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Last week Europe economy review and analysis (August 17, 2010)

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

EZ Q2 GDP growth came in at 1% but Germany accounted for two thirds of this as its growth was an astonishing 2.2% (equivalent to an annualised 9.9% of Asian magnitude and never achieved since reunification). France recorded 0.6%, Italy 0.4%, Ireland 0.4%, Spain 0.2% and Greece -1.5%. German exports and stock-building are the major contributors and a lower figure is expected for Q3. The ironic tale of Germany’s booming on a weak euro may soon take another twist when the ECB hawks (led by Axel Weber) start campaigning for higher interest rates.

Greece is, of course, the poorest of the poor relation and its significant progress in slashing its deficit is apparently not enough to stop the spreads for 10-year bonds over bunds widening the most since May to 8.29% (i.e. a total yield of 10.68%). Spanish regions (which account for two thirds of public expenditure) are finding it impossible to sell bonds and are borrowing from banks. Spanish banks’ borrowing from the ECB has reached ?130bn. The ECB is helping Ireland by buying bonds ahead of next week’s auctions. The Bank of Ireland is taking a hit of ?932m in two tranches as it transfers non-performing assets to NAMA, AIB may become majority state-owned after a proposed ?7.4bn rights issue and nationalised Anglo Irish is said to need more funding. Slovakia has blotted its copybook by declining to contribute to the Greek ?110bn bailout after ratifying its contribution to the larger general bailout.

The latest news from (some of) the PIIGS has taken the gloss off Germany’s recovery and the euro‘s recent rally went into reverse during the week. It did, however, recover some of its recent losses against the Norwegian and Swedish kroner.