We predicted in our February report that there would be a bailout of one or more of the more reckless European nations by the more prudent. We also asked what would the voters of the more prudent countries feel when asked to foot such a bill?

In May, not only was Greece bailed out, but the German government lost its majority in the upper house as a direct result of the bailout. The reason Greece was bailed out was that if Greece defaulted, contagion would quickly spread to Portugal, Ireland, Spain and possibly even Italy. If this occurred, the euro would be finished and there would be huge writedowns on assets held by European financial institutions, once again calling their solvency into question. This was Europe's Lehman moment.

For once, eurozone leaders tried to get ahead of the problem. A combined EU / IMF support package worth EUR 750 billion was announced. Markets rejoiced and the euro rallied, but only briefly. After a single day's respite the euro resumed its fall against the dollar. Concerns continued to swirl concerning whether default and euro dissolution were merely postponed as opposed to avoided.

Huge problems remain. For all their railing against evil speculators, European governments need the markets to buy their debt. They are running huge budget deficits in order to stimulate their economies and stave off another recession. But this means that their overall debt levels are increasing rapidly which means that interest payments will make up an ever-increasing part of their future spending. Can countries afford to service such debt levels in the future? For the more profligate countries that have failed to address structural issues, markets are unconvinced, requiring ever higher interest in order to accept the perceived increasing risk of buying their debt. But this is a self-fulfilling prophecy. Demand for higher interest makes the cost of servicing current and future debt more difficult to absorb and thus the possibility of future default all the more likely. So countries are being forced to announce ever more stringent austerity packages. But whilst this reduces the short-term need for debt and helps to give the image of sustainability going forwards, it will also remove a vast chunk of economic support from economies that are on life support and therefore risks increasing unemployment. Which in turn increases welfare expenditure and reduces future tax revenues, thus increasing budget deficits!

How much more austerity will the citizens of such countries stomach? Spanish unemployment is already running at 20%. Governments have been hiding the scale of the problems for years. How easily will electorates accept that they need to receive far less in government benefits and pay far more in higher taxes for an indeterminate, but lengthy, timeframe? Rather than railing about speculators governments should be explaining the hard choices they face and trying to secure fundamental support for what is to come.

And EUR 750 billion, although a lot of money, is not enough to bail out everyone. There are rumours concerning discussions on a secret €200-250 rescue package for Spain. Were such a package to come about, which domino would be the next to fall? There is not enough money to bail out everyone, and those countries doing the bailing would see their creditworthiness start to suffer. Not to mention the political costs of spending vast amounts of taxpayer money on bailing out countries perceived as profligate. How do you argue against the anger of a German voter who can retire at 67, asked to bail Greece to pay for the pension of a Greek worker who is able to retire before the age of 55?

As a result, the prognosis for European harmony and the euro itself looks bleak. But it is not as if the fundamentals of the UK and USA mean that GBP / USD look certain safe havens over the longer term. Although the EUR could easily suffer a short-term rout, investors at some stage will remember that the fundamentals of the USD look far from solid. Ultimately, the real currency revaluation will be a weakening of western currencies when compared to far eastern currencies, spearheaded by an increase in the value of the RMB.

The Beijing Property Bubble - a Local Perspective

Recently, the Chinese government has taken stern measures aimed at curtailing speculation in residential real estate in key cities. Whilst I've known for some time that Beijing residential real estate was in a bubble situation, this was really brought home to me last month, when I visited a friend's apartment.

"So, what do you think of my US $1.6M apartment?" he asked. I blinked. Several times. The apartment was just outside the 4th ring road, on the east side of the city - a decent location, but not fantastic. And whilst very nice, in a city where the average monthly income is probably around GBP 300 per month, it did not look like a $1.6M (approx. £1.15M) apartment. Down to business.

"How big is it?"

"228 m²" (Beijing property is quoted gross - in the UK it would probably be the equivalent of around 1,600 square feet).

"What's your rental?"

"RMB 14,000 / month" (About £1,400 per month.).

"So..." quick multi-currency mental calculations... "the rental yield is around 1.5%?".

"I calculate it as considerably less. The landlord pays all management and heating fees. I calculate the pre-tax rental yield at nearer 1.25%."

No doubt about it, a bubble has arisen in Beijing residential property prices. It will be very interesting to see how successful recent initiatives by the government will be in bringing prices back to earth.

But, will the bursting of such a bubble have a significant negative effect on the Chinese economy? Unlikely. The loan-to-value ratios and debt levels of consumers are very low when compared to the likes of the UK. And whilst such bubbles exist in certain cities, there is no nationwide property bubble.