In Between Days: Call me on Thursday, if you will. Or call me on Wednesday, better still

by CC December 5, 2011 1:59 am • Commentary


After weeks of pressure from investors, European leaders won themselves a breather last week amid hopes for quick action on the debt crisis there. For the markets, the question this week is whether they can deliver.

Beginning with a series of events on Monday and ending on Friday with another major euro zone summit meeting, investors are facing a series of milestones that will signal whether some kind of solution to the Continent’s long-running debt drama is at hand. If it is not, and policy makers offer up another round of half-measures, the stock market’s recent gains could evaporate.

“This is Europe’s chance,” said Julian Callow, chief European economist at Barclays. “Maybe they can get things right this time.”

The rally last week, which lifted the Standard & Poor’s 500-stock index by 7.4 percent, was the market’s best weekly performance since March 2009, when the stock market roared back from multiyear lows.

All eyes will be on Italy, the center of the debt crisis in recent weeks, where the new prime minister, Mario Monti, won approval from his new government on Sunday for an austerity plan that includes a combination of tax increases and spending cuts to close its yawning budget deficit. For investors, a focus will be on whether the plan, worth 30 billion euros, or $40 billion, is comprehensive enough and whether there will be sufficient political support to see it through.

Italy is among the biggest borrowers in the world, and its debt accounts for nearly a quarter of the total debt of the overall euro zone.

“Italy is the key to unlocking this,” Mr. Callow said, noting that it was a surge in yields on Italian bonds last month that threatened core countries in Europe like Germany and France with contagion, prompting investors to dump their bonds.

Keenly aware of that, President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany are to meet on Monday to discuss how to better integrate fiscal policy across the 17 European Union countries that use the euro, including the potential for sanctions on countries that fail to get their budget deficits under control.

Once again, investors will be looking for specifics from the two leaders, not the kind of blandly worded communiqué that has often followed conclaves of this kind.

In addition, International Monetary Fund officials will also meet on Monday to review austerity measures and fiscal policies in Greece, the heavily indebted country where the euro zone debt crisis began.


PARIS — European leaders are working overtime on a tentative deal to try to save the euro, which they hope to complete at a crucial summit meeting in Brussels this week. But rather than one transformative leap, the deal will have several moving parts, together meant to show resolve to protect Italy and Spain, revise the economic governance of the euro zone and prevent further debt crises, officials involved in the talks say.

The emerging solution is being negotiated under great pressure from the markets, the banks, the voters and the Obama administration, which wants an end to the uncertainty about the euro that is dragging down the global economy.

In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.

But important disagreements persist, and the two primary leaders of the euro zone, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, will meet on Monday in Paris to try to hammer out a joint proposal for the summit meeting. That meeting, which begins Thursday evening, is considered a last chance this year to set the euro right, even as some investors and analysts are beginning to predict its collapse.


China’s services sector cooled in November to its weakest growth in three months, an HSBC purchasing managers’ index showed on Monday, the latest data portraying an economy slowing quickly and in need of policy support.

The index fell to 52.5, a sharp decline given that October’s reading was 54.1 — the highest in four months — though the index remains above the 50 level that separates expansion from contraction in the sector.

Expectations for new business dropped to their lowest level in three months too, but remained firmly above 50.

“With price pressures easing further, Beijing can and should use policies that are targeted on small businesses and service sectors to keep GDP growth at above 8 percent for the coming year,” Qu Hongbin, HSBC’s chief China economist, said in a statement.

China’s official PMI for its non-manufacturing sector, released on Saturday, fell to 49.7 in November from 57.7 in October, the China Federation of Logistics and Purchasing said.

The readings mirror similar weakness in the country’s giant manufacturing sector and underline expectations that Beijing will ease monetary policy further to cushion the blows of the global economy.

PMI data in the past week has shown that both domestic and export orders are weakening, helping explain the central bank’s decision last week to cut bank reserve requirements for the first time in three years.


HONG KONG — The Chinese government over the weekend sought to tamp down international expectations that Beijing might use its large financial reserves to help ease the European debt crisis.

The two government agencies that control the reserves face heavy restrictions on their use, Chinese government officials and economists said.

“The argument that China should rescue Europe does not stand, as reserves are not managed that way,” China’s vice minister for foreign affairs, Fu Ying, said in comments prominently reported by the state news media over the weekend.

Ms. Fu’s statements were significant because Chinese diplomats and political leaders had been less publicly hostile to the idea of helping Europe than Chinese economic policy makers, who had been strongly opposed.

Her comments conspicuously echoed some of the arguments made for several months by Chinese economic policy makers.

She said that the $3.2 trillion in bonds, bills and cash held by the central bank as official foreign reserves represented national savings that were not easily disbursed.