A flurry of reports on the European Union’s fiscal crisis has been released just prior to the opening of the European stock markets. The following articles detail the latest information from Switzerland, Germany Portugal and Greece. This will not be a pretty week for the financial markets.
The September Swiss National Bank balance sheet update is out and while it reportedly indicates balances at the end of August, it appears that the SNB intervention in the FX market (i.e. the currency peg) started early, which would make sense as the first peg rumor hit on August 11. As a result, as the chart below shows, the latest central bank balance sheet to be completely devastated as a result of currency wars is that of Switzerland, where both Foreign Currency Investments and the total balance sheet increased by just under 50%, the biggest such monthly increase. In fact, in September, “aggregate short and long positions in forwards and futures in foreign currencies vis-a?-vis the domestic currency (including the forward leg of currency swaps)” increased by $92 billion CHF or just about $100 billion – a whopping 20% of Swiss GDP!
And this is the capital at risk for Switzerland to avoid having its currency trading a parity with the euro since the bulk of this increase is due almost certainly purely to EUR purchases. And here is the bad news: since the bulk of the purchases were made in the 1.40+ area, we can’t wait to find out just how NZZ and other Swiss financial publications will react tomorrow when they learn that the SNB has experienced an immediate 5% drop in its “assets” courtesy of the subsequent plunge in the EUR. And with the SNB’s total balance sheet at a record (?) CHF 365 billion, something tells us that the days of this latest attempt at repegging the Swiss Franc to some arbitrary number are coming to an end, and with that Hildebrand’s futile attempts at preventing parity.
Germany’s government debt may be downgraded in the next three months after Moody’s decision to cut Japan’s credit rating reflects investor concern about developed nation debt, said Aberdeen Asset Management Plc.
“The writing is on the wall” for a German government downgrade, Singapore-based fund manager Anthony Michael said by telephone today, citing “weak fiscal fundamentals” in the country and risks from the euro-area structure.
Thousands of people rallied in Portugal on Saturday against government austerity measures amid reports that the country’s economic situation is even worse than feared.
Greece will miss a deficit target set just months ago in a massive bailout package, according to government draft budget figures released on Sunday, showing that drastic steps taken to avert bankruptcy may not be enough.
The dire forecasts came while inspectors from the International Monetary Fund, EU and European Central Bank, known as the troika, were in Athens scouring the country’s books to decide whether to approve a loan tranche. Without that installment, Greece would run out of cash as soon as this month.
The 2012 draft budget approved by cabinet on Sunday predicts a deficit of 8.5 percent of gross domestic product (GDP) for 2011, well short of the 7.6 percent target.