Tag Archive | "Angela Merkel"

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Germany And France Data Prompts Equities Growth

Good news from Germany and France lifted the euro zone out of a prolonged 18 month recession and broadly boosted European equity markets. Germany’s critical economy posted a 0.7 percent growth rate in the second quarter. GDP expanded due to strong spending within the country and with better exports than expected. Public consumption has been slow during the past 18 months but the new data reflected a new and stronger consumer sentiment in Europe’s largest economy.

Meanwhile, in France, the economy posted 0.5 percent growth during the second quarter. Both countries surpassed the US growth of 0.4 percent. The gain marked France’s biggest upturn since early 2011.

Olli Rehn, the Commissioner of the European Economic and Monetary Affairs, announced a euro zone gain in GDP of 0.3 percent in the second quarter. This gain comes despite obvious struggles in the region’s southern tier, particularly in Spain, Italy, Greece and Cyprus. Rehn was quick to point out that while this is a positive step, the recovery as extremely tenuous and political dissention and economic policy shifts could reverse the positive trend.

German Chancellor Angela Merkel and France’s President Francois Hollande were quick to move center stage alongside the new data. The political leaders have had opposing opinions about the relationship between austerity and growth. The common thread in the euro zone currently is that growth must always be given consideration. The effects of the region’s sharp austerity programs seem to be easing in countries other than in the southern tier.

One austerity nation in the southern tier, Portugal, who has served as a role model of sorts, saw its GDP grow 1.1 percent, the largest gain in 3 years. Even Spain, which has been the center of bitter internal and external controversy improved its GDP but still came up short with a 0.1 percent contraction.

Euro zone bad boy, Greece, is enduring its sixth consecutive year of recession. Contraction is projected at about 0.25 percent this year. Meanwhile, island nation Cyprus, still reeling from the banking scandal earlier this year, saw the economy shrink about 1.4 percent in the second quarter.  Data has not been released from Italy but preliminary projections are not optimistic.

On the downside, most analysts feel the growth will be difficult for European countries to sustain for the rest of 2014. Sustained growth is projected to begin in 2015.

Another European Union member that posted stronger than expected employment data was the UK. A sharp downturn in jobless claims in the UK pushed sterling to $1.5519, up 0.5 percent. Speculation as to whether interest rates would continue to be linked to unemployment immediately followed. There is strong support for a rate hike by the Bank of England (BoE).

Strong GDP growth was posted in Czechoslovakia who posted a 0.7 percent gain and marked the end of a prolonged recession.

Despite the positive economic data, the euro gave some ground against the dollar to $1.3252, a 0.1 percent fall. The dollar lost ground to the yen at 98.18 yen. The US 10-year note yield hedged a little to 2.7154, off Tuesday’s high of 2.72 percent.

Trading is light in US markets. Uneasiness about Federal Reserve policy is the main factor but with Congress on vacation and many investors breaking for the month, trading has been light.

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Euro Zone GDP Contracts Further

The 17-nation euro zone output shrank by 0.2 percent in the first quarter 2013 creating the longest recession in the bloc’s history. Projections for the future are not promising. Analysts project slight growth in late 2013 but no significant upturn until 2015. The first quarter contraction marks the sixth consecutive quarter that euro zone GDP has contracted.

France which has been teetering on the edge of a recession finally crossed the line and suffered a 0.2 percent downturn, equaling its output in the fourth quarter 2012. Unemployment in France is at record levels.

France joined the list of euro zone economies in recessions. Finland, Cyprus, Italy, The Netherlands, Portugal, Greece and Spain are solidly entrenched in recessions. Italy and Spain, the euro zone’s third and fourth largest euro zone economies, have endured seven consecutive quarters of negative growth.

The new data pushed the euro below the 1.29USD mark. The currency fell to six-week lows and shows little hope for recovery. The trend of the euro and the anemic growth in the bloc may prompt the ECB to engage in more aggressive monetary easing initiatives.

Last week, the ECB cut interest rates to historic lows. However, Mario Draghi, ECB president, has said that he is not opposed to another rate cut.

