Vlad Demochko
Western mass media, including such major editions as The Wall Street Journal and The Financial Times, report that 2013 is going to be the 4th consecutive year of economic and financial weakness of the eurozone.
2013 is expected to bring more troubles to investors:
First of all, Spain is expected to emit a record amount of bonds estimated at €145bn.
Secondly, more analysts expect Spain to ask for external financial aid within a couple of months.
Political risks are expected to escalate as well. Italy is nearing elections.
What are the near-term prospects of the eurozone and its currency?
Experts: Spain and Italy May Initiate Eurozone Collapse
Maxim Gunn, one of the best Forex traders in Russia, assumes that Spanish bonds present major risks for the eurozone integrity at this point. In the second half of 2012, Spanish bond yields saw almost no changes. Moreover, the 10-yer bond yield retraced form 7% back to 5%. Spain easily sold out the bonds till November 2012.
However, in 2013, major difficulties may emerge. First of all, Madrid has never before tried to sell so many bonds. Moreover, the Spanish economy is unstable. Therefore, it may become much more difficult to find new buyers for the newly-emitted bonds.
Moreover, the Spanish GDP is expected to show a decline by 0.4% in Q4 2012. At the same time, the European Commission expects the Spanish economy to increase only by 1.4% in 2013, which is below the forecast made by the European government. They also question Spain ’s ability to fulfill the budget deficit goal set for 2013 and 2014. The current goal is below 3% of the GDP.
Structural demand for bonds is expected to become the major problem for Madrid. In 2012, the demand for Spanish bonds was above the average. However, taking into account Spain ’s plans to boost the amount of emitted bonds up to a record level, the supply will probably be excessive.
When it comes to the eurozone’s recovery and economic stability, another key factor to consider is the forthcoming Italian election. Italy is planning to elect a new Prime Minister on April 1st. There are chances of preliminary elections. Mario Monti is not going to participate in the election.
The latest surveys cannot give us a more or less distinct frontrunner. Therefore, the formation of a coalition is a highly probable scenario. A center-left coalition would be the best option for financial markets as it will probably continue Monti’s though policies. However, if the parties fail to form a coalition, Monti may well become a technocratic Prime Minister once again, which will calm down the markets in mid–term perspective.
At the same time, Mario Draghi keeps repeating the Euro exchange rate is not the focus of the ECB’s attention. However, he underlines that the common currency exchange rate is crucial for the eurozone’s stability and economic growth. This means that the ECB is indeed concerned about the current volatility seen in the market of EURUSD.
The chart below, courtesy of , reflects the current state of affairs in the market of EURUSD. The experts say that there are no aggressive sales while the bulls have accumulated their pending orders within the 1.3300 - 1.3350 price range:
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Is Eurozone Bankrupt?
The recent Euro summit was like a thunderstorm. During the summit, Martin Schulz, President of the European Parliament, called the EU financially inconsistent and warned that the Parliament may fail to approve the 7-year budget if the summit participants try to save.
The summit itself was delayed because some EU leaders (including Angela Merkel and David Cameron) had conducted talks behind closed doors but failed to compromise on several major issues.
The key issue on the agenda was the disputed 7-year European budget. Some EU leaders want to cut the budget from €1033bn down to €950bn. As a result, the revenue that comes from the contribution paid by all the members will be reduced dramatically. If this is the case, we will see a €60bn deficit.
The President of the European Parliament criticized these ambitions in his report, thereby saying that such a big budget deficit is absolutely unacceptable under current economic conditions.
If there is no unity over the issue, EU countries will have to adopt a new budget every year. The EU entered 2012 with a big deficit, yet the deficit keeps growing like a snowball. At this point, the deficit has reached €16bn. The deficit keeps growing on a daily basis… This factor cannot but affect the overall economic situation in the region, including the common European currency…
Vlad Demochko
