At the June G-20 summit in Toronto, it was decided that countries would pursue necessary budget cuts to reduce sovereign debt.  The U.S. insisted that the member nations continue to pursue growth as part of a successful formula to end the recession.  The growth-trim controversy was the key discussion at the Toronto summit.

While the participants agreed to the concept, they returned home to unleash austerity cuts with little concern for growth.  The avoidance of a strategy to grow alongside the debt reduction has spread beyond the euro zone as Britain, Brazil and India have joined the parade.

On Tuesday, China expressed concern that the euro zone cuts would greatly affect the country’s export balance.  The U.S. has expressed the same concern ever since Greece needed assistance to meet its obligations.

In Monday’s after trade quarterly reports, IBM and Texas Instruments announced lower than expected results.  The surprise announcements sent tremors thought European markers and sent the Nikkei to a 1.2 percent loss as European equities fell for a fifth straight day.

Earlier in the day, the euro had crossed the $1.30 mark and was holding at $1.3029.  Nervous investors seemed to doubt the currency’s ability to handle the results of the stress tests to be revealed on Friday.  The euro was trading at $1.2851 when U.S. markets opened but the slide looked to be continuing.

Director of research at Forex.com, Jane Foley, explained, “We’ve seen risk appetite claw back a fair amount and the market is questioning whether that move is valid.

China Speaks

On Tuesday, China’s Ministry of Commerce spokesperson, Yao Jian, said that the country’s export business would fall as a result of the cuts in he euro zone.  China has enjoyed stellar gains in the first half of 2010.  

In June, exports increased 43.9 percent in year-over-year comparisons and 48.5 percent in May comparisons.  However, imports also rose dramatically and nearly nullified any growth in GDP.

 Yao said that second half export growth would fall to about 16.3 percent yielding a 24.5 percent rise in GDP.  That rise is modest by 2009 comparisons, but wages have been increased in certain areas and the Ministry of Commerce mentioned these changes are detrimental to the export-import ratio.

 According to the International Energy Agency, China has replaced the U.S. as the world’s energy consumer.  China challenged the report saying that Beijing was aggressively pursing replacement of outdated manufacturing plants.

Yao said China is expecting to begin new construction projects to meet the country’s rising consumption expenditures.  With newly increased wages, demand for products has also increased and China will see a significant rise in internal sales.

Seven weeks ago, the euro was staggering.  After creating a $100 billion safety fund, the euro zone has implemented a series of austerity cuts while countries that seemed pitted against each other have pulled together in a common cause to save their troubled currency. 

The originally divisive financial plan, which includes stress testing of the zone’s 100 largest banks, has buoyed the euro.  In overnight trading, the euro reached a two-month high at $1.2970 and seems certain to cross the $1.30 threshold soon. 

On June 7^th, the euro had fallen to $1.1875.  Based upon strong showings at debt auctions in Greece, Portugal and Spain, the euro has stabilized and has moved ahead.  Greece, Spain and Portugal have suffered credit rating reductions by all major credit agencies. 

The European Central Bank’s strong cash position has eased intra-bank trading.  The euro has gained 9 percent since early June and unless the Federal Reserve raises its rates, the dollar may continue to slide against other currencies.  Thus far, the Federal Reserve has hesitated to raise rates because another round of quantitative easing may well be in the offing.

On July 1^st, the dollar fell to 89.96 yen, the lowest rate since December.  The dollar’s 14-year low against the yen is 84.82, struck in November 2009.  After that fall, the Bank of Japan invested 10 trillion yen in the dollar.  Analysts had projected a 90.18 dollar/yen gain by March 2011.

Euro Zone Progress

Following a solid Spanish bond auction, successfully renegotiated wages in Greece and a vote of confidence in Italy, French Prime Minister Francois Fillion addressed the media on Friday.  The Prime Minister stressed that recent weakness in the euro was the result of poor national fiscal policies and not weakness in the euro currency system.

The prime minister allayed fears by asserting that the euro was on the mend.  Fillion pushed Japan to maintain faith in the currency.

