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The Euro sign. (DANIEL ROLAND/AFP/Getty Images)
The Euro sign. (DANIEL ROLAND/AFP/Getty Images)

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In crisis, euro leaders must risk 'personal damnation' Add to ...

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Troubles in global economy From Berlin to Beijing and Washington, storm clouds are gathering today, casting a pall on the outlook for the global economy and putting financial markets in a foul mood.

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In Europe, the failure of a German bond auction illustrated how the debt crisis is now in the very core of the 17-member monetary union. In China, the latest manufacturing numbers have raised fears that the engine of the global economy is stalling. And in the United States, a raft of weak numbers added to the gloom.

"I wish there was better news to share," said Derek Holt of Scotia Capital. "The risk trade is on the run again this morning, chased away as the last vestiges of hope for at least near-term euro zone economic growth are eradicated ... Pick a culprit, as there are many."

Investors are clearly anxious. Hong Kong's Hang Seng slipped 2.1 per cent, and major European markets were down, by well over 1 per cent. The angst then spread to North American markets as the S&P 500 and Toronto's S&P/TSX composite sank.

Currency markets were also roiled as the U.S. greenback climbed in response, and others, like the Canadian dollar slipped.

"The barrage of bad news shows no sign of relenting, and with many wanting to reduce risk ahead of markets closing for the Thanksgiving holiday tomorrow, the resulting flight to safety is of little surprise," said Yusuf Heusen of IG Index.

"This morning's poorly received German bond auction was the latest reminder as to just how nervy investors are over the euro zone debacle. The resulting fallout has seen German and U.K. 10-year yields converge further. Belgium and France have bond auctions next week, so this is clearly going to remain very much in focus - another failed auction would do nothing to help build confidence moving towards the year-end."

Euro crisis strikes core One of the most striking things about today was the failure of a German bond auction, which suggests the debt crisis has now struck the very heart of Europe, raising the stakes not only for the monetary union but for the global economy as the continent also plunges toward recession.

German officials said the disappointing debt sale - it fell short as the country found buyers for 35 per cent less debt than it was seeking to sell - signified only the nervousness of the market but that anxiety is showing signs of further crippling the 17-member euro zone.

"The stakes keep rising in Europe and the bid to cover off 1.1 on German 10-year bunds is a clear signal that investors have severe doubts about the sustainability of the current state of affairs," warned analyst Michael Hewson of CMC Markets.

"With German auctions now feeling the chill winds of investor concerns it's safe to assume that the core or Europe is now starting to become affected by the contagion."

Germany, whose bonds are seen as the safest in Europe and whose yields are nowhere near the stratospheric heights of its neighbours, planned to sell €6-billion in 10-year bunds, but did just €3.6-billion of that, leaving the Bundesbank to pick up the rest. The average yield was 1.98 per cent.

The sale was seen as a huge blow, and came amid economic readings on manufacturing numbers that suggest the euro zone may be headed toward another recession, if not already in one.

The crisis had already spread from the so-called periphery countries of Greece, Ireland and Portugal to bigger economies Italy and France, and into nations deemed safer bets. Now, it's an all-out war in the bond markets.

"The crisis is expanding and evolving fast," said Bank of Montreal's chief economist Sherry Cooper, though she advised North American investors not to panic.

As she has before, Ms. Cooper urged euro leaders to act - she's not alone there - and like others called for immediate bond purchases by the European Central Bank.

"Nevertheless, the crisis can worsen and continue for some time and, so far, the European authorities are only assuring us there will be no big bazooka," Ms. Cooper said.

"Unfortunately for them and us, there is no Hank Paulson or Ben Bernanke in Europe, with the gravitas to convince the politicians of the severity of the situation and the need to provide all the money that is needed now to end the crisis. It could be done, but not without the kind of leadership that is willing to risk personal damnation to support the sovereign debt markets, recapitalize the banks and ease liquidity pressures to prevent a deeper economic contraction."

Whither the eurobond? One wonders if today's auction might change Angela Merkel's mind on the issue of a eurobond. Not likely, but it might be a wake-up call.

Many observers have suggested that a eurobond could help ease the debt crisis, among other measures. But Germany has stood fast in its opposition.