Austerity vs. Growth

To a degree, German led calls for austerity have stabilized the euro zone treaty. But, most of the nations want to shift the focus to growth. Euro zone unemployment is estimated to include more than 19 million workers.

The consensus is that the natives of the euro zone have been pushed about as far as they can go. France has been an advocate for growth and has marked the formation of a Europe-wide banking supervisor as an important step in the region’s recovery. German finance minister Wolfgang Schaeuble and Chancellor Angela Merkel have opposed this new initiative fearing that Germany would have to bear the heavy load.

On Tuesday, Schaeuble appeared to soften his position, suggesting that the new, broader banking union could be structured by June. A second aspect of this initiative would call for identification of banks that need to be closed. Schaeuble told French finance minister Pierre Moscovici that the new banking union was a “priority object.”

Germany, always the pillar of the euro zone, is facing its own manufacturing, export and GDP problems. GDP was revised from negative 0.6 percent in the fourth quarter 2012 to 0.7 percent. Germany narrowly avoided falling into recession by posting a 0.1 percent gain in the first quarter 2013. Despite its tempered growth, Germany enjoys the lowest unemployment rate in years.

Liquidity Driving Equity Markets

The euro is off 2.3 percent in May, hitting 1.2883USD in overnight trading. The dollar rests comfortably in the 102 range against the yen. The ECB is likely to consider another rate cut before the end of the year. The dollar reached 102.63 yen overnight.

Meanwhile, the Federal Reserve and the Bank of Japan continue to pour money into easing programs. The weak yen is very liable to cause more export stress in Europe.

The UK has been damaged by the weaker euro and the stronger pound. UK exports have lowered to Europe but have increased to other markets like Southeast Asia and Africa. Outgoing Bank of England head, Mervyn King hinted that the BoE may be softening its easing program shortly. King put forth the first positive outlook for the UK since the outset of the financial crisis. Britain has been successful encouraging small business growth but still fights high unemployment and a slumping housing market.

All eyes will be on Italy’s upcoming 30-year bond auction after Spain had a successful 10 billion euro sale of its 10-year bonds on Tuesday. After Fitch Ratings upgraded the nation’s sovereign debt, a positive accomplishment, Greece’s 10-year bonds surged in Wednesday’s auction. Greece is no longer viewed as a country about to leave the euro zone, a credit to the tough love imposed by Germany.

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Another Day of Betting on the ECB

Another Day of Betting on the ECB & QE3

After a downturn at the open, US equity markets turned positive on news from the euro zone and the European Central Bank (ECB). The DJI closed up 100.51 points while the Nasdaq Composite Index ended the week at 3,089.79 and the S&P 500 climbed up enough to close at 1,411.72. On the whole, US equities are still bullish.

Despite news from the Fed that stimulus was unlikely at this time, an encouraging development in the debt ridden euro zone outweighed the Fed’s Thursday report. Investors have been leaning heavily on the Federal Reserve and appear to be anticipating the controversial QE3 stimulus. The market opened on the downside in anticipation of a selloff due to Bernanke’s announcement.

Fed Chairman Bernanke does not mince words.  After his report on Thursday, equities all turned lower. After meeting with Greece’s President, Antonis Samaras, on Friday and talking with France’s Francois Holland on Thursday, Chancellor Angela Merkel announced that Germany and France were in agreement that they wanted Greece to remain in the euro zone. Merkel stipulated that she would abide by decisions made by the troika of international investors. Once again, the Chancellor stressed that Greece must meet its commitments before any infusion of any further financial aid could be made. Merkel falls short as credible. Without easing her position, it is difficult to see how the euro zone can escape a catastrophe.

Recently rated the most powerful woman on the planet, Merkel’s political future is in doubt. In any case, global markets did not react to the chancellor’s statement.

However, later in the day, ECB President Mario Draghi announced the central bank was contemplating setting targets in another bond-buying spree that would be deigned to control euro zone borrowing costs. The focus of this initiative will be to stabilize Spain’s volatile and unsustainable borrowing rates.

In looking back over the week, perhaps the most unnerving occurrence is Finland’s development of a course of action to withdraw from the euro zone. This would be a voluntary withdrawal and more importantly a signal that other members, including Germany, may be contemplating ending their participation in a broken model.