“Greece has endangered the credibility of its budgets, but public finances in the EU are no worse than the situation in the U.S/ and Japan,” said Fillion.

In early Friday trading, the dollar continued its 1 percent slide against the euro, the yen and sterling.  Poor economic news and political infighting have caused weakening of the dollar.

A report showing that producer prices fell for the third successive month was released on Thursday.  On top of the Empire State Survey, conducted by the New York Federal Reserve, which shows that New York’s production fell to its lowest rates since December, and a similar report in Pennsylvania, projections for growth have been trimmed.

Goldman Sachs released projections that the euro would rise to $1.35 in the next six to 12 months.  As bond auctions in the U.S. continue weak performances, investors are left to question exactly what is the economic policy in Washington today?

The International Monetary Fund earlier raised predictions of U.S. GDP to 3.3 percent in 2010 and 2.9 percent in 2011.  The nation’s high unemployment rate and steadily climbing foreclosure rates are the chief concerns of the IMF, who suggested that unless these problems were addressed, the likelihood of a double dip is strong.

Spain beat the clock Thursday morning by successfully selling 3.5 billion euros in 5-year bonds just ahead of Moody’s downgrade of the credit rating in five of the country’s regions.  Surprisingly, the average yield at tender rose just 12 basis points from Spain’s successful May auction. 

On Wednesday, Moody’s announced an upcoming review of Spain’s credit rating.  The success of the bond auction indicates that investors had already factored in the ratings slide. Standard & Poor’s and Fitch had already downgraded Spain’s rating earlier this quarter, but on Wednesday Moody’s said the rating could fall by as much as two levels.

Spain’s Prime Minister has tried to keep the country one step ahead of analysts, many of whom feel the country is headed for a “Greece-type decline.”  Prime Minister Jose Luis Rodriquez Zapatero’s Socialist Party managed to pass austerity legislation in May by the slightest of margins – one vote.  Ever since, support for the Socialist Party has declined.  Much of the dissatisfaction has been focused on proposed reforms to the country’s labor laws.

Spain currently faces a 20 percent unemployment rate.  Adding to the fiscal woes is the fact that the country’s recession recovery has amounted to barely a whisper.  Political opposition to the austerity cuts mounted in June.  The opposition maintains that policy changes regarding unemployment only scratch the surface of a deep hole.

The country must find the means to deal with the reality of minimal growth to offset a decade of inflationary practices and some of the highest levels of household and corporate debt in the euro zone. 

Greece Pains The PIIGS

Comparisons to Greece also continue to haunt Portugal, Italy, Ireland and, of course, Spain.  Kathrin Muehlbronner of Moody’s describes what is happening in Southern Europe.  “The contagion has been so dramatic in the markets in the last few months people forget really what a gulf there is between Spain and Greece… Spain is a very highly credit worthy country,” said the analyst.

In 2009, Spain had a public deficit of 11.2 percent.  Spain’s debt-to-GDP ratio is closing in on 55 percent.  Moody’s says the ratio will rise to 80 percent by 2014. 

Zapatero’s government announced a plan to trim 15 billion euros from the budget by 2013.  The government projects these savings will cut the budget deficit to 3 percent of GDP by 2013. 

Moody’s strongly disagrees, citing the government’s growth projections as unrealistic.  The rating agency projects 1 percent growth from 2010 to 2014.  Government projects 3 percent growth by 2013.  In Wednesday’s report, Moody’s stressed the need for deeper cuts and a revamping of the country’s employment policies.

Labor reform legislation is currently under review by parliament.  Spain has the highest unemployment rate in the euro zone.  Critics say the reform package does not acknowledge the severity of the employment crises.  40 percent of employable Spaniards under the age of 25 are unemployed.

The country is busily finalizing plans to bring the unlisted private banks under one umbrella.  The merger of some of the country’s troubled banks has already cost the government 10 billion euros.  Plans to bring the smaller, private banks under tighter reins through mergers are projected to cost another 30 billion euros. 

Adding to the financial pressure is a July redemption ticket for 16.2 billion euros.

