Friday, 7 May 2010

Eurozone Greek problems spark worldwide sell off: UK likely to have a Conservative minority Government

World wide equity markets fell by around 2.5% yesterday as worries about further sovereign debt crises in the Eurozone increases. It seems to have been sparked by the revelation that at yesterday's rate setting meeting the ECB did not even discuss Quantitative Easing, or in common parlance, printing money to buy up dodgy Eurozone sovereign debt. This is what the Bank of England did with Gordon's gilts to keep the UK government solvent. Its a short term remedy which the US have also used. It works, but if over-used quickly becomes the Robert Mugabe solution.

I cannot see the EU/IMF aid package working. The Greek people know their political class is nepotistic and corrupt and they do not trust them. The package is being spun by the EU as the IMF solution to try and deflect Greek anger onto the Anglo Saxon IMF. Greece holiday tourist bookings are reportedly well down but there will still be tourist related jobs on the islands for Greek workers this summer. I doubt whether the Greek government can survive the Autumn when these workers return to unemployment in the large Greek cities. I opine military rule will be the only option.

I have no doubt that given a free hand the IMF could sort Greece out. They are well used to dealing with corrupt regimes of all political persuasions. The EU will however not allow the IMF a free hand. Anglo Saxons solving Eurozone problems is unthinkable as is a Greek default and devaluation a sine que non for recovery.

What spooks the markets and breads contagion is the indecision at the heart of the Eurozone. Constructive ambiguity rules for the Eurocrats but the markets like clarity. Club Med bond to bund spreads will continue to blow out and investors will seek to withdraw capital from these areas.

Meanwhile back in the UK Clegg the king maker, has confirmed his electoral promise that the party with the largest share of the vote and seats, the Tories, should be allowed to form a minority government. This is a smart move by Mr Clegg. It is as Mervyn King said, whichever party forms the next government will be out of power for a generation because of the draconian austerity measures it will have to impose. The fate of the Greek government will be a salutary warning to our political class. Sterling will continue to fall and gilt yields rise until austerity commences in the UK.

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