“We’re taking no lectures from you” was the polite message European finance ministers and policy makers subtly delivered to USA treasury secretary Geithner on Friday during their meeting in Poland. Austrian Finance Minister Maria Fekter found it “peculiar” to be lectured by the USA, a country with higher aggregate debt than the euro area.
When a municipal area of the USA, Jefferson County, Alabama, which approved a deal with holders of $3.14 billion of its sewer debt, requires action by state lawmakers to avoid the biggest municipal bankruptcy in U.S. history, the point Ms Fekter makes becomes crystallised. Criticism that the USA should literary “get it’s own house in order” could be justified as USA banks have stepped up their actions against homeowners who have fallen behind on their mortgage payments, paving the way for a fresh wave of foreclosures. The number of U.S. homes that received an initial default notice, (the first step in the foreclosure process), jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. recently revealed. This increase represents the biggest monthly gain in four years. The spike signals banks are starting to take sifter action against homeowners despite interest rates being at historical lows.
Bank of America is also considering the “nuclear option” of writing off $30 billion of sub prime loans relating to their ill timed acquisition of Countrywide Financial, the most aggressive sub prime mortgage lender during the past decade. At 17% market share Countrywide was the largest mortgage holder in the USA, lending circa $400billion in 2007 alone. A further significant deterioration in house prices in the USA could have huge consequences.
Luxembourg Prime Minister Jean-Claude Juncker also told the meeting in Wroclaw Poland; “We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal-stimulus packages. We don’t see any room for manoeuvre in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.” Juncker went further; “We are not discussing the increase or the expansion of the EFSF with a non-member of the euro area..”
The cost for European banks to fund in dollars has immediately risen, signalling that investors view the central bank policy makers’ unified offer of unlimited loans in the currency as a short-term three month fix doesn’t actually address the euro region’s underlying problems. The cost of converting euro payments from dollars was 85.4 basis points from 81.9 basis points the previous day. The cost of one-year dollar funding also climbed to 63.9 basis points, compared with 62.1 basis points the day before, according to data compiled by Bloomberg. The difference was 75.2 basis points on Sept. 13, when the swap was the most expensive since December 2008. That 2008 spectre was raised by Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “Liquidity is not an issue, but solvency still is.”..The “S” word mentioned again..
With the exception of the DAX European markets had a subdued reaction to the solutions discussed at the Poland meeting. The DAX closed up 1.18%, the CAC closed down 0.48% and the ftse closed up 0.58%. The STOXX closed up 0.17%.
The SPX closed up 0.57% responding positively to the Michigan consumer sentiment survey for early September. Sentiment, as measured by the Thomson Reuters/University of Michigan index, inched up in September, despite remaining at painfully low levels consistent with “outright falls in consumer spending.” The index ticked up to 57.8 from 55.7 in August, above expectations of 57.0. However, on closer inspection the report was not the good news heralded, for the next six months the index fell to 47, the lowest level reported since May 1980.