This weekend’s G-8 and G-20 summits in Toronto were surrounded by aggressive protestors and strong containment by police forces, but inside the meetings an air of cooperation that yielded some surprisingly positive results.  The 20 economic leaders of the world’s wealthiest nations are not due to put together a written policy statement until later in the year, but more progress was made at these meetings than was expected.

German Chancellor Angela Merkel who has proven to be Europe’s most powerful and sensible spokesperson may have summarized the meetings best; “This was part of the final communiqué.  Frankly spoken, this is more than I expected.”

The differences between the Obama Administration’s stance that stimulus spending is still very much needed to sustain the fragile recovery and Europe’s position that it is time to rein in the global debt led observers to think the summits would be contentious.  With many of Europe’s economies underwater and with the U.S. carrying staggering debt levels, the G-20 summit focused on the foundation of a compromise.

The Europeans would not accept any conceptual agreement that did not prioritize austerity cuts and the U.S. is fixed that global economies commit to growth to enable increases in the GDP to sustain the recovery and prevent a double dip in the recession.

President Obama said, “Our challenges are as diverse as our nations.  But, together we represent some 85 percent of the global economy, and we have forged a coordinated response to the worst global economic crisis of our time.”

More Harmony Than Expected

Outside the meetings, Toronto’s streets were filled with protestors, many of whom used violence to express their dissatisfaction.  Police were required to release tear gas on both days of the G-20. 

But, inside there was unexpected cooperation.  While unemployment is a global crisis, the emphasis seemed to shift from government sponsored employment lifts to private sector job increases.  Another area of concentration is on sustaining the current recovery.  Speculation has increased that due to the debt levels in European economies the global economy is headed for a double dip.

The level of frustration in Washington has reached its highest point.  Mired in political backbiting over the crisis in the Gulf of Mexico, the War Afghanistan, the financial crisis and the unemployment stagnation, the Congress and the Administration seem unable t arr4iove at any positive solutions.  The Administration seems to be awaiting the results of the mid-term election and the discarding of as many incumbents as possible before asserting new initiatives.

Compromise Made Sense

Politically, this G-20 summit was not the time for the Administration to draw any lines in the sand.  With the recovery’s credentials in question, the most important result was to create a positive environment upon which the U.S. and Europe could build.

The most important concessions were the United States’ agreement to join Europe in cutting deficits in half in exchange for the G-20’s agreement to make growth the group’s top priority.  Under the plan, member nations will halve their deficits by 2013 and “stabilize” debt loads by 2016.

Through this compromise, nations agree that it is necessary to “wean” their economies from further stimulus.  This shift in policy will take great discipline and a change in political thinking in Washington.

Another area of agreement is that in the absence of a bank tax, financial institutions will be forced to pay for any interventions.  While this is a basic concept, the G-20 will finalize a list of options. Considerable discussion surrounded this topic.  European leaders advocate an immediate levy on the banking industry.  The member nations agreed that banks should be required to maintain enough capital to deal with “the stresses of a magnitude associated with the recent crises.”

The Obama Administration was hoping to arrive at this weekend’s G-20 Summit in Toronto with proud financial reform legislation that would showcase the country’s commitment to change.  Instead, the reform legislation that was passed by Congress yesterday is an embarrassingly watered down version of the original bill intended to eliminate the possibility of “too big to fail” institutions.

Meanwhile, the European Union members are bringing their own reform packages to the G-20 table.  There are significant differences between the euro zone stance and the position of the U.S.

The G-20 meetings are scheduled for Saturday and Sunday.  On Friday and early Saturday, the G-8, composed of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States, will have preliminary meetings.  What was hoped to be a weekend where countries mapped out a united plan for sustaining the delicate global recovery may instead be a weekend where more economic differences are raised than solutions presented.

Unexpectedly thrown into the tense environment is Beijing’s new, relaxed stance concerning its currency.  The Obama Administration sees China’s move with the yuan as another attempt by the world’s third largest economy to gain a trade advantage.

“The initial signs were positive.  But it is too early to tell whether the appreciation, that will track the market, is sufficient to allow for the rebalancing that we think appropriate,” Obama said on Thursday.