Draghi has been high profile in stating his case for more ECB easing. It is not certain how his initiatives will be received by his member nations. The ECB President will speak at the G20 in Jackson Hole next Saturday.

Investors still hold out hope that the Federal Reserve will come through before the end of the year, but there does not appear enough negative data to justify what could be a final push to decrease unemployment. New factory equipment purchased was down in July but production was up. The unemployment rate edged up to 8.3 percent. There is no doubt that uncertainty about the euro zone is undermining the US economy.

The US Congress, with its newest approval rating of ten percent, has been called upon by Congressional Budget Office to not repeat the horrific battle about extending the deficit come December. There is little reason to believe that this Congress will put their jobs on the line prior to Election Day.

No matter how you view the politics of the time, Congress, not the President, drives or stops the engine known as the US economy. Two years ago, Republicans used the deficit to force the President’s hand and extend the Bush Tax Cuts, which will revert to pre-Bush tax rates on January 1, 2013 unless a compromise is reached.

The Congressional Budget Office (CBO) warned Congress that if arrangements were not made to avert the $500 billion in tax hikes and pre-arranged budget cuts, the US economy will plummet into another recession in the first half of next year. The CBO further warned that unemployment would rise to 9.1 percent during the first quarter of 2013. It is crunch time for the US economy and nobody is home minding the store. Whoever the President is will be of little consequence unless the House and Senate have similar majorities to the President’s.


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Merkel Turns Positive Again

In the complicated politics that is holding the global economy ransom, Angela Merkel stepped out in front of the bus to sound optimistic about the solution to the Euro Zone debt crisis. If you think you have heard this message before, you have. Yes, it is a posture the politically troubled German Chancellor has taken in the past only to reverse her position within weeks. At home and abroad, Merkel is losing her grip.

But, once again, equity markets and currency markets responded positively to her latest endorsement of the Euro Zone and the ECB.  But, like Merkel, her message is tired and probably lacks credibility. She has become a tap dancer of sorts dodging bullets and buying time by mixed messages of support, intimidation and bullying. Could this be a last gasp effort to try to rally support for what promises to be a stern political challenge at home? Definitely.

For Germany, the Euro Zone, the ECB and the US, September will be a crucial month. Politicians and investors are expected to return to work and either pump life into the global economic woes or squash all hope.  Germany’s announcement came on the heels of Finland’s report that the country was preparing for the possibility of a Euro Zone breakup.

There is a strong case for Germany to withdraw from the Euro Zone. Politically, Merkel is the only Euro Zone head of state that has faced an election and still remains in power. Her grip on Parliament is a single vote majority, a situation that will reverse in the next election. Merkel has played just about every card in the deck, including a generous tax refund to the populace to try to quell resistance but the chancellor may be playing into a done deal.

Merkel threw her support behind ECB President Victor Draghi’s recent stance that the ECB would aggressively buy bonds in the Euro Zones most troubled economies. Germany has insisted, along with the International Monetary Fund (IMF) that countries like Greece and Spain should not receive any bailout funds until they commit and stand behind the requirements of the European Stability Mechanism (ESM).

Merkel’s stance has alienated many Euro Zone nations who believe a more measured and balanced approach is the only way to grow economies and get their citizens back to work. In a recent statement, France has joined the call for less austerity and more pro-growth initiatives. France has adamantly supported its position that it will not cater to Germany or Merkel. The Euro Zone’s second largest economy does have some clout at home and abroad.  Its position is more in line with what economists believe to be reasonable.

However, the impact of Merkel’s statement was felt in global equity and currency markets. The euro climbed to six-week high against the yen. The dollar also rose to a five-week high against the yen. As The largest importer of American goods, what is good for the Euro Zone is good for the US. However, one of Federal Reserve Chairman Ben Bernanke’s available boosts for the US economy is to weaken the dollar in efforts to make US goods more affordable and desirable.

Overall market conditions are low. Volume is low, bulls are driving the market and September may change the playing field one more time before the US elections. There is some speculation that a poor economy will actually boost President Obama’s chances come November.  The thinking is that the worse the economy is the more likely voters are to disdain an overhaul of the questionable federal benefit programs.

