[Marxism] Morgan Stanley fears 'catastrophic event" as ECB fights Fed
ffeldman at bellatlantic.net
Sun Jun 22 09:28:56 MDT 2008
Evans-Pritchard is a long-time disaster-monger, I believe. On the other
hand, we are now in the midst of an actual economid disaster of some
character and scope. I favor following it step by step, without many
predictions (although I admit believing that the next few months are going
to be pretty rough for world capitalism, and probably for most everybody
else as well.
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 1:29am BST 17/06/2008
The clash between the European Central Bank and the US Federal Reserve
overmonetary strategy is causing serious strains in the global financial
system and could lead to a replay of Europe's exchange rate crisis in the
1990s, a team of bankers has warned.
"We see striking similarities between the transatlantic tensions that built
up in the early 1990s and those that are accumulating again today. The
outcome of the 1992 deadlock was a major currency crisis and a recession in
Europe," said a report by Morgan Stanley's European experts.
Just as then, Washington has slashed rates to bail out the banks and prevent
an economic hard-landing, while Frankfurt has stuck to its hawkish line -
ignoring angry protests from politicians and squeals of pain from Europe's
Indeed, the ECB has let the de facto interest rate - Euribor - rise by over
100 basis points since the credit crisis began.
Just as then, the dollar has plummeted far enough to cause worldwide alarm.
In August 1992 it fell to 1.35 against the Deutsche Mark: this time it has
fallen even further to the equivalent of 1.25. It is potentially worse for
Europe this time because the yen and yuan have also fallen to near record
lows. So has sterling.
ECB in no mood to rescue us from debt. Morgan Stanley doubts that Europe's
monetary union will break up under pressure, but it warns that corked
pressures will have to find release one way or another.
This will most likely occur through property slumps and banking purges in
the vulnerable countries of the Club Med region and the euro-satellite
states of Eastern Europe.
"The tensions will not disappear into thin air. They will find fault lines
on the periphery of Europe. Painful macro adjustments are likely to take
place. Pegs to the euro could be questioned," said the report, written by
Eric Chaney, Carlos Caceres, and Pasquale Diana.
The point of maximum stress could occur in coming months if the ECB carries
out the threat this month by Jean-Claude Trichet to raise rates. It will be
worse yet - for Europe - if the Fed backs away from expected tightening.
"This could trigger another 'catastrophic' event," warned Morgan Stanley.
The markets have priced in two US rates rises later this year following a
series of "hawkish" comments by Fed chief Ben Bernanke and other US
officials, but this may have been a misjudgment.
An article in the Washington Post by veteran columnist Robert Novak
suggested that Mr Bernanke is concerned that runaway oil costs will cause a
slump in growth, viewing inflation as the lesser threat. He is irked by the
ECB's talk of further monetary tightening at such a dangerous juncture.
The contrasting approaches in Washington and Frankfurt make some sense.
America's flexible structure allows it to adjust quickly to shocks. Europe's
more rigid system leaves it with "sticky" prices that take longer to fall
back as growth slows.
Morgan Stanley says the current account deficits of Spain (10.5pc of GDP),
Portugal (10.5pc), and Greece (14pc) would never have been able to reach
such extreme levels before the launch of the euro.
EMU has shielded them from punishment by the markets, but this has allowed
them to store up serious trouble. By contrast, Germany now has a huge
surplus of 7.7pc of GDP.
The imbalances appear to be getting worse. The latest food and oil spike has
pushed eurozone inflation to a record 3.7pc, with big variations by country.
Spanish inflation is rising at 4.7pc even though the country is now in the
grip of a full-blown property crash. It is still falling further behind
Germany. The squeeze required to claw back lost competitiveness will be
Morgan Stanley said the biggest risk lies in the arc of countries from the
Baltics to the Black Sea where credit growth has been roaring at 40pc to
50pc a year. Current account deficits have reached 23pc of GDP in Latvia,
and 22pc in Bulgaria. In Hungary and Romania, over 55pc of household debt is
in euros or Swiss francs.
Swedish, Austrian, Greek and Italian banks have provided much of the funding
for the credit booms. A crunch is looming in 2009 when a wave of maturities
fall due. "Could the funding dry up? We think it could," said the bank.
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