The yuan has risen 0.4 percent against the dollar but has a long way to go.  Analysts suggest that a 25 to 40 percent increase is needed to achieve fair market value.  The Chinese economy is expected to gain 9 percent this year.

Sparks Will Fly

The differences between the U.S. stance and the EU are expected to be sensitive.  The United States would like to see more economic stimulus in Europe but the EU, and especially Germany, the zone’s biggest economy, are determined to undertake deep austerity cuts.

Leading by example, German Chancellor Angela Merkel has announced 80 billion pounds in cuts over the next four years.  Merkel leads the charge against deficit spending that many European leaders feel landed the euro in the tenuous place it is today.  The U.S. sees this position as a threat to the ginger recovery and favors a continuation of stimulus spending. 

In describing the difference between the U.S. for more protracted cuts and stimulus investments to spark jobs and consumer spending, Canadian Finance Minister, Jim Flaherty, said, “That is the delicate balance that we need to try t strike this weekend.”

The Obama Administration’s Treasury Secretary, Timothy Geithner, explained to the BBC that, “Our job is to make sure we’re all sitting there together, focused on this challenge of growth and confidence as paramount.” 

President Obama’s popularity has fallen to his lowest ratings in his short presidency.  Within the past week, he has dismissed his ranking military leader in Afghanistan and been forced to settle for an unpopular and largely indifferent reform package.  At the same time, the BP oil spill in the Gulf of Mexico continues to defile the environment and put hundreds of miles of precious shoreline at risk.

At a time when Americans need strong leadership and a willingness from existing legislators to enact change, political bickering has paralyzed the nation.  The possibility of a double dip recession seems more likely than ever.  

China’s decision to allow its currency to trade more openly looks good at first glance but there may be more to the move than meets the eye.  The immediate effect is that certain G–20 economic leaders may be caught off balance in advance of this weekend’s G-20 summit in Canada.  Monday’s announcement appears designed to give China a more balanced import-export level and to answer public criticism of the nation’s currency policy.

The timing of the announcement, just days before this weekend’s G-20 summit in Canada, may thwart some tough resistance from member nations but conservatives warn it is too early to fully assess the impact.  China’s trade policy has been the focus of many disgruntled G-20 nations heading into the weekend meetings.

The net effect appears to be that companies like GE and Caterpillar with big investments in China will not see much change but companies like Walmart, Liz Claiborne and Target that rely on low cost manufacturing from China may be pinched to keep their prices down.

The Beijing announcement ends a 23-month peg against the dollar and will clear the way for the appreciation of the currency, which many analysts feel is undervalued by 20-40 percent.  Internally, China has been pressured by the labor force to increase wages.  A recent strike at a Honda Plant and 11 suicides at manufacturing giant Foxconn have pressured the government to act and thus spur internal consumer spending.

G-20 Divided Over Austerity Cuts

The move by China may divert some of the criticism that was planned by G-20 members.  Now, the rift may well be centered on the austerity trimming policies of euro zone countries and specifically Germany.  Chancellor Angela Merkel feels political pressure to maintain a somewhat defiant posture about austerity cuts.  The Chancellor has openly rejected advice from President Obama about the depth of euro zone cuts and the timing of trimming measures.

The U.S. feels that the depth of the cuts and the rapid implementation of the austerity plans will send Europe spiraling back into another recession.  Merkel has said that Europe will push for a fast exit from loose fiscal stimulation policies and will state its case at the G-20 with a strong budget consolidation plan.

The United States sees a relatively loose approach as a deterrent to a double dip recession.  China is expected to criticize the U.S. policy at the G-20.  Obama has said that nations, like China, with large export surpluses should change their focus to developing internal consumer spending. The idea that the U.S. consumer can be relied upon to lead the way out of the recession is outdated.  U.S. unemployment stands at close to 10 percent and surveys reveal continued uneasiness on Main Street.

Increased Consumer Spending In China

China’s shift in the yuan policy should help ease trade imbalances among G-20 member nations.  On Monday, global equity markets responded favorably to the move.  The change in policy will raise the cost of goods in China and may make goods manufactured in the west more appealing.