A more realistic analysis is that no matter who wins the Presidency, if Congress, which yesterday posted a 10 percent approval rating, is not fixed the office of the President of The United States will be largely ineffective.

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Does The Euro Zone Need Germany

For its leadership role in the region, Germany has received much criticism from other euro zone members and the international investment community.  At the same time, Chancellor Angela Merkel is walking a political tightrope while facing a strong challenge to hold a majority coalition in Parliament. Meanwhile, German taxpayers are not feeling the pain of the other euro zone nations and do not support financial assistance to irresponsible EZ members. Accordingly, Merkel has been confrontational about austerity demands and addressing growth through increasing or at least not reducing sovereign debt.

For many months, finance ministers and political leaders have nervously observed what will happen with Greece, Ireland, Portugal, Spain and Italy.  The urgency about Greece is the belief that a default would ignite a series of triggers that would have investors withdrawing from Spain, Portugal, Italy, Ireland and eventually France. This has led to questions about the dissolution of the euro zone.  It has never led to questions about a euro zone without Germany.  At this week’s summit, Merkel’s intransigency has led to speculation that this is a possibility.

This possibility seems to be gaining traction and serves Merkel well as she addresses stiff political pressure from a nation of taxpayers who do not think the euro zone crisis is their problem.  Germany’s economy is not what it was before the Lehman crash, but factories are busy and the economy is strong enough that taxpayers all received a bonus earlier in the year.

In its current structure, common practice dictates that all euro zone initiatives have to clear the paymaster, Germany. The current composition of the 17-member alliance pits Greece, Spain, Portugal, Spain, Italy and a number of other EZ members who are supported by the IMF, the US, the European Commission and the ECB against Germany. As these countries share similar economic symptoms, they have common, growth oriented strategies.  While Merkel has presented a positive spin to the media, when push comes to shove, she rejects economic revival plans that are not austerity- based.  With a wavering majority in the parliament, Merkel’s hands are tied.

All along, the premise has been that if Greece falters, contagion will spread, picking off one defaulting country after another. However, what would happen if Germany left or were ousted from the Euro Zone?  Surprisingly, there might well be real advantages for other members and very real problems for Germany.  Firstly, the struggling nations would work together to create a series of stability initiatives. Secondly, these at-risk economies would be capable of drafting longer-term austerity and growth strategies. Thirdly, the Euro Zone would present a brave, unified voice.

Most importantly, with Germany out of the way, the coalition of nations with common challenges could launch several initiatives, the countries have put on the table.

  • The ECB would be empowered to follow the strategies of quantitative easing that other Central Banks have implemented.


  • The euro zone could issue euro bonds.


  • Deposits up to 250,000 euros could be secured by the central bank and encourage domestic and foreign investors to keep money in the banking system.

Without Germany, the ability of the stressed euro zone members to right the ship increases significantly. Without the euro zone, Germany would revert to the mark.  The mark would be a strong currency that would hamper the nation’s export trade. German banks would need recapitalization and the Bundesbank’s recapitalization would dwarf the recapitalization of any American bank.

Unquestionably, a euro zone without Germany would hurt Germany and help the struggle economies in other member nations. Unless there is a dramatic shift in Germany’s policy, it will not be long before troubled euro zone nations unify and bump Germany.


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Spain Needs Bailout, India Needs Investors

Spain formally applied for bailout funding for its troubled banking sector.  The amount needed was not revealed but indications are this will be discussed and approved at Thursday’s European Union meeting.  Early Monday, Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos verified the need for up to 100 billion euros to settle the country’s banks.  Rajoy announced the country would soon implement a new pro-growth strategy aimed at increasing jobs and expanding the economy.  As is apparently the custom in the region, no details were revealed. Most likely this will be another much debated topic at the Thursday meeting.

De Guindos said a letter of intent would be executed and relayed to the European Union and Euro group.  EU leader, Olli Rehn, said the deal could be completed in a few weeks. The announcements helped reduce the yield of Spanish 10-year bonds down from more than 7 percent last week to 6.5 percent on Monday.

