(DGAP-Media / 03.08.2012 / 10:46)
– ECB ready to save the Euro
– Euro-area current account improves, while capital account is not
collapsing
– Gold is too speculative to benefit more from Euro-debt crisis
Markets reacted with disappointment to the ECB decision today. The main
disappoint was not the decision to leave rates unchanged but the statement
regarding bond purchases following comments by president Draghi last week.
Draghi said today that the ECB stands ready to take new exceptional
measures including buying government bonds provided governments continue
with fiscal and structural adjustments, EFSF and/or ESM are activated to
intervene in government bond markets and the ECB itself deems the measures
as necessary to serve its mandate. The ECB will decide later what measures
it will exactly take, given these guidelines.
Markets were disappointed by the conditionality, vagueness and the lack of
a timetable. In our judgment, however, the ECB made very clear that it
views the current bond market conditions as a key risk for the Euro and is
determined to act. Importantly, Draghi stressed that size and possible
sterilization of the measures are to be adequate and not pre-determined.
Concerning the conditionality, Greece certainly does not qualify, but Spain
does. The Spanish bank rescue program also explicitly allows for the
purchase of bonds by the EFSF. All that is missing is for the EFSF to
take the first step. Thus, ECB action could come faster than markets
expect.
Euro holds up better than feared
One notable outcome in the latest round of the Euro crisis has been the
depreciation of the Euro itself. From its peak in the first quarter, the
Euro fell about 9% against the Dollar. In effective terms, the Euro fell
6% over the same time period and is now weaker than it was in mid 2010 when
it fell below 1.20 versus the Dollar. There are neither signs that the ECB
deliberately drove the Euro weaker nor that it is uncomfortable with the
depreciation. Indeed, gradual currency depreciation, whether deliberate or
as a byproduct, has to be part of the
Euro-area–s monetary adjustment. Nevertheless, it seems curious why the
Euro has not fallen more. The simple answer is that the Dollar is not in
much better shape. A closer look shows three important factors.
First, the Euro-area current account is moving into surplus. Unlike the
US, the Euro area never had a large permanent current account deficit.
Shifts in the balance have been cyclical. However, regional differences
have been huge, with the periphery running large deficits, which were
offset by the surplus in Germany. This is changing. Germany still runs a
large surplus, but the deficits elsewhere are shrinking, pushing the
balance into surplus. Irelands current account balance, for example, moved
from a large deficit into a surplus. Spain–s and Portugal–s deficits
shrank by 65% and 50% respectively. The IMF estimates that the Euro-area–s
current account will move from a deficit of nearly 1% of GDP in 2008 to a
surplus of about 1% of GDP this year. In our judgment, the adjustment will
be even bigger.
Second, there is no large-scale capital flight. Clearly, the weakness of
the Euro is a sign of capital leaving or avoiding the Euro area. However,
the exodus is not as large as one would expect. Net portfolio outflows
amounted to EUR47.4 billion over the first five months of the year, which
is just 0.1% of GDP. The outflows are largely due to foreign investors,
such as US money market funds. Domestic investors, on the other hand, have
not rushed for the door. Instead, the capital movements are largely within
the Euro area. This is particularly true for banks and explains the huge
bank deposits at the ECB and the widening gap in sovereign bond yields
between the core and the periphery.
Third, reserve managers are still buying the Euro. Reserve managers in the
rest of the world, especially Emerging Markets express concern over the
Euro and there are reports that some are reducing their positions.
Official reserve figures also show that the share of the Euro in global
reserves has fallen from 28% in 2008 to about 24%. However, this has more
to do with the valuation effect of the Euro depreciation. In absolute
terms, global reserve managers increased their Euro holdings by EUR250
since 2008. The increase in Euro holdings is most significant with those
Euro-area neighbors that are managing their currency versus the Euro, such
as Switzerland, Denmark and Norway. Their buying of Euros contributes to
the strong performance of sovereign bonds in the core, including France.
Gold disappoints
While the Euro has held up surprisingly well, gold has not performed as
well as it could, given market uncertainty. Two years ago, we predicted
that the gold price could reach USD2,000 per ounce within two years, due to
growing investment demand. We came close to our target last year at the
height of the Euro crisis. Since then gold has underperformed. The gold
price fell 15% in Dollar terms and barely held its level in Euro terms.
Three factors explain the development. First, opinions over the fair
value of gold differ widely. Nevertheless, hardly
anyone views current prices as cheap. Second, gold benefited a lot from
the rising fear of inflation in the first half of last year. The fear
of inflation is not gone, certainly not in Germany, but global price and
output dynamics make deflation currently the bigger concern. Third, gold
was seen as save haven against global economic and financial uncertainties.
However, gold turned out not to be a stable asset in itself. This should
not have been surprising, given the various and traditionally volatile
supply and demand conditions. What has increased the volatility of gold is
the growing participation of investors. Many are not holding gold as
long-term investments but for speculative purposes. The volatility was
compounded by the use of leverage, mostly in the form of gold derivatives
and structured products.
Disclaimer
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