The cost of Chinese manufacturing has already increased 8 percent in the past 12 months.  In early Tuesday trading, the yuan fell slightly as China’s banks moved to purchase dollars instead of the national currency.  On Monday, the currency posted its biggest gain in four years.

In April, China posted its first monthly trade deficit in six years.  In May, the export-import balance returned to positive, but the labor force continues to apply pressure.  The increased labor costs are seen to be subtly impacting export levels, a welcome trend for the west. 

Most likely, this weekend’s G-20 summit will only result in the release of each country’s conceptual policies regarding economic reforms.  At the November summit, specific policies are expected to e stated by each country.

In separate talks yesterday, two highly regarded analysts and Fed Chairman Ben Bernanke seemed to agree that the euro zone may be committed to succeed but has painful moves to make this year.  Meanwhile, the U.S. economy and especially the dollar keep looking better and better.

Highly regarded analyst Robert Prechter, author of Conquer The Crash, spoke at the Reuter’s Investment Outlook Summit in New York on Monday.  Prechter predicted the bull market in 1982 and the subsequent 1987 crash.  Regarding U.S. equity markets, Prechter said the S&P 500 would fall back to 666 mark of March 2009.

Prechter’s information indicates that 98 percent of investors are bearish on the euro and 98 percent are bullish on the dollar.  On Monday, the euro fell below the $1.19 mark for the first time in more than four years.  Prechter, the President of Elliot Wave International in Gainesville, Georgia, believes the euro will stage a short-term rally this summer but by year’s end will be on par with the dollar.

In his 2002 book, Prechter predicted an impending crash.  He currently favors cash and Treasury bills as safe havens against the U.S. deflationary depression, which already has taken root.  He predicted a second phase of selling for non-government bonds.

“The public has decided the safest place to be is in municipals as well as corporates.  I think that’s the next area of severe decline… the area you most want to avoid,” said Prechter.

He feels that municipal bonds are under more pressure than ever before. The upcoming depression may cause municipalities to hit unprecedented levels and force the rarest of events, municipal defaults.

In Europe All Eyes Turn To Spain

Many analysts have already determined the fate of Greece.  Until the country restructures its debt, the European debt crisis will remain in disarray. Despite imposing austerity cuts, the day of reckoning continues to draw near.  Even if Greece meets the euro zone’s stringent demands, the country will be unable to reduce its debt.  Basically the $1 billion in aid does little more than service the country’s debt.  Analysts believe restructuring is needed within the next twelve months.

Greg Peters, head of fixed income and economic research at Morgan Stanley, said, “There’s really no quick solution.  The European crisis will not slow down or abate until Greece is forced to restructure.”

Given that Greece will restructure, Spain is the next key component.  Last month the country’s credit rating fell from AAA to AA with Fitch and Standard and Poors.

So far, Spain’s banks have been successful obtaining short-term funding.  The government has been able to implement austerity cuts without the public upheaval in Greece.

Peters’ biggest fear is that what is happening in southern Europe could very well happen in Great Britain and the U.S. unless these countries begin to tighten the reins.  Peters believes the U.S. is in a slow, sustainable recovery but supports a raise in the Federal Reserve’s interest rate.

Corporate bonds for company’s that depend on euro zone sales are under extreme pressure.  While Peters support Kansas City Federal Reserve President Thomas Hoenig’s recommendation that the Fed up its rate to 1 percent by the end of the summer, he has confidence in investment-grade and high-yield corporate bonds.

Bernanke Stands Behind the Euro Zone

Chairman Bernanke says that euro zone members are committed to the success of the euro.  The $1 trillion rescue package gives the euro zone enough money to meet its obligation.  In his speech at the Woodrow Wilson Center in Washington, Bernanke spoke specifically about the southern tier members, Spain, Portugal and Greece.

The Chairman of the Fed emphasized the unity of the European Union’s members.  However, little was made of recent reports that Hungary and Poland, northern euro zone members were in similar circumstances. 

Bernanke stopped short of a full endorsement for the new regulation legislation, but did say it was an improvement.  The most important aspect of the reform legislation must be that it gives the government authority to control too big to fail companies.