The Spanish bond yields began to rise as results from Friday’s meeting between the region’s four biggest economies in Rome.  With Italy, France Spain joined Germany attending at the summit, German Chancellor Angela Merkel squashed any ideas of a quick fix and rejected the idea of new financial commitments.

Every week it becomes more difficult to see what Germany wants or does not want.  One week Merkel is willing to discuss pro-growth strategies only to oppose this possibility early the following week.  On Friday, Merkel told the other big four members of the euro zone that Germany wanted no part of shared liability concept that pro-growth underperforming economies sought.  Merkel also doused the idea of guaranteed deposits. The disconnect wore heavily on fatigued investors as the euro gave back 0.53 percent, settling at $1.2501.

The upcoming EU summit marks the 20th attempt by the group to create a successful, unified workout. However, Merkel’s stance that German taxpayers will pay no more will most likely doom this meeting before it begins.

India Pushes For Growth    

For much of the post-Lehman Bros. collapse era, the emerging BRIC nations were sailing smoothly.  Of late a few chinks in the armor have developed, especially in China and India.  To increase growth, India unveiled a four stage strategy to increase in-country investment and to encourage international investment in Indian companies.

The Rupee fell to a record low to $57.32 USD on Friday.  In response, India raised its level of foreign investment and relaxed restrictions on several types of investment.  The country’s new bond limit will be $20 billion, of which $5 billion can come from foreign investors. Investors appeared to be disappointed by the offering thinking that limits would be increased more.

The central bank not only relaxed the term for which foreign investors must hold government bonds but the government also opened the bond market to pension funds, other central banks, sovereign funds and insurance companies.

Of late, India’s economy has come under fire.  The rupee began to fall against the dollar mid-summer last year and is down 7 percent this year. India’s equity market shed 0.53 percent after Monday’s announcement, indicating dissatisfaction with the proposed remedy. Prior to the global recession, India was growing its economy by a stellar 10 percent per year.  After March 2012, growth was at a nine-year low of 5.3 percent.

A critical issue for India is the poor infrastructure that is now hindering growth. To grow support for infrastructure construction, India opened its doors to foreign investment in companies that were previously unavailable to outside investors. India also reduced the amount of time that foreign investors would have to hold their bonds from three years to one year.

India’s deficit is believed to be in the vicinity of $72 billion at the end of June. A year ago, the deficit was $49 billion.  India has already lost many international investors and as Fitch prepares to downgrade the country’s credit to junk status, enthusiasm is disappointingly low.

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Euro Leaps Higher

For followers of market driven data, the news from the euro zone presents puzzling trends.  The European Union and the euro zone are struggling with high unemployment, low manufacturing, low consumer confidence, a debt crisis that expands every day and a volatile euro that defies logic.  Most of the economies in the region suffering their 3rd, 4th or 5th recession in the last six years.

Citizens are walking away from metropolitan areas and returning to the countryside soil, much of which has been neglected for 50 years or more. Unemployment among the young is more ten 30 percent.  For university graduates or young persons with expertise in a trade, the only unemployment solution is to escape.  Only one euro zone political leader has held office since 2008.  And, that leader, Angela Merkel, has lost the confidence of her constituents.

Investors want the euro zone to succeed but they are out of patience.  Feeding off baseless political rhetoric, sophisticated investors are shying away from most of the region’s bond markets.  Italy and Spain have been forced to offer unsustainable yields on both short and long-term bonds. Spain is in the midst of a banking crisis that could collapse at any time.  The euro zone has committed more than 100 billion euros to rescue Spain’s banks, but thus far it appears as more idle talk rather than anything else.

Euro zone finance ministers have lost their credibility while the European Central Bank and the International Monetary Fund and the European Union have poured more than 1.5 trillion euros into losing propositions. Having gone about as far as possible, sovereign debt originators are now turning to international and private investors to keep the region functional.

The G20     

At this week’s G20 summit in Mexico, the positive spin continued.  European leaders told anxious economies that a plan was in the works to develop “concrete steps to integrate its banking sectors.”  Throughout the debt crisis, the only consistent behavioral pattern for the euro zone has been to assess what international investors want and then announce a remedy along those lines.  Time after time, these announcements have hit a roadblock and been left for dead.

