Despite the drawn-out dithering over the debt crisis in Europe, there are sure signs the world economy is on the mend.
SO LONG as they don't read the fine print, the markets will remain mightily pleased with Europe's biggest and best debt solution yet. It doesn't have to work, just look like it will.
And since the fine print hasn't been published yet - and I suspect not even worked out - that should suit them fine.
Can't be disappointed then, can they?
Europe's bail-out fund, which goes by the catchy title of the European Financial Stability Facility but is really the stop-this-getting-to-Italy facility, will be able to lend more to its banks than even the US did after the collapse of Lehman Brothers.
Not only that, China may be coming to the party. Consider it vendor finance for its biggest customer.
One trillion euros will go a long way in bailing out European banks holding suspect government bonds, which has been the issue all along rather than Greece's fate.
Maybe I'm being finicky, and don't breathe a word, but the trillion euros mentioned by the politicians aren't anywhere in the written communique which, like a Rob Oakeshott speech, goes on and on without saying much.
And there's another problem: the package, which doesn't cut interest rates, won't do anything for economic growth.
There will just be more borrowing to repay other borrowing, even if China agrees to lend a hand, so to speak.
Since the European banks will have to write off half the value of their Greek bonds and get their capital ratios to 9 per cent, they're not going to be lending much.
That will leave Europe in the economic doldrums - but then, what's new?
Yet for all Europe's dithering over its debt, which had frightened the bejesus out of the markets and sapped confidence everywhere, the global economy has been managing quite well, thank you.
In fact, the worse it has looked, the better it's really been. Sure our growth this year has been disappointing but bad weather and a strong dollar are to blame.
Even inflation is behaving itself if you overlook electricity and water prices and anything else to do with state governments, or some serious re-counting by the Australian Bureau of Statistics.
It's amazing how quickly the underlying rate, the one the Reserve Bank watches, has more than halved from an annualised 3.6 per cent to an almost deflationary 1.2 per cent in just six months.
That's really something considering Australia has experienced its biggest income surge ever due to soaring commodity prices.
Oh, didn't notice? It generated jobs, pushed the dollar past parity with the US dollar, boosted the government's coffers and kept shareholders in the big resource stocks happy.
All right, so it did nothing for your super - and there's no denying it squeezed retailers, tourism and the few manufacturers we have left - but you can't have everything.
Commodity prices can't keep rising when global growth this year will be slower than last year. In fact, iron ore and coal have been falling lately as China has turned down the heat from boiling to simmering.
Nouriel Roubini, the New York University professor who predicted the GFC, is tipping an odds-on (or as he puts it "more than 50 per cent") chance of recession in the US, Europe and Britain in the next 12 months.
I don't know what his tip for the Melbourne Cup is but I'm not sure I'd be backing it.
Even in Europe there's still growth overall from Germany and France. Japan, never one to rush things, is slowly on the mend.
But the surprise is the US. The statistics are all over the place, a sign of an economy at a turning point, but more of them are showing pleasant surprises than not.
With Europe solved for as long as the market believes it, China bubbling along and the US turning around, the world is going to have to find a different rock to look under for a crisis.
Frequently Asked Questions about this Article…
What is the European Financial Stability Facility (EFSF) and why do markets care?
The article explains the EFSF is Europe’s bailout fund set up to shore up banks and stop sovereign contagion. Markets have reacted positively because the fund promises large lending capacity — politicians even talked about up to €1 trillion — but the fine print hasn’t been published, so markets are mainly reacting to the idea rather than the full details.
Will Europe's bailout package by itself restore economic growth in Europe?
No. The article points out the package doesn’t cut interest rates or directly stimulate growth. It may involve more borrowing to repay other borrowing, and because banks will face write‑downs and higher capital requirements, lending and economic growth in Europe are likely to remain subdued.
Could China’s support help solve Europe’s debt problems?
The article suggests China may 'come to the party' and act like vendor finance for a major customer, which could help provide funding. However, even with external lending, the package alone wouldn’t necessarily restore bank lending or broader economic growth, according to the piece.
How does Europe’s exposure to Greek bonds affect bank lending and investors?
The article notes European banks may have to write off about half the value of their Greek bonds and raise capital ratios to around 9%. That balance‑sheet hit means banks are likely to cut back on lending, which can slow economic activity and affect investor returns across sectors that rely on credit.
Is the global economy improving despite Europe’s debt worries?
Yes. The article argues that, despite European dithering, the global economy has been managing reasonably well — with growth from Germany and France, Japan slowly improving, and surprising positive signs in the US — so the world economy appears to be on a slow recovery path.
What does the article say about inflation trends in Australia and what that means for investors?
According to the article, Australia’s underlying inflation (the rate the Reserve Bank watches) fell sharply from an annualised 3.6% to about 1.2% in six months. While commodity income surged and boosted miners, the benefits didn’t translate evenly: superannuation didn’t necessarily get a lift, and retailers, tourism and some manufacturers were squeezed.
How are commodity prices and China’s slowdown connected, and what should investors watch?
The article warns commodity prices can’t keep rising when global growth slows. It highlights that iron ore and coal have been falling lately as China cools its rapid expansion — a trend investors in resources and related stocks should monitor.
How real is the recession risk in major economies and what perspective does the article offer?
The article cites Nouriel Roubini’s view of an odds‑on (greater than 50%) chance of recession in the US, Europe and Britain in the next 12 months. At the same time, the author notes many economic indicators — especially in the US and from some European economies — are showing more pleasant surprises than not, suggesting the outlook is mixed and investors should watch data closely.
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