/perspectives/global-cio-outlook/make-way-for-debt-mutualization-in-europe

Make Way for Debt Mutualization in Europe

Hurdles and hold-ups are inevitable but recent policy developments in Europe indicate that the ECB and the Bundesbank are cooperating and greater federalization is likely.

November 06, 2012

Global CIO Commentary by Scott Minerd

“While the Northeast braced for Sandy and the rest of the country turned its attention toward the election, there were two significant developments in the European Union. The first was that the Troika, comprised of the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB), recommended cutting peripheral countries’ official debts, which includes debt held by institutions. This would follow the haircut on publicly owned debt that occurred a few months ago. The other major development is that it is now likely that an agreement will be reached on budgetary regulation.

The proposed debt-relief program is significant because the Troika owns those obligations. Writing off a large portion of Greece’s debt would be a major step forward in clearing up the present crisis and getting the immediate concerns about Greece off the table. The catch, however, is that the initiative remains politically unpopular among German voters, and Dr. Merkel and her cabinet are acutely aware of this as they head into an election year.

ECB President Mario Draghi and Germany’s finance minister, Wolfgang Schäuble, are now working much more closely with one another. The two have been in agreement on a number of topics recently. Schäuble was openly supportive of Dr. Draghi’s testimony in front of the Bundestag in late October, when Draghi managed to relieve some of Germany’s concerns over the inflationary risks in his policies. Between that and Dr. Draghi’s endorsement of what I would call the “Über Budget Regulator” that originated in Germany and will be proposed in December, the ECB and the core are cooperating to a greater degree than ever. There will inevitably be fits and starts but it appears Europe will continue moving toward federalization.”

Economic Data Releases

Another Solid Jobs Report is Promising for the Economic Expansion and Recovery in the U.S. Labor Market

Last week's U.S. economic data was positive overall, with non-farm payrolls increasing 171,000 in October, and upward revisions of 84,000 for the previous two months. Following the 873,000 gain in September, the household employment survey posted an increase of 410,000 jobs in October. In spite of this, the unemployment rate increased to 7.9% due to an increase in the labor force participation rate, which rose to a four-month high. In other sectors, the ISM manufacturing index rose to 51.7, its highest level in five months. The non-manufacturing index fell to 54.2 in October, the first downturn in fourth months. The Conference Board Consumer Confidence Index rose to 72.2 in October, the highest level since February 2008.

Further Economic Stagnation in the Eurozone While China Seems to be Stablizing

The latest PMI reports from Europe provide little hope of relief for the ongoing recession there. The eurozone PMI composite, which covers both manufacturing and servicing sectors, fell to 45.7 in October, the lowest level since June 2009. Further declines in manufacturing and service PMIs have been reported in October for Germany, France, Italy and Spain. Economic data in the U.K. deteriorated further last week. U.K. industrial production fell 1.7% in September, the second consecutive month of decline. The manufacturing PMI in the U.K. has been in contraction for six consecutive months and the service PMI fell to its lowest level since December 2010. In China, the official manufacturing PMI rose to 50.2 in October, the first time it has expanded in three months. China’s non-manufacturing PMI also rebounded to 55.5 in October from 53.7 in September.

Chart of the Week

Eurozone Monetary Financial Institutions’ Lending to Non-Financial Corporations YoY Percent Change*

Despite two rounds of Long-Term Refinancing Operations (LTRO) and the European Central Bank’s announcement of its bond purchase program, credit conditions in the Eurozone’s real economy remain tight. In September, the Eurozone Monetary Financial Institution's (MFI) lending to nonfinancial corporations fell 1.4% YoY, the largest decline in 24 months. Lending to nonfinancial corporations in the eurozone's peripheral nations fell 5.8% YoY to the lowest level since August 2007. Meanwhile, business lending in the rest of the Eurozone also fell to 0.9%, the slowest growth since February 2011. The continued contraction in business lending seems to have spread throughout the entire Eurozone and suggests that the recession on the continent will continue in the absence of credit expansion.

Eurozone Monetary Financial Institutions’ Lending to Non-Financial Corporations YoY Percent Change


FEATURED PERSPECTIVES

May 16, 2018

Positioned for Choppier Waters

After several quarters of low volatility, tight spreads, and abundant liquidity, financial conditions are shifting.

May 09, 2018

Forecasting the Next Recession: Updating Our Outlook for Recession Timing

New developments in fiscal policy, the labor market, and the neutral interest rate suggest that the expansion could extend into the latter half of our recession range.

April 26, 2018

Seeking a Return on Sustainable Development

A framework for transitioning sustainable investing to an institutional asset class.


VIDEO

Forecating the Next Recession 

Forecating the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.