President Barrack Obama and Treasury Secretary Timothy Geithner echoed support for this initiative but Obama was quick to emphasize that this plan did not resemble a silver bullet.

IMF chief Christine Lagarde, whose bank just pledge 1.4 billion euros to struggling Ireland, was enthusiastic about the announcement. “It doesn’t matter if it takes a long timer.  It has got to be done well.”  Lagarde added that all short term remedies had to be consistent with the long-term plan. This is the prototype that advocates of growth have been awaiting. This strategy could also come to the aid of Greece and Portugal who may receive extended terms to their bailout packages.  This sounds more like the plan that France’s Francois Hollande recommends than the pan Germany’s Merkel supports.

After pain received a pledge to capitalize the Spanish banks, it has become apparent that the country needs a more comprehensive bailout because the government cannot meet its obligations. While the euro zone could survive a Greek default, it will not survive a Spanish default.

To complicate the landscape further, Italy has now asked the European Union for assistance with its sovereign debt obligations.  These funds could conceivably be issued by either the European Financial Stability Facility (EFSF) or the European Stability Mechanism. The funds would be invested in the purchase of Italian bonds and thus reduce the yield for short and long-term debt.

Italy’s president Mario Monti said the EFSF or ESM investments were only to be deployed to countries that are compliant with the austerity cutting measures required by the euro zone members.  Monti does not want these investments considered as part of a bailout package. Between the ESM and the EFSF, there would be nearly one trillion euros ready for investment by the end of this month.

The fate of the euro and the euro zone falls into the hands of Germany’s Merkel. The Chancellor must explain why her vision of the euro zone has changed from pro-austerity to pro-growth.  This strategy is not popular with Germans who are the cornerstone of Europe, the world’s richest economic entity.

Merkel received heated feedback for her announcement earlier in the month that supported extending Spain’s time frame to reach the country’s targeted deficit reduction targets.  The success of this new, long-term initiative will certainly determine Merkel’s legacy and political future.

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Greece Government Receives Threats

The leader of New Democracy, Greece’s conservative party, won Sunday’s election and was immediately charged to align a functional parliament that would support the party’s pro-bailout stance. The vote was interpreted as support from the populace for Greece remaining in the euro zone and operating under the single currency.

All the euro zone nations offered plenty of support prior to the election. The tone was conciliatory and suggested that the 17-member euro zone would work with Greece to ease the tight austerity and extend the terms of the bailout that has fueled Greece’s 5th recession and 22.5 percent unemployment.

Germany went as far as taking out a full page add in the nation’s most well read newspaper.  The ad was a plea to voters to support the New Democracy.  The voters were not pleased with the tone of the article but pushed New Democracy over the top.  The party expects to announce a controlling alliance with the Socialist Party, PASOK.  This is the same coalition that has controlled Greece for decades.

On Tuesday, New Democracy’s top gun, Antonis Samaras, is expected to announce the creation of a government that will be able to carry necessary parliamentary rule to support the bailout. World markets opened on the up and the euro had a short rally before the nations that had seemed amenable to modifying terms of the bailout began to renege on their pre-election overtures.  Germany’s Chancellor, Angela Merkel was quick to stress the need for Greece to strictly follow the terms of the original agreement. Jean-Claude Juncker, former head of the European Central Bank and current leader of Eurogroup, backed Merkel’s puzzling policy reversal.  Juncker said that some conditions might be eased but that there could be no major changes to the bailout package.

The euro zone and Germany in particular has been criticized for austerity cuts that make it impossible for Greece’s 219 billion GDP to grow. Unemployment for young workers exceeds 30 percent.  Pensions and wages have been trimmed significantly.  If the euro zone and Germany do no offer some easing, Greece is doomed.

