Eurogeddon haunts South Africa

Panic gripped global markets again this week as Eurogeddon returned, forcing investors to scramble for safety. Just when it seemed the Eurozone might be digging itself out of an untimely grave, it has begun to relapse as Spain’s debt and bank woes continue and the possibility of a Greek exit from the European Union gains pace.

The Financial Times reported on Wednesday that Spain’s plan to pay for rescuing its banking conglomerate, Bankia, was shot down by the European Central Bank, raising fears that its borrowing difficulties would become more acute as the market prices in extra funding.

In response to the media coverage, the bank tweeted: “Contrary to media reports published today, the European Central Bank has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank.”

Nevertheless, Spain’s central bank governor, Miguel Angel Fernández Ordóñez, has stepped down a month early following growing criticism.

The precarious situation does not look good for South Africa. If there is a run on the banks in these European countries, their economies will be brought to their knees and South Africa will be hit. Europe is still the country’s biggest trading partner and the contagion will be felt on local shores. The rand has already been a victim: it hit a five-month low of R8.46 to the dollar last week as investors continued to flock toward safe havens.

Domestic outlook
Last week the South African Reserve Bank appropriately cited concern about worrying developments in Europe when it kept the repo rate stable at 5.5% for the ninth consecutive meeting of the monetary policy committee.

“Global economic prospects continue to cloud the domestic outlook,” said Reserve Bank governor Gill Marcus. “The stabilising impact of earlier European Central Bank interventions, particularly the long-term refinancing operations, appears to be losing momentum and its positive impact on spreads on some peripheral European country debt proved to be shortlived.

“The uncertainty posed by, and the ramifications of, a possible Greek exit from the eurozone have resulted in heightened risk aversion in financial markets,” Marcus said.
Moves have been made to lessen South Africa’s exposure to the eurozone crisis. China has taken its place as South Africa’s largest export market, but, should the situation in Europe worsen, local exports will undoubtedly be affected.

According to trade data from Statistics South Africa for the first quarter of 2012, South African exports to the European Union amounted to R36.9-billion, almost 23% of the total exports value. Spain accounted for R1.9-billion of the total and Greece accounted for a little more than R152.2-million.

Another major concern about a eurozone implosion is its destructive force on the ever-volatile rand.

Marcus said volatility was likely to persist unless decisive political decisions were taken, but the fluid political dynamics in the EU had increased the unpredictability of policy responses.

Sanlam Investment Management economist Arthur Kamp said in a research report this week that the derailment of the rand was certainly a notable risk.

Recently released figures showed that inflation remained outside the target band of between 3% and 6% at a slightly softer than expected increase of 6.1% for April. This week, growth in credit demand by South Africa’s private sector disappointed with a dismal 7.33% year on year in April compared with 9.16% in March.

Gross domestic product growth figures released on Tuesday showed that South Africa’s growth had slowed to 2.7%, lower than the 3.2% in the previous quarter, but certainly better than an anticipated 2.3%. “Overall, South Africa has now experienced 11 consecutive quarters of positive growth following the recession,” said Stanlib chief economist Kevin Lings.

But Chris Becker, an economist at ETM Analytics, said the GDP figures were a history lesson of what had already happened in the economy. “And a bad history lesson too. It gives you little to no indication of what lies ahead for the economy,” he said.

The relative strength of GDP growth was in direct contrast with the down phase of the business cycle materialising in China, Europe and the United Kingdom, he said.

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