Tag Archive | "Bailout"

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Employment Disappointment Shakes Markets

Disappointing numbers from the US labor Department’s non-farm payroll report unnerved investors and shook currency markets around the globe. The disappointment came along with some very positive data from June regarding consumer spending and US factory goods.

The payroll data reflects the economy’s inability to sustain growth on its own merits and will surely be viewed with concern by the Federal Reserve. Non-farm payrolls added 162,000 jobs in July, a solid number but well below projected increases of 184,000. However, the unemployment rate fell two-tenths to 7.4 percent, the lowest rate since December 2008. Over the past three months, non-farm payroll growth has averaged about 175,000 new jobs per month.

The Federal Reserve concluded two days of talks on Wednesday without announcing any policy change. Markets received this status with enthusiasm.

Markets reacted quickly to the disappointment. After closing at record highs on Thursday, equities endured modest losses on Friday. The disappointment was apparently negated by the probability that the Federal Reserve will remain committed to its $86 billion per month stimulus through the rest of the year. The S&P 500 index, which crossed the 1700 threshold on Thursday, the DOW and Nasdaq all were down by midday.

Earnings Strong

Another offset to the employment data is the strong performance of US corporations. Of the 375 companies that have reported second quarter earnings, 67.5 percent have surpassed expectations. On Friday, AIG, the giant insurance carrier beleaguered during the recession, announced its first capital return since the 2008 bailout. The company is offering a dividend and stock buyback. Shares jumped 3.4 percent to $48.67.

Linkedin also surpassed expectations, reporting heavier than expected sales. The stock jumped 9.8 percent to $233.88. Over the last four quarters, 55 percent of reporting companies have posted bigger gains than expected.

Other Data On Friday

The Commerce Department’s gauge of core inflation rose 1.2 percent in June. May inflation showed a 1.1 percent rise.

The average work week tuned down to 34.4 hours. Earnings slipped 0.1 percent.  5.7 percent of Americans with jobs could not log enough hours to qualify as full-time jobs. In July, 4.25 million Americans had been unemployed for six months or longer.

Politicians have rejected the President’s infrastructure worm programs and thus have forced the Federal Reserve to be more active than most Americans would like. Additionally, government layoffs continue to hurt the economy as the sequestration passed by Congress will play out during the rest of 2013. As Congress prepares for their August vacation, taxpayers should be asking what Congress will do to get Americans back to work.

Currency Changes

The euro rose 0.4 percent against the USD to $1.3265. The dollar posted gains against the yen to 99.11. The dollar index fell 0.4 percent to 81.994 against a basket of currencies.

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Euro, Yen Surge Against US Dollar

More woes and strikes in Greece and disagreement about ECB policy in German high courts could not discourage the euro from posting four-month highs against the USD. The euro reached its highest point, $1.3346, against the US Dollar since February 20th. Meanwhile, a lack of a policy statement from the Bank of Japan (BoJ) about the volatility of its equity markets prompted global selloffs in equities. The yen continued its surge against the dollar falling to 95.16 before settling at 95.40, down 0.6 percent on the day.

Currency market trade was light on Wednesday but the concern about Federal Reserve policy outweighed the negative sentiment from Europe and Japan.

Athens in Upheaval

Demonstrations erupted in Athens as unions rallied in support of journalists after the Samaras government unexpectedly shut down the nation’s public television station, ERT, in the middle of the night. The closing of the liberal network eliminated 2,600 jobs including 600 journalists. The Helenic Broadcasting Corporation ETR has been up and running for 75 years.

The beleaguered station only has  a 13 percent viewing rate. Several dismissed journalists continued to occupy the building in protest of the shutdown. The Athens journalistic union ESTEA immediately announced a strike. Thousands of citizens protested in front of the Athens station and then proceeded to march on the capital.

The station was closed as a result of a ministerial decree and surprised many members of the divided Parliament. Prime Minister Samaras’ short reign has been marred by controversy and dissension.

The most recent setback was the revelation that a sale for the national gas company fell through. This failure puts Greece on the verge of default with its bailout commitments. Under terms of the bailout, Greece was obligated to terminate at least 2,000 state employees. The closing of ERT meets that stipulation. However, the government has failed to meet its commitment to liquidate state-held assets.