Combining this bitter reality to the crisis in Spain turned global markets into a late day tailspin. The euro touched briefly at $1.2601, fell to $1.2580 before closing at $1.2591. US analysts were quick to note that Spanish 10-year bonds crossed the 7.00 percent yield mark. There is a lack of confidence in the economies of Spain, Greece and Italy and investors are finally sensing the dysfunctional theater of operations. At the G20 in Mexico City, President Obama is pressing Germany to develop a long-term solution for the region. Whatever appetite international investors may have had for euro zone investment is stalled. Several forex experts have predicted the euro will fall to par against the USD before the end of 2013. Most of these investors also believe the euro zone will continue to shed members very quickly if Spain does not stabilize. This is bad news for the USA whose biggest importer is Europe.

In addition to PASOK’s cooperation, a smaller, left wing party known as Democratic Left has thrown its support behind New Democracy. It appears that the euro zone is prepared to let Greece kick the can down the road until the economic powers in the region set a course that benefits them. This is not the long-term arrangement international investors hoped to see. Once again, the political instability in the region is playing against the welfare of the troubled economies. Without pressure from the international community, Disaster looms.

In a race that went down to the wire, the conservative New Democracy party finished just ahead of SYRIZA and has begun talks on a new government. It is expected to form a coalition with the Socialist PASOK party, meaning that Greece would continue to be governed by the two parties that have ruled for decades and led the country to economic disaster.

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Europe In Turmoil

The week began with optimism as the euro zone committed to lending 100 billion euros to Spain to capitalize the country’s troubled banks.  Aided by a confluence of events, optimism has turned to caution as the world awaits the results of Sunday’s election in Greece and the upcoming G20 meeting. By Tuesday, investors expressed concern that while a plan for Spain’s banks was on the table, there were no specifics as to how the funding would be provided. This week, Spain’s 10-year bonds were forced to yield a record high and unsustainable 6.86 percent

The first surprise came from Spain where it became clear that 100 billion euros would only capitalize the country’s banks for a short term. Yesterday, Moody’s downgraded Spain’s debt by 3 notches to Baa3, one level above junk status. Spain was forced to pay more than 7 percent, a historic landmark, on its 10-year notes.  These three developments halted a surging rally for the euro, leaving the currency at $1.255 USD.

Speaking to her Parliament, German Chancellor Angela Merkel was forced to explain the country’s position. Clearly frustrated by Spain’s insistence that it does not need international aid and then saying it needed more capital than originally thought put Merkel in a difficult position at home. Merkel told Parliament that she was opposed to “miracle solutions,” including the creation of euro bonds or creating a euro zone deposit guarantee program.  Italy’s Mario Monti and France’s Francois Hollande favor these actions.

One generic remedy offered by Merkel is that the euro zone members work more closely than in the past. In theory, the formation of a euro zone central government would enable the euro zone to act swiftly without needing approval of its 17 member parliaments.  Outsiders have reacted positively to this possibility but there is a lot of national pride at stake.  Yet, all solutions for the region’s distressed economies go through Germany.

Another initiative promoted by Germany’s Council of Economic Advisors would call for all debt in euro zone economies that exceeds 60 percent of GDP would be pooled and amortized over 20-years. Merkel has not endorsed this possibility but it would provide a long-term solution, which is what is needed.

After last week’s announcement that Spain had applied for and would receive the 100 billion euros, the euro zone seemed on the surface to be on the same page.  But, as has happened numerous times in the past two years, things began to fall apart once the markets opened and the region’s finance ministers had to account to their taxpayers.

Italy Enters Stage Right  

Italy’s interim ruler, technocrat Mari Monti, has seen his popularity suffer since implementing strong austerity cuts. This week, Monti struck favorable terms with Merkel and Germany when the Prime Minister announced Italy was selling some of the country’s assets but would not be able to implement any further austerity cuts. German Finance Minister, Wolfgang Schauble not only approved Monti’s program but encouraged Italians to support the Prime Minister’s plan.

Italy now has about 1.9 trillion euro or 120 percent of GDP as public debt, closer to Greece’s debt-GDP ratio than any other member of the euro zone. Monti Has gained favor with Germany because he has stuck with his original plan.  He has passed legislation to install pension and labor reform and now he is liquidating some assets.  This is the formula than Germany likes.  However, on Thursday, Italy’s one-year bonds will yield 4 percent.  Just six months ago, Italy’s one-year bond had a yield of 2.34 percent.

