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Author Topic: Crisis stalks Europe again as deflation deepens, Germany stalls  (Read 23 times)

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http://www.telegraph.co.uk/finance/economics/11029679/Crisis-stalks-Europe-again-as-deflation-deepens-Germany-stalls.html
Quote
Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral.
The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS.

Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7 in July, from -0.2pc the month before. Spain’s provisional estimate is for a fall of 0.3pc. The risk is that this cause inflation expectations to become unhinged and extremely difficult to reverse.
“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.”

The ECB is waiting to see whether its new four-year loans for banks (TLTROs) will stop the relentless contraction of credit and stave off the threat of a Japanese-style deflation trap, but the auctions will not take place until September and December.

“Europe could be in deflation before the TLTROs have even begun. They cannot wait until February or March to start thinking about quantitative easing,” said Mr Roberts.

Morgan Stanley warned that Germany’s economy contracted by 0.1pc in the second quarter, raising the risk of outright recession as the Russia crisis starts to bite.

"Momentum really stalled in May and June,” said Hans Redeker, the bank’s currency chief. “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4pc in June, a fall not seen since the white heat of the Lehman crisis in late 2008. The DAX index of stocks in Frankfurt has plummeted 10pc over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06pc. A sudden drop in yields typically signals a recession risk.

Ingo Kramer, head of the BDI, the German industry federation, the BDI, said the German companies are struggling but it has not yet reached crisis level. “We are not at risk of recession,” he said. Brussels expects sanctions agasint Russia to cut eurozone growth by 0.3pc this year.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6pc of GDP over the past year, despite austerity.

Portugal is close behind. Its debt has jumped from 127.4pc to 132.9pc, and is certain to move higher after the recovery collapsed earlier this year. There are growing concerns that the Portuguese state will end up footing the bill for the rescue of Banco Espirito Santo after senior bondholders were protected. Deflation is pushing both nations into a textbook debt trap.
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