As a result Europe now has two non-democratically elected governments, Italy and Greece. There was change in Spain with the centre-right Popular Party led by Mariano Roy winning a resounding victory but at least it was democratically elected.
The political landscape of Europe is shifting faster than it has in a very long time. Social discontent with politicians is growing by the day and as austerity measures are discussed in parliaments protests grow. Cutting spending is a painful experience and more often than not the most painful for the less well off in society – it is all well and good politicians such as Cameron saying: “We’re all in this together” but the public knows this isn’t the case, like many politicians Cameron is far removed from the economic reality of austerity.
Governments in both developed and developing nations have been buying gold at a rate not seen since Bretton Woods over forty years ago. This buying has been led by emerging countries where it seems the driving factor is diversification. The fall in the gold price back to $1,500 was perhaps a trigger point it seems but it is also a sign of slowly evaporating trust in the stability of the financial system. If this trend continues then the gold price is almost certainly going to rise, and this seems likely because central banks set targets for their holding of currencies, assets and any gold they want.
Another issue bubbling below the surface is the real value of credit default swaps. In the normal course of events when a bond defaults they pay out. Many banks have used them to reduce exposure to riskier positions, peripheral European sovereign debt being one. But it seems if the default is voluntary as opposed to forced then CDSs won’t necessarily pay out.
While Greek CDS exposure is small in the scheme of things it is only a small step to see the problem grow rapidly if Italy, Spain and Portugal are included. What’s more, banks, especially those in Europe that appear to have modest exposure to potentially vulnerable sovereign debt because of their CDS positions, could be in a very different and difficult position if these CDSs don’t pay.
At the corporate level CDSs are usually written on the least risky class of debt that company issues, which means a company could default on some tiers of their debt but not all, another factor to take into account.
There is plenty to worry about in the world at the moment and the issues mentioned here may or may not duly find themselves in the spotlight but all too often seemingly ‘small’ concerns can become serious quickly.