Greece Elections On Sunday   

Recent polls indicate that Sunday’s election will go down to the wire.  The majority of elder Greeks favor staying in the euro zone and negotiating for some relief with euro zone members. This is the position of the New Democracy, the conservative party. Younger Greeks favor the anti-austerity position provided by the liberal SYRIZA party.

As encouragement to Greek voters, the euro zone nations announced today that if Greece stays in the euro zone, terms could be renegotiated with the new government. The elections in Greece will have far-reaching repercussions for many international economies and this offer is clearly designed to sway independents to the New Democracy.

Greeks are withdrawing billions of euros from its banks and are stocking up on food and necessities in advance of Sunday’s election. No matter which party wins, there is bound to be public demonstrations. Surprisingly, Greece’s equity markets enjoyed a sharp upward turn.  This was promoted by release of an unofficial poll showing the two parties to be in a virtual deadlock.  The poll also noted that 16 percent of the population as not decided how to vote.  Much of the Greek population as taken to the countryside.

Germany and Greece have had a troubled relationship since Greece applied for bailout funding. There are 300,000 Greeks residing in Germany.  Greece is the most popular vacation destination for Germans.  Ten percent of Greeks has visited Germany. Yet, there is no political love lost between the two countries.

On deck is a G20 meeting and a euro zone meeting at the end of the month. For now, all eyes are on Greece. Whichever way the elections go, be prepared for more volatility.

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Think Spain, Forget Greece

Greece is dangerous, but Spain is the toxic poison that could end the single currency. On Tuesday, the euro gave more ground settling at $1.2487USD, down 0.41 percent. Investors are jittery about Greece, but are in fear of a collapse of Spain’s fragile banking system.

Financial leaders and politicians are scrambling to create a long-term solution. The 17-member euro zone seems resigned to the failure of Greece. While some nations have suggested that Greece be given more time to get their political and financial houses in order,  Germany and Chancellor Angela Merkel appear to have drawn a line in the sand believing that Greece will default at some time, sooner or later.

Greece’s four largest banks received 18 billion euros from the country’s bailout fund last week. Along with Spain, Greece is in jeopardy of the depositor panic, already manifested in Ireland.  As the likelihood of a euro failure, Greeks and Spaniards are withdrawing more than is being deposited.  In Spain, the crisis is so bad that banks will not lend between themselves unless the proceeds have collateral.

If Greece and/or Spain fails, the money on deposit will be converted to the national currency, which will be severely devalued.  The populations are realizing this is a strong possibility and are clearing out savings and deposit account leaving the banks in terrible shape.  Most are unable to meet daily expenses.

Investors believe a default by Greece would be bad but manageable.  Not so for Spain.  If Spain defaults the euro zone will be all in.

Mario Draghi, the President of the European Central Bank (ECB), has stepped up his message. The ECB has infused more than 1 trillion euros into 3-year, low interest loans or Long Term Repayment Operations (LTRO) since December. The perception is that euro zone members will do everything possible to cover the possibility of a run on Greece’s banks. But, the euro zone paymaster is Germany and Chancellor Merkel is in the most delicate of political situations.  Germans do not support further funding to Greece, who is unable to commit to a repayment plan.

Euro zone members are not optimistic about Greece, who has gone one bridge too far with its repayment commitments.  Draghi has kept the pressure up on the euro zone members to construct a serious failure protection mechanism. Recently, Ireland’s banks came under pressure as depositors started withdrawing as much as they could.  When the government stepped in to meet the bank’s obligations, the government was insolvent. The IMF and the European Union came to the rescue but the scenario is likely to happen.

ECB policymaker, Joerg Asmussen explained the region’s biggest fear. “The recapitalization of a troubled bank by its government may lead to a deterioration of the government’s fiscal position.” Draghi has said the regional countries must come up with a failsafe in the event a run on the bank in one country spreads to others.

One strategy which Draghi supports is increasing the euro zone’s guarantee for depositors, which is now.  The US has said that increasing the insurance on deposits could generate as much as $2 trillion in liquidity. This may be a regulatory change the euro zone can accept. Failure to enact some policy change will end the single currency.


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