In his speech at the Reuter’s Investment Outlook, Barry Ritholtz, director of research at Fusion IQ, said, “The euro is going to have problems for a long time.  People are already talking about $1.132, but I could see parity before year’s end.”

Riholtz was has concerns about the strength of the U.S. recovery but does not believe there will be a double-dip recovery.  He projected a modest 2-3 percent growth in GDP.

Fear of further weakness in Greece, Spain and Italy drove the euro to levels close to parity against the dollar as many investors moved to the sidelines while gold pressed the 1200 mark as a safety net.  European equity markets closed at the lowest levels in nine months as U.S. equities underwent across- the-board meltdowns.

The euro downtrend hit $1.2142 before a small rally just after European markets closed.  Currently, the euro has lost 17% since January and is well below 2008 highs of $1.60.   

With Greece resisting certain provisions of the EU’s austerity plans and Spain applying for assistance to hedge banking sector weakness and Germany announcing the possibility of broader short selling bans, turmoil reined in global currency and equity markets.

Jane Foley, Research Director at Forex.com said the euro’s weekly average of $1.18  marked “fair value” for the troubled currency.  “Historically, currencies don’t stay around fair value for long.  In the medium term, I think there is a risk of overshoot which could take us down to $1.15/1.10 area,” said Foley.  The Research Director did not rule out the possibility that the euro could fall as low as $1.00.

BNP Paribas Forex strategists suggested that Purchasing Power Parity (PPP) euro/dollar stands at $1.1370 and that the euro would fall further in the first quarter of 2011.  Ian Stannard of BNP Paribas reported that, “Assuming an adjustment to one standard deviation below PPP, this provides a target of $1.03, which is consistent with our forecast of parity.”

Greece and Italy Raise Fears

Greece’s Labor Minister said on Monday that the EU and the IMF were tightening the country’s controversial pension reform as part of the “aid for pain” agreement.  The EU fell short of saying that Greece was non-compliant but said their role was to assure member nations of Greece’s compliance with all austerity plans.

The current pension draft allows pensioners to begin drawing funds after 37 years of contributions.  The new plan would add another three years of contributions before payouts could commence.  The current plan would commence on 2018 but the EU-IMF expects a 2015 deadline.

In essence the EU’s plan addresses more comprehensive changes such as raising the retirement age for women and discouragement of early retirement among public employees.  These provisions are included in the EU’s plan but have not been approved by Greece’s parliament.

In Spain, fear of more bank bailouts has weighed on the euro.  Over the weekend, the Bank of Spain seized control of Cajasur, a small savings bank, whose merger efforts with Unicaja failed.  Other Spanish banks fear takeovers by the Central Bank if their planned mergers do not succeed.

The takeovers come in the wake of a 15 billion euro austerity package announced by the government just last week.  Investors fear that bank balance sheets in the euro zone exceed the government’s ability to bail them out.

“We believe the intervention is quite negative news for the financial system, for the sovereign risk profile and for the economy in general,” offered Credit Suisse analyst Santiago Lopez.  The bailout comes on the heels of the S&P’s sovereign debt downgrade last week.

Spain’s bank shares fell sharply during trading on Tuesday.  Approximately one third of the country’s savings banks have already completed mergers while an additional one third are in merge talks.

Expanded German Short-Selling Bans

A paper created by the German Finance Minister and leaked on Tuesday indicated the country planned further bans on naked short selling that would include derivative trading.  Markets fell sharply upon the release.

As Italy prepared to announce a two-year austerity trimming plan, fears escalated that the European Union was in the midst of a banking crisis.  The pan-European stock index fell by 3.4 percent to a nine month low.

Meanwhile U.S. Treasury Secretary Timothy Geithner will be moving from China to Europe.  It is believed the Secretary will be calling for stress tests used by the U.S. to stabilize financial markets.  It is believed Geithner will encourage the stress tests as a mean to restore transparency to the euro zone.

