European debt surfaces again – but the recovery continues

Euro.jpgLike a bad penny, or pence, concerns about the health of European banks keep turning up, hitting stock markets worldwide and undermining what little confidence there is in the fragile global economic recovery. However, the issue is not likely to derail the slow upturn.

On Tuesday, the focus was on Irish banks. The government, which has already nationalized Anglo Irish Bank, said the institution will be split into two parts – one of which will contain the loan assets and be sold or partly sold. The other part will be a stand-alone government-regulated deposit bank. The government also extended guarantees on short-term bank liabilities, including corporate deposits, from the end of Setpember, through the end of the year.

Concerns mounted about the cost of Ireland’s bank bailouts, which are estimated at over €30bn ($38bn). Ireland government bonds fell, sending yield spreads against the benchmark German bund to record highs.

Also roiling markets was the expectation that global regulators will agree on a plan to increase capital requirements for banks, driving the need for yet more funding. A German bank association released a report saying the country’s 10 largest banks may need to raise as much as €105bn in new capital under the new rules.

On top of that, a Wall Street Journal report indicated that European bank stress test results released in July understated exposure to European sovereign debt.

However, on Wednesday, Portugal’s sale of over €1bn in sovereign debt went off better than expected despite the 10-year record yield spreads over German bunds. This eased European debt jitters a bit and stock markets quickly recovered.

Despite the continued worries about European debt, overall business activity and chemical demand appear to be relatively healthy.

For any leading indicator of business activity, look no further than chemical distributors. If there’s a spike or collapse in demand, these firms will feel it first.

In an interview with US-based chemical distributor Univar’s CEO John Zillmer earlier this month, he said that the commpany has been experiencing “a significant improvement in volumes year to date,” and that there has been “no indication of a downturn in volumes.”

Univar is the leading chemical distributor in the US and Canada, and the number two player in Europe behind Brenntag, which itself posted solid second quarter results in mid-August.


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