Today, the European Commission, as expected, outlined three options for issuing bonds that would involve the 17 countries in the monetary union. In turn, the EC wants the power to monitor the budgets of member countries.

"Overnight Merkel repeated her opposition to the idea saying the commission focus on eurobonds is inappropriate as it gives the impression that the debt burden can be shared," said currency strategist Elsa Lignos of RBC in London.

"She says the proposals will not work and confidence can only be won back via treaty changes. Tighter control of member state budgets is no bad thing, but given past EU failures in applying rules, we expect it will do very little for confidence ... Eventually we expect the Germans to back down and accept some form of common issuance."

China sparks fears Also playing into global markets was a surprising drop in a key manufacturing reading suggests it go further.

The purchasing managers index released today slipped in November to 48, down from 51 a month earlier and the worst showing since March of 2009. (Remember March of 2009?) The 50 mark on a PMI is what separates expansion from contraction.

Beijing has been tightening policy in an aggressive tussle against inflation, sparking some fears in the market that the powerhouse economy is headed for a hard landing. While today's numbers are disappointing, some analysts suggest China could still avoid such a scenario. Today, the People's Bank of China lowered reserve requirements for some banks, but now the central bank may go further.

"The unexpectedly sharp drop in China's flash PMI for November, if corroborated by other indicators, is likely to push policy makers to go beyond policy 'fine-tuning' to outright easing," said Mark Williams and Qinwei Wang at Capital Economics in London.

"The major concern in today's release is clearly the apparent weakness of domestic demand as signalled by the decline in new orders overall," they added. "We continue to believe a hard landing can be avoided but only because policy makers have room to inject stimulus. The price data suggest that inflation is a fast receding threat."

U.S. numbers disappoint And if all this weren't enough, the readings from the United States today weren't so pretty either, though it's worth noting they're short-term and follow other measures that haven't been too disappointing.

"Well, the run of good U.S. economic news was good while it lasted," said senior economist Jennifer Lee of BMO Nesbitt Burns. "Unfortunately, the streak came to an abrupt stop this morning with weak durables and personal spending data."

Among the indicators released today in advance of the Thanksgiving holiday were orders for big-ticket items, which dipped 0.7 per cent last month, marking the second consecutive decline, though it included a hefty drop in orders for planes. Another reading showed personal spending basically flatlined, the 0.1-per-cent tick up far lower than expected. That came, though, as personal income climbed 0.4 per cent, the best showing since March.

"So instead of spending, most of the higher incomes went to savings as the savings rate edged up from 3.3 per cent to 3.5 per cent, the first increase since June," Ms. Lee said.

"Recall this is the reverse of what happened in September, when a modest gain in incomes translated into a sizeable jump in spending, at the expense of savings, which we noted was not healthy."

Whither Canada? As many have said, Canada may be rebounding from the Great Recession, but it isn't an island amid the global storms. Here's what Bank of Nova Scotia's Alex Koustas said in a new forecast today:

"The Canadian economy is expected to remain on a relatively slow growth path in the coming months, with both international and domestic issues weighing on its performance. Sluggish demand in the United States and Europe is dampening international trade prospects and consumer confidence. Meanwhile, Canadian consumers are tempering their spending plans during a period of higher uncertainty, slowing job growth and weak income growth. Fiscal retrenchment will also weigh on growth, with a pullback in public spending coming into full effect in 2012. Housing markets have remained buoyant across all regions, but conditions are expected to cool somewhat in 2012. Business investment will continue to be the key driver of growth for the Canadian economy during a period of slower-than-expected export and consumer spending expansion."

No Ontario tax hikes The Ontario government today ruled out tax increases and across-the-board spending cuts to put Ontario’s finances on a long-term, sustainable path, The Globe and Mail's Karen Howlett reports. It also rejected privatizing public health care, which consumes the lion’s share of program spending.

“These are uncertain times,” Finance Minister Dwight Duncan said as he unveiled his economic outlook and fiscal review. “And people are anxious. And that is understandable.”

