While I write, a note has come from a major Wall Street office discussing the negative action today on European Bourses. The big negatives: Credit Default Swaps (bond insurance, see earlier blogs for details) on Greek and Portuguese debt blowing out due to growing default worries and an undersubscribed German sovereign bond issue as global appetite falls for all European debt on contagion fears. More on that below, but first the UK.

A busy week for economic data releases, with yesterday’s inflation data coming in above expectations for both CPI and RPI. While today’s unemployment figures were not bad the big test comes at the end of the week when we get the first estimates of 2010 Q1 growth figures. Despite the bad weather there is hope we can post some decent growth (long overdue after such a sharp contraction) however some remain doubtful. If the figures come in on the low side this could point towards the risk of stagflation (stagnant growth with high-ish inflation) which is difficult to deal with as it is tough to raise interest rates to counter inflation when this will kill off anaemic growth.  Thankfully if you strip out autos and fuel from the figures they look less bad, although still far from perfect.

Frankly whoever wins the next election has some impossible choices to make (they’re all lying by the way, or worse, staggeringly ignorant) but stagflation is a gate crasher we really don’t need. Let’s see what Friday brings. Stay posted.

Greece

We continue to be amazed at how little attention this is now getting, with everyone apparently assuming there is a rescue in place, even when the Greek government is wriggling like mad to avoid accepting rescue package MK3 (or is it 4?). All the while protests grow within Greece about the austerity cuts that haven’t even been made yet. Mmmm.

If a bail-out goes ahead (still far from certain) it can only buy time (at great cost both financially and to EU political harmony) and as Wolfgang Munchau wrote in the FT on Monday:  ”The bail-out prevents a default this year, but makes no difference whatsoever to the likelihood of a subsequent default. Just do the maths”. But nobody is paying attention to this, or the implications. A research note found me yesterday, ironically from the New York office of a major German Bank, anticipating that a restructuring was inevitable and more likely than a simple bail-out. It argued well that an organised 50% “hair-cut” was likely and slowly being priced in by markets. While a very credible outlook it still leaves massive question marks about the state of the Euro, the downgrading of other European debt and most importantly European banks.

It is well known that European banks have been far slower than US banks in recognising bad debts and many are thought to be technically insolvent, but it is European banks who will suffer further massive losses if any default/restructuring takes place, which it almost certainly will. Worse the research also indicated that a similar Portuguese debt restructuring was also inevitable and again it is European banks with the most exposure. Yesterday’s IMF report on Global Financial Stability (235 pages of joy for financial geeks) points to slowly reducing bad debts globally, with the caveat those sovereign debt problems could upset the applecart.

And this brings us back to the UK unfortunately as we face a future with no easy answer to our own problems and the fear of a hung parliament starting to weigh heavily on many, indeed the head of a respected economics house said to me yesterday “we are in danger of having the IMF at our door if we aren’t careful”.

And finally...not a joke but some thoughts from FDR, taken from his famous “the only thing we have to fear is fear itself” inauguration speech in 1933:

“Only a foolish optimist can deny the dark realities of the moment...The rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence...Faced by failure of credit they have proposed only the lending of more money...They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.”