Few weeks ago (see article), I wrote that Euribor heading to 6% was not unrealistic.
At that time I thought that could come gradually and reach it sometime end of the year or in 2009.
Today, it was shocking to witness the Euribor at 5.4 % !
The reason is Euribor reflects the stress or low confidence that banks are willing to lend to each other, persistent credit crisis and a gearing for the end of the quarter . Another way to put it, thay need to have enough capital to handle any future losses on non performing loans or defaults.
Euribor reflects as well the level of future interest rates thus higher there are and higher is inflation expectation.
We know clearly that policy mistake were made by the U.S. Federal reserve to let its interest rates to 1% in 2003, and the ECB to let it to 2%. All they have done is to throw oil to the fire so to say, triggering the biggest ever rally in oil, food and real estate price...
The U.S. has learned nothing to past mistakes as they have again lowered their interest rates from 5% to 2% in a record time. They had to bail out the financial system and glorify "moral hazard", at the end they had to rescue the whole system: Capitalism.
Europe, through the ECB, has a very clear mandate and it is to fight inflation. They are not following either the US or UK, instead they had maintained the rate at the same level with the possibility to raise rates next month.
People purchasing power in Europe and around the world has been eroded at the a very rapid pace, something not seen since 1989 or 1995.
In Finland, Competitiveness is plummeting (wage soaring in immovable jobs, and unbearable inflation i.e rents, food transportation etc...) and Corruption is growing (Land allocation, political etc...) . All the ingredient that could lead to very hard time ahead...
At some point, the system need to clean up; that's the one of the positive characteristic of capitalism ...