Sunday, April 26, 2009

The ECB continues to mismanage the crisis and underestimate CEE

We've never been huge fans of Euro central bank policy and the recent news coming out is not doing much to change that view. The Europeans have consistently been the slowest in slashing rates and even now, are sitting at 1.25% in the face of further precipitious falls across demand, supply, exports, etc. Many currency strategists are expecting a bullish move in the Euro in the short term due to the spread between the spot and swap prices (see below) but we have to wonder if that alone is sufficient in the face of the other macro factors at play. In other words, relying on the continued stupidity of central bankers is not the most tenable investment thesis.

There are numerous reasons to continue to be bearish on the Euro, not the least of which is that we aren't convinced that the full impact of the "CEE effect" has been priced in. The focus of this piece is not to do a full investigation (though there is plenty of material to do a full investigative piece) but we want to present some data for your consideration.

First, the CEE countries are still extremely leveraged; for illustrative purposes, we compare them below to Asian countries in '96.

Second, this debt is owed to a lot of western banks (i.e. Euroland banks).

Finally, the trade flows are extremely weak in the region. This of course is far from surpring when you consider the larger macro forces that we have discussed before.

We have to believe it's not a question of if, but when we are going to see a rate cut. A half-assed bailout package and a slow reaction to market signals doesn't quite inspire confidence but eventually the ship has to come around. Right?

Thanks to GS and Credit Suisse for data
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