The situation in Europe just keeps getting worse. The Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October fell to 47.1 down from 48.5 in September. A number below 50 suggests the sector is contracting, the pace of which is picking up.
The prospect of an economic slowdown in Europe has grave ramifications. Slowing economic growth hits tax revenues badly and pushes up debt-to-GDP ratios. This in turn puts pressure on sovereign credit ratings. The market is most concerned about France losing its AAA status. A downgrade of French debt would pose another blow to the French banking sector, which holds a sizable portion of the debt.
And following on from Greece’s decision to ask her people what they think about the whole thing, the European Financial Stability Facility (EFSF) had to pull a measly €3 billion bond auction due to lack of demand. So much for the bazooka.
Whether the Greek referendum (now slated for 4 December) will go ahead is uncertain. However we’re still trying to work out why the Greek PM called one in the first place.
Referendums should only be called very rarely. Governments are elected to govern and lead and should not throw hard decisions back to the people when things get tough. But in this situation, with the Greek people being asked to endure another decade of hardship, it makes sense to consult the people.
Is Papandreou scared he might get taken out if he accepts the terms of the bailout in the face of widespread public opposition? Is he therefore trying to push the responsibility of the decision back on the Greek people and potentially wriggle out of the obligations agreed with his masters – Merkel and Sarkozy?
Who knows? What we do know is that the eurocrats are not at all happy. Now they’re telling the Greeks to stick to the rules (designed by them) or leave the eurozone. If the referendum does go ahead, expect a campaign selling apocalypse to the Greek people if they vote no.
In the meantime, expect uncertainty and more volatility. As Murray Dawes says in his just released YouTube Stock Market Update, ‘everything is now set up perfectly to see the markets fall over in the near future’.
Here we go again.
for The Daily Reckoning Australia