Default lines could bring a shock

The markets are a little more cheerful these days. Once again, 6,000 on the FTSE 100 is the object of regular flirtation for investors. We are hardly in breaking-away mood but at least some calm has returned.

There was even a flurry of excitement last week when the European Central Bank raised rates. Our own Bank of England kept them on hold.

Interest rates in the eurozone are now three times of those back home. Perhaps that says something about the prospects for our respective economies, although the European experience has hardly been homogenous. But there have been some interesting theories as to why the euro has been more valuable to the core economies, Germany, for where the blame needs to be more widely spread. It is interesting to see both Germany and France have encouraged – pressured, even – their banks to accommodate the Greeks by lengthening the terms of their loans. Because Europe is so close, we have become a little too fixated on what happens across the Channel. But the US remains the country we need to watch. With mutterings of a possible default on government paper there, we need comforting news from the world’s biggest economy more than confirmation that the eurozone can muddle through. The comfort from learning that US jobless claims fell marginally (14,000 is neither here nor there in US terms but example, than to countries such as Greece and Portugal.

Perceived wisdom has it that the problems in the eurozone are the result of lax economic management and inaccurate reporting of the true state of financial affairs by governments eager to embrace the benefits of a single currency.

However, it can also be argued that the wide diversity of countries within the zone resulted in its value being held down, making the likes of Germany more competitive.

 Add to that a propensity of some of the banks in the economically stronger Northern European states to lend to the new entrants at rates kept low by the single currency, encouraging them to buy the goods of their established neighbours, and you start to see a situation where the blame needs to be more widely spread.

It is interesting to see both Germany and France have encouraged – pressured, even – their banks to accommodate the Greeks by lengthening the terms of their loans.

Because Europe is so close, we have become a little too fixated on what happens across the Channel.

But the US remains the country we need to watch. With mutterings of a possible default on government paper there, we need comforting news from the world’s biggest economy more than confirmation that the eurozone can muddle through.

The comfort from learning that US jobless claims fell marginally (14,000 is neither here nor there in US terms but at least it was a fall) and that private sector jobs were up by nearly double expectations may not have been that great but it did send indices on both sides of the Atlantic higher.

Perhaps investors are clutching at straws but given the weight of bears over bulls, it does start to look like any good news can reverse sentiment.

The other important news of last week, that world food prices are close to the all-time high reached last February, provoked hardly a stir. The fact that such a development has a much bigger impact on the high-growth economies of the emerging world gathered barely a mention. But in China and India, food accounts for 30 per cent and 45 per cent respectively of household budgets, compared with just 8 per cent in the US.

Will this impinge on global growth? We cannot be certain but it might slow the development of the new consuming classes in these countries.

By the time you read this, Imight have a better steer as the next Cofunds round table discussion will be on commodities. I look forward to sharing the results of what promises to be a most interesting debate.  

Brian Tora is an associate with investment managers JM Finn & Co