Experience has shown that deep, arbitrary, across-the-board cuts do not work, the economic outlook says in a pointed reference to the previous Harris government, which slashed spending on hospitals and schools in the 1990s as part of the Common Sense Revolution. Instead, the government plans to reduce program spending by reforming the way it delivers services.

Nexen pushed out Yemen has rejected an application by Nexen Inc. to continue operating in the country, pushing the Canadian oil giant out of one of its biggest projects, The Globe and Mail's Carrie Tait reports.

The Calgary-based company has a partnership deal with the government tied to the Masila oil field. The production sharing agreement expires Dec. 17, and Yemen did not renew it, Nexen said in a statement today. A new state-controlled operating company will take over the project.

“While we’re disappointed we did not receive an extension, we’re proud of the accomplishments we’ve achieved there," said chief executive officer Marvin Romanow. "Our operations at Masila have generated significant value for our company, enabling us to deploy the cash flow to build our current portfolio of legacy assets."

WestJet to return to LaGuardia WestJet Airlines Ltd. will be returning to New York’s LaGuardia Airport after winning an auction for flight slots, bolstering the carrier’s profile in the East, The Globe and Mail's Brent Jang reports.

The outcome means WestJet will be launching service between Toronto and LaGuardia, with details on a start date and daily flight schedule to be announced later

Business ticker

Dumb, smart, interesting and arguably funny 1. “Between now and 2025, agricultural production in the Netherlands will run into environmental limits, particularly for the disposal of manure." So says a study published today by Wageningen University and Research's LEI, and reported by Bloomberg News. As if the euro zone doesn't have enough s*** to deal with.

2. “Agriculture is the largest renewable industry in Alberta, totaling $6.7-billion in exports in 2010 and employing 70,000 Albertans directly and indirectly. A thriving agriculture industry is an important part of a strong Alberta economy.” This comment from Premier Alison Redford came today as the Agriculture and Rural Development Department reported that 2011 has been a good year for crops, while livestock receipts rose by 1 per cent. It's great that cows, pigs and chickens are helping to buoy Alberta's economy but "renewable industry" may not be the best choice of words for the woman whose province is home to the oil sector.

3. The chief of the Vatican Bank, Ettore Gotti Tedeschi, waded into the euro crisis today, adding his voice to calls for the European Central Bank to become the lender of last resort. Given its holdings, perhaps the Roman Catholic Church could help out?

4. A rare upside revision today from Standard & Poor's. Iceland? Really?

5. "The day to day pressures of the job are intense," Steve Tappin, chief executive officer of Xinfu and author of The Secrets of CEOs, writes for CNN. "Most CEOs are at the mercy of their diaries, their businesses, the press and their shareholders. With the western economies entering a long, hard winter, and the rising competitiveness of eastern businesses, CEOs in western countries face some of the harshest conditions of their careers." Yup, they also earn millions and walk away from their jobs with millions more.

6. Mandatory resident tuition and campus fees for more than six units run up to almost $3,300 (U.S.) at Sacramento State U. There are also late registration fees, re-enrollment fees, and the cost of student professional liability insurance. There's also a $20 fee for bouncing a check. But here's one "fee" psych 101 students don't have to pay any longer: Snacks to attend Professor George Parrott's class. The Sacramento Bee reports that the professor has been demanding snacks from his kids for at least 39 years, but members of the psych department at California State University, Sacramento, decided he shouldn't have walked out of class two weeks ago because there weren't enough. The professor says it's his way of encouraging the kids to work together.

In Economy Lab Many European politicians wish to declare war on the markets, writes Martin Wolf of The Financial Times. They need to remember that they want people to buy their debt.

In International Business It has been a year since a hostile takeover of Potash Corp. of Saskatchewan Inc. was vetoed under the Investment Canada Act. But for people working with high-level mining and energy deals involving Chinese companies, it still feels far too fresh, Carolynne Wheeler reports from Beijing.

In Globe Careers Hunting for a new job should be strategic and thoughtful, not merely a knee-jerk reaction to your terrible boss, evil co-workers and other factors, says Harvard Business Review.

In Personal Finance Donating time, points, or skills, or opting to spend with a company that is already giving back, is a great way to contribute to a cause.

From today's Report on Business

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