The closing of the state television network overshadowed more serious problems. MSCI reclassified the country as an emerging market. MSCI stated that the Athens bourse has been to small for a developed economy for the past two years. This could have serious repercussions with funds that have invested in Greek bonds. Optimists believe the reclassification will open up other investment vehicles.

Yields on Greek 10-year bonds nudge above the 10 percent mark when Athens announced failure to sell DEPA, the state gas company. Equity markets traded at two month lows following the reclassification.

MSCI’s world index slipped by 0.13 percent on Wednesday. The Euro STOXX 50 index dropped 0.62 percent to 2,666.52. The euro climbed 0.27 percent.

The yen gains were sparked by the Fed’s perceived slowdown in asset buying and the BoJ’s inference that it will continue its easing program. The markets has expected a pullback by the BoJ.

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Cyprus, ECB and BoJ Weigh On Markets

As details of the Memorandum of Understanding (MoU) between government and the “Supreme Savings‘ international lenders” were revealed on Tuesday, markets stepped back to gauge the 10 billion euro bailout. Markets also slowed in anticipation of this week’s updates from the Bank of Japan (BoJ) and the European Central Bank (ECB). Investors are concerned about whether the BoJ will scale down its proposed easing initiative. At the same time, the ECB will need to calm investor fears in the wake of the Cyprus fiasco that cost international investors billions of euros.

One of the big concerns facing the euro zone and the European Union is whether the Cyprus model is the model that could befall Spain and Italy. A general lack of confidence in the EU has led to the paring of the euro. Investors are unclear as to the direction of the BoJ and the USD rose to its highest level in two weeks against the yen.

Cyprus Turnaround Outlined

The MoU leaves little doubt about what the bailout investors, who contributed 10 billion euros to the troubled banking sector, will require of Cyprus. Meanwhile, the former finance minister resigned in anticipation of legal action for his roll as President of the country’s second largest bank, which failed last week.

As if there was not enough disgruntlement on the island nation, Cypriots are now staring at some lofty goals that are likely to impose the similar austerity sanctions other southern tier euro zone neighbors face.

The MoU says Cyprus must attain a four percent of GDP primary surplus by fiscal year 2017. This would a significant turnaround.

Reuters reports there are a number of other goals established by the MoU:

  • In 2013, Cyprus will suffer a 395 million euro budget shortfall (2.4 percent of GDP) in 2013.
  • This shortfall exceeded the 1.9 percent deficit in 2012.
  • In 2014, the deficit will expand further to 678 million euros.
  • The MoU expects the deficit to pare down to 344 million (2.1 percent GDP) by 2015.
  • In 2016, Cyprus is charged to achieve a primary surplus of 204 million euros (1.2 percent GDP) by 2016.
  • By 2017, Cyprus must achieve a 4 percent surplus by 2017.
  • Growth in Cyprus will contract by 8 percent this year.
  • Growth in Cyprus will contract 3 percent in 2014.
  • Growth will finally increase by 1 percent in 2015 and 2016.

In light of these assumptions, Cyprus has much work to do to live up to expectations. The 8 percent paring of GDP suggests a good amount of austerity will be necessary and Cypriots have thus far rejected most EU initiatives.

The MoU states that Cyprus will earn about 1.4 billion euros by selling certain state-owned assets, such as state-owned telecoms. Additionally, Cyprus expects to realize revenue from selling off rights to undersea natural gas deposits, which have been found of the island coastline.

The future of the public sector will be under pressure with new actions taken by government. The banking sector employment is already in turmoil. Now, government has announced that public sector pensions are frozen. The retirement age will be raised by 2 years. New taxes will be imposed upon alcohol, tobacco products and petrol. The VAT will be increased and corporate taxes on earnings and on interests earnings will also rise. Fees for all government services will increase by 17 percent effective immediately.

These measures are designed to ensure that debt in Cyprus is at 100 percent by 2020.

The ECB, BoJ and BoE

Investors are anxiously awaiting results from the three central banks. There are concerns that the BoJ will scale back on its proposed quantitative easing policy.

