We begin this week much like last week—with great uncertainty about the economic situation in Europe. Unfortunately, this week includes an additional uncertainty—the addition of Italy to the critical list of economies joining its neighbor Greece. While some positive jobs data in the US late last week might have pushed rates higher in normal times, the “Southern European Saga” will hold current mortgage rates low today.
Let’s begin with Greece. From current reports it appears that Greek Prime Minister George Papandreou will resign to make way for a unity government that is set to approve the deal offered by the European Union and IMF last week. It is vitally important that this happen quickly as Greece will run out of money within days and would then be in the position of defaulting on its debts.
In Italy, the situation is not as dire, yet the path appears accelerated from the one Greece has been on over the past year. Bond investors have been demanding record high yields on Greek debt over the past few weeks as Italy has made virtually no progress in improving its fiscal situation. Much like in Greece it appears that Italian Prime Minister Silvio Berlusconi will resign and that a new government will be formed. Italy’s debt obligations appear manageable until next March, so getting a plan together and implemented over the next few weeks is very important.
The problems in Greece and Italy are very similar. High government spending on social programs and low productivity in the economy has produced a very unbalanced fiscal situation. European Union partners have offered assistance in exchange for reduced government spending and increased revenue generation. Unfortunately, in Greece initially and more recently in Italy, the government leaders have been quick to accept the help, but slow to implement the necessary changes.
This week is very light on economic data in the US. On Thursday we will get new import price data, weekly jobless claims and trade balance figures. Friday is the day for new consumer sentiment data. Only the weekly jobless claims really have a chance to move mortgage rates. Consequently, mortgage rates will take their cue from Europe. New governments and positive rhetoric from Greece and Italy will probably push rates higher, while more chaos will keep them at current levels.
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