By Tuesday morning, stern questions surrounding the EU – IMF euro zone rescue plan had already begun to surface.  The $1 trillion bailout package for the 27-member euro zone, which prompted a global upturn in equity and money markets on Monday, fell under closer scrutiny and skepticism rose quickly as the overall consensus seemed to be “too little, too late” for the euro and perhaps the EU.

The EU-IMF’s nuclear rescue package was unveiled by European Central Bank President Jean-Claude Trichet on Sunday night.  Under the agreement, the EU will contribute 500 billion euros and the IMF will add another 250 billion euros to complete the bailout package.  An additional $100 billion for Greece has already been committed.

By Tuesday, pressing questions about how politics will play out as the package unfolds arose.  Just about every nation in the region needs austerity cuts to meet the EU’s stringent standards.  Under attack are the size of government, unrealistic benefits to public employees, and disparity among retirement ages.  These cuts are political nightmares. 

In Greece, socio-economic changes incite the public and influence politics.  As evidenced by the bloodied streets of Athens and the electoral defeat of German Chancellor Angela Merkel, the bailout, the fate of the euro and the fate of the European Union mean less to the public than their existing lifestyles.  Any euro zone nation seeking aid will have to undergo austerity cuts similar to those of Greece.   

The media consensus is that the bailout package along with the previously committed $100 billion allocated for the bailout of Greece will stem the current tide but may not provide the spectacular, long-term solution the region needs to right the euro.  At some point soon, government operating costs must decrease and sales must increase in order for the ECU to survive.

As the EU and the IMF struggled to put the pieces of the bailout together, global markets closed Friday with a wait and see attitude.  The size of the EU – IMF commitment is impressive and the euro rose sharply on Monday only to fall back on Tuesday.  By midday, the euro stood at $1.273 against the dollar. 

The Benefits of The Bailout

The most immediate benefit of the package is the stabilization of world markets and the time that has been bought for member nations to toe the austerity line.  Opponents of the move content that outside influences impacted the EU – IMF decision.  The reality is that action was needed and sooner rather than later.  

A secondary benefit is that Greece has a financial reprieve.  However, the government is left with strict mandates to get spending under control and trim debt to 3% of GDP.  Currently the rate exceeds 13.9% of GDP.  On Monday, Greece’s cabinet approved major changes in the pension system and raised the retirement age from 60 to 65. These changes are imposed by the EU as a condition to financial assistance.  On Tuesday, Greece approached the ECB to request immediate assistance.

The austerity plans for Greece are complex and multi-dimensional.  Public retirement ages have been raised, benefits will be trimmed and services cut.  Any other EU nation needing financial assistance will find stringent austerity cuts attached.  The hope is that governments will begin to act now to remedy their large deficits.  Troubled economies in Spain, Portugal, Italy and Ireland now have time to impose the cuts necessary to close the gap between sovereign debt and the GDP. 

On Monday, Greece’s cabinet approved major changes in the pension system and raised the retirement age from 60 to 65. These changes are required by the EU as a condition to assistance.  On Tuesday, Greece approached the ECB to request immediate assistance.

The European Central Bank announced that it would begin to buy euro zone government bonds to help stabilize markets.  This action is a reversal of form as the ECB has only participated in full-scale asset purchases in the past. 

Trichet explained his view of the package.  “For us, what is absolutely decisive is the commitment of governments of the euro area to take al measures needed to meet their fiscal targets this year and in the years ahead.”

Always the master of understatement, Trichet is guiding the EU through its most challenging period.  The true benefit of the bailout package is that it buys time for the member nations.  Members are certain to see a more proactive governing body and there are many details yet to be resolved, but for the time being, the euro is still in business.

The Weaknesses of The Bailout

There are many skeptics who question the prudence of the bailout that basically has taxpayers from Germany paying for years of fiscal irresponsibility by other nations.  The availability of the money may give politicians in the zone’s most troubled economies more breathing room to implement the very necessary and much needed spending cuts.

Trichet’s announcement was accompanied by a warning to member nations that it is now time to make those heavy cuts.  No euro zone nation is compliant with the debt to GDP ratio that was at the core of the EU’s foundation.

“This is a big plaster and there’s a lot of work to do in terms of getting these budget deficits under control and it’s also a reminder that the financial sector isn’t in great health,” offered Marc Ostwalt of Monument Securities.

