to its largest spread of 137bps versus the German) as investors expect a premium yield for default risk (see chart); housing and manufacturing output, especially in the all-important car industry, continue to show sequential deceleration; and critically the crisis of confidence suffered by Banks in the US and UK now appears to be hitting Western and Eastern European financials square in the face.

Last week East and Central Europe received $31 Billion in aid to refinance debt and equity, credit lines, and political risk insurance. Yet early indications (Hungary proposed a $230 Billion package for the region that was rejected by EU officials and Romania claimed it alone needs 10 Billion Euros to cover its account balance and budget gaps) suggest that the region will need more aid—at the very least “recovery” in 2010 may be far too optimistic.

Sweden yesterday committed to a $1.1 Billion loan package for the Baltic states, a region in which Swedish banks (Swedbank, SEB, Nordea) account for 53% of lending. For more on Western European Bank leverage to Eastern Europe see Monday’s article EYE ON EASTERN EUROPE: A Facelift of Funds, Hungary Wants More.

If you could see our playbooks on Europe you’d note the consecutive pages of red ink punctuating the negative data points from the region.

We remain the opinion that the ECB and BOE’s cuts are “too little too late” and stand firm that there is no auto-correlation among the European markets. We haven’t been long anything in Europe in 2009, and we remain bearish on Europe as a whole.

Matthew Hedrick
Analyst

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