Tomorrow is unemployment Friday. It is usually a very significant data release in times of economic weakness but after today’s massive selloff of all risk-based investments, its significance has been greatly diminished. The world has awakened to the turmoil that the European debt crisis has created. Last week we argued that although Greece was only 3% of European GDP, its economic situation would bare much greater weight in its effect on the other PIIGS. The Greeks did much to raise that point when they started pointing fingers at other EU countries that also had major funding problems. While the pundits were openly scoffing at a mere 3% having such wide effect, the credit analysts were warning that with Greek debt under so much pressure the credit issue was going to erupt, and sovereign debt was going to be questioned as good collateral.
It is this issue that is causing so much havoc in the banking world as creditors are increasing haircuts on collateral and putting more stress on already hard-pressed borrowers. We cannot stress enough that a German-run bailout is of the utmost necessity before this gets further out of control. The Germans are practicing economic brinkmanship to achieve the maximum political result. The ECB needs to appoint Axel Weber as its next president, thus assuaging the monetary hawks that dominate the fabric of German financial thought. Whatever else Germany can squeeze out is between Merkel and the other EU leaders, but it is a cost that needs to be paid. It is the Germans who were largely responsible for October 1987 because of their intransigence on interest rates and the breaking of the Louvre Accord, which crated the world’s stock markets.
Now is not the time for shadenfreude but rather clear headedness in what needs to be done. Today’s massive selloff was just a mere taste that awaits if another credit crunch is thrown onto the back of this fragile global economy. If tomorrow’s U.S. unemployment number is better than expected and the market fails to rally it will be another “short” day.