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Message: European Perspective
A respected European economist provides his perspectives on this week's events...
Regards - VHF
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Paulson Tours ECB and Bundesbank Before Eurozone Rate Meeting
Monday, June 30
Toni Straka
Will US Treasury secretary Hank Paulson beg for a delay in the inevitable series of rate hikes the Euro will see in the next two years?
Paulson has started out on a trip to Frankfurt in order to have a cup of tea with ECB president Jean-Claude Trichet and declared ueberhawk German Bundesbank president Axel Weber. He will see them at separate meetings before the ECB will decide on a possible rate hike in its governing council on Thursday.
Trichet has no other option than to hike rates if he wants the commitment to the ECB's mandate of fighting inflation still to be taken for serious.
Eurozone inflation shot to a record 4% in June, after 3,7% in May, Eurostat reported in a flash estimate on Monday. This figure has never been varying more than 0.1 percentage points. Theses are official figures although.
My lying wallet tells me otherwise as European gas prices shoot from one record to the next on an almost daily basis. Given my limited grocery experience I nevertheless see especially milk products taking the sky for a limit. Inflation now hides in shrinking packages sizes, I notice.
European bonds declined on Monday, signalling the market expects a hike form the ECB.
From Bloomberg:
European government bonds fell, sending the German two-year note to its biggest drop in three weeks, after inflation accelerated more than forecast in June, bolstering the case for policy makers to raise interest rates.
The decline pushed the yield on the two-year note up by the most since June 5, with the price poised for its biggest quarterly slide in at least 17 years. A government report showed the inflation rate in the 15-nation euro region rose to 4 percent from 3.7 percent in May. Economists had forecast a 3.9 percent rate, according to the median of 38 estimates in a Bloomberg survey.
This comes at a a time when the strain on Europe's economies and its inflation ridden consumers cannot be hidden anymore. A real estate bubble is threatening to bring down several of the Eurozone members where millions are stuck with property they did not have the money for in the first place.
Add into the picture that European banks are stuck with once AAA rated US property debt papers that are hidden in off-balance subsidiaries. Probably all dirty tricks are used to keep the illusion of a mark-to-model pricing scheme that keeps the real disaster among Eurozone banks hidden from shareholders.
If the concept of the Euro shall be held up Trichet has to announce both a rate step to 4.25% in its target leading interest rate policy and threaten more of the same medicine, regardless of economic developments that I would categorize as drastically slowing, thanks to a super strong Euro in comparison with Federal Reserve Notes (FRN's) that are poised to experience more devaluation day by day. A look at the USD index chart tells me a next drop to €1,70 could be imminent.
The image of a rich Europe cannot even be attached to the former Wirtschaftswunder, Germany anymore. A report in the German Weekly die Zeit from last week shows that 18.6% of Germans live under the poverty line, somewhere around €780 per month.
Looking (and blogging) since more than four years at the paper debt bubble I conclude that we indeed could see a dramatic global meltdown of banks. The mountain of more than $700 TRILLION derivatives can only be settled in a dramatic way. The past 4 years have given more than enough signals.
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