Invisible euro zone risks

Invisible euro zone risks

The week started on a negative point for the Eurodollar. May inflation data came out unchanged and sentiment indexes in Germany and the euro zone were in a loss. Earlier surveys have expressed concern that the loud measures announced at the last meeting of the ECB may not bring the expected results. The fact is that the ECB relies on stimulation of lending by the banks. 

The negative deposit rate and attractive terms of the updated LTRO, by design, should finally shake the lending market, which has regularly reduced on a monthly basis for nearly two years. There is only one catch, namely the lack of demand for those loans, as well as the alertness of banks themselves, fearing to inflate their portfolios through unreliable borrowers. 
It's all about the debt load in the southern European countries. For example, in Portugal at the end of 2013 the debt burden of the private sector accounted for almost 220% of the GDP. In conditions of high unemployment and with several programs in place to reduce government spending, there is nothing surprising in significant amount of creditors failing to pay. And here we face a problem as all plans to reduce the debt burden of low inflation are broken. 

Moreover, the leitmotif of all structural reforms is increasing the competitiveness of lagging economies of the euro zone through mechanisms of cost reduction, which ultimately leads to a drop in prices. However, with low inflation, these processes are much more difficult and there is a risk of this turning into decades of stagnation. However, as recent studies show, investors are positive about the future. 

A feeling is forming that the risks are simply being underestimated. In fact, no dramatic improvements in the euro zone can be observed. Although the acute phase of the crisis has passed, the GDP is still "floundering" around the zero mark. Do not forget about the tightening of fiscal rules - a full launch of mechanisms of the "fiscal union" is already scheduled for 2016, which will lead to a partial loss of financial independence of the euro zone countries.  
The correction, which continued on Friday after the publication of negative data on the PPI (Producer Price Index) in the United States, is coming to an end. The recent inflation data was released at 0.3%, which is higher than market expectations. Consequently, tomorrow, the Fed are likely to go on to the next reduction in QE3, which may give an additional impetus to the current down-trend. 



RoboForex research department Stanislav Koval