The ECB is now expected to hold steady on current interest rates. Prior to the Cyprus crisis, it was projected that the EC would raise interest rates.

In England, the BoE is expected to continue its current purchase of asset program without increasing the stimulus. British sterling gave back recent gains in anticipation of the upcoming central bank meeting. It is nervous times on the currency front.

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Currency and Equity Markets Volatile

The euro pulled back on Monday but quickly gained a footing before rising again on Tuesday. After a dynamic increase to $1.37 on Friday, the Monday market turned cautious as Europe’s Southern tier nations continue to weigh on the region and the currency. Primary culprits remain Spain and Italy. The political turmoil in Italy may cause a disastrous reincarnation of one the region’s fiscal culprits.

Yet, uneasiness quelled as Germany posted a strong Purchasing Managers Index (PMI). German Bunds climbed four basis points or 1.67 percent. As strong as Germany’s PMI is, France finds itself reeling after more disappointing data reported Tuesday.

After a robust start of the year, Spanish bonds fell six basis points to 5.38 percent on Tuesday. Italy fell four basis points to 4.43. Both nations are facing political turmoil. Unemployment for Spain’s youthful workers remains at 50 percent, generally an unsustainable figure and the cause of political unrest.

In Spain, there is pressure on Prime Minister Mariano Rajoy to resign. The call for resignation comes with the unveiling of supposed payments received by the PM from a slush fund. The Prime Minister denies the charges but his popularity is at a low point as he has stubbornly refused to apply for bailout funding. The Prime Minister is viewed with disfavor in many of the country’s wealthier areas.

The political scene in Italy is complicated and getting more so every day. Former Prime Minister Silvio Berlusconi appears to be a top candidate for the position to be filled by Mario Monti. Berlusconi’s platform is gaining strength because it is contrary to the platform of the departing regime. Berlusconi’s return will surely cause uneasiness with investors.

All investors will pay close attention to Mario Draghi at the ECB meeting held in Thursday. Draghi is expected to keep interest rates at the low 0.75 percent.

US Equities

The major equity indices pared gains on Monday but began to pick up the slack on Tuesday. Monday’s doubts were created by a disappointing report about factory orders.

Additionally, while Germany is expanding, the rest of the euro zone and most European Union economies are associated with risk. The latest political events will not inspire confidence in the region. Further political instability in Europe and the US send tremors through international markets.

US investors may be using China’s economic data as more significant than Europe. And, in China a recovery appears to be gaining momentum.

HSNC China announced that the PMI increased to a four-month high of 54 in January. Projections are that China’s GDP will grow 8.1 percent in 2013.

Commodities Mixed

Brent crude rose above $1.00 per barrel to $116.75. US crude shed $1.60 to $96.17.

Gold remained stable, mired in the $1,660 – $1680 range and settling at $1,673. Platinum increased 0.2 percent to $1695.99 per ounce. Copper dipped 0.2 percent to $8,290 per ton.

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Greece Protests Send Message To Brussels

As European Union (EU) leaders met in Brussels with the bailout of Greece a backburner topic, most of Greece’s workforce staged a second national work stoppage in the last three weeks. Tensions in the streets of Athens rose as one man died and three strikers received injuries while 50 protestors were arrested. Protestors hurled anything they could throw at police who were forced to fire rounds of tear gas into the swelling crowd.

The country’s two largest labor unions, ADEDY and GSEE called for the 24-hour strike. Yannis Panagopoulos, the leader of the GSEE’s 2-million private sector members explained the protest. “Agreeing to catastrophic measures means driving society to despair and the consequences as well as the protests will then be indefinite.”

In order for Greece to comply with terms set by the European Commission, the European Central Bank (ECB) and the IMF, commonly called the Troika, Greece must trim another 11.5 billion euros from its budget before another Tranche can be released. These cuts will put the workforce at risk of working for substandard pay that prevents the household from sustaining itself and will further deplete the pensions of today’s workers.

The intent of the EU meeting in Brussels is ostensibly to mend fences so that a banking union can be created. Many participants of the euro zone feel this is a necessary evil but some countries have no interest in participating. As a result, the meetings will be more conceptual than substantive. Usually, these