The kind of record you don't want to set...

European banks set new records this past week for monies left on deposit overnight at the European Central Bank. It's another indicator of the intense concern about the denouement of the European sovereign and bank crisis.

Consumption buoyed the Mexican economy in Q3...

Consumption drove growth in the third quarter. Measured using the US reporting methodology (versus previous quarter, annualized), private consumption climbed 8.4% and government consumption, 8.8%. Investment rose 8.0%. Exports, in contrast, contracted 2.0%. 

Sound familiar?

From an article in today's New York Times:

"...Italian politicians, whose salaries rank above the European Union average and who are widely seen as more eager to protect their privileges than their country’s future, have balked at the prospect of belt tightening for themselves."

One British view of the choice confronting Germany...

Martin Wolf of the The Financial Times concludes that Germany's choices are these...

"Germany must choose between a eurozone disturbingly different from the larger Germany it expected, or no eurozone at all. I recognise how much its leaders and people must hate this choice. But it is the one they face. Chancellor Angela Merkel must dare to make that choice, clearly and openly."


For his analysis, see 
http://www.ft.com/intl/cms/s/0/c3085eb4-202d-11e1-9878-00144feabdc0.html#axzz1gXTdpMke

The ECB cuts again...

The ECB cut the interest rate another 25 basis points today, leaving the rate at 1%. It's the second 25 basis point rate cut in less than five weeks. The first reversed the 25 basis point increase in July under former ECB President Jean-Claude Trichet; it occurred the second day of Mario Draghi's brief tenure as the new head of the ECB.

What does this mean for Mexico?

First, it's a signal of just how fragile the situation in Europe is. The two rate reductions are an abrupt about face of ECB policy and demonstrate that the central bank is much more concerned about a recession than inflation at this point in time. Today's rate cut was accompanied by measures to keep the inter-bank lending market moving, another indication that European banks are facing severe funding pressures. If Europe blows, it will hit growth in Mexico.

Second, the odds that Banxico will reduce the Mexican reference rate in the first quarter of 2012 are substantially higher. Not that a lower interest rate is going to be terribly effective in offsetting the impact of a European crisis...

"Full of sound and fury,"

Shakespeare finished his famous line with "signifying nothing". We have to hope that the meetings Europe's leaders are holding this week have a different ending than Shakespeare's. Otherwise, it's hard to imagine anything other than some variant of the fourth quarter of 2008 playing out in the markets.

That the IMF will be able to forestall the turmoil the markets fear is unlikely. The Fund's available resources don't quite cover the debts Italy and Spain must rollover in the next six months. The US Treasury has already indicated it doesn't look favorably on proposals to increase the Fund's lending capacity.

That S&P is on the verge of downgrading all European sovereigns, including France and Germany, suggests just how dangerous the situation is.

The only realistic option to avoid a meltdown is if the European Central Bank (ECB) can act as lender of last resort for the EU. It's up to Germany.