Critics suggest this is the age-old shill game but throws good money after bad.  The $1 trillion package may only last until 2012 unless cuts are enacted quickly.  Germany and Spain have committed to begin trimming immediately.

The package and the ECB’s decision to pump money into the system will temporarily end the liquidity crisis and dampen speculators.  European laws do not permit the ECB to purchase debt directly from governments in the way the U.S. Banks did.  The ECB is permitted to participate in secondary markets.

After a surprisingly strong 10-year syndicated bond sale raised 5 billion euros on Thursday,Greece staved off pending financial doom and built a strong case for the success of its fiscal moves. The sale was three times oversubscribed and, at a hefty 6.4%, provided a return twice as large as offered by Berlin.

The quality of the investor was also impressive. Long-term investments such as pension funds, commercial banks and insurance companies replaced shorter-term hedge fund speculation. 90 percent of the investments came from outside Greece.

Across the globe, analysts were anxious to weigh in on the success of the bond auction and the country’s recently announced austerity-spending cuts. For the most part, the finance ministers showed relief with the auction but continued to push for deeper cuts. All eyes now turn to the Friday meeting between Greece’s Prime Minister George Papanadreou and German Chancellor Angela Merkel in Berlin.

Papanadreou seeks additional support from Germany to help the struggling economy lower its borrowing costs. Merkel has played it close to the vest, shunning suggestions that Germany rise to the occasion. German economists and media have taken a strong position in opposition to any further aid. With other euro zone economies in desperate straits, Merkel is not likely to set a dangerous precedent for relief. Publicly, the Chancellor has encouraged Greece to mend its own fences.

While the bond sale may be encouraging and provide some immediate relief, the problems in Greece are very real and very near at hand. The country must raise 20 billion euros by the end of May and another 53 billion by the end of the year.

While euro economic ministers voiced approval for Greece’s budget trimming and bond auction, the citizens of Greece roared their disapproval. This is not to say, the labor unions do not recognize the need for the cuts. The Prime Minister still maintains healthy approval ratings.

On Thursday, Greece’s communist labor unions stormed the finance ministry, occupying the building and preventing agency employees from entering the workplace. Public and private labor unions called for a 3-hour strike on Friday at the same time the new austerity cuts will be enacted by Parliament in an emergency session.

Euro Up Briefly

The euro continued its rocky walk on Thursday. The bond sale in Greece pushed the euro above $1.37 before strong economic news from the U.S. buoyed the dollar. U.S. employment numbers improved and retail sales were stronger than anticipated. The reports drove the euro down, settling at $1.3572.

The euro is off 10 percent since euro zone members began to lag in November 2009. German resistance to aid for Greece has also weighed on the currency.

European Central Bank chief economist, Jean-Claude Trichet quelled any promise of raising the record low euro zone interest rates, announcing that rates will remain unchanged. The announcement signaled a slight pullback from the central bank’s strong support.

In Asia, currencies turned upwards on the positive news from the U.S., the largest importer of Asian goods. Late Thursday Congressional approval of the $15 billion labor legislation is likely to pressure the euro further while boosting Asian markets.

Upon an announcement by the Bank of Japan that more quantitative easing was forthcoming, the Nikkei 500 average was up 2.07 percent. The Topix gained 1.53 percent in high trading.

German Resistance Gaining Support

As Greece’s Deputy Foreign Minister made an extraordinary plea for German support on public radio, the buzz and media assailed Greece’s plan and any use of taxpayer revenue to bail out euro zone members. Dimitris Droutsas pled for help saying, “What we need from our EU partners and from such an important EU partner as Germany is an explicit, clear signal to the international financial markets that Greece and the Greek government have their full confidence.

Policy expert for Chancellor Merkel, Frank Schaeffler, rebutted publicly, “Those in insolvency have to sell everything they have to pay their creditors. Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.”

Germany’s media seized on the story, suggesting that the country sell vacated outlying islands immediately. The radical remedy was dimly viewed in Greece, setting the stage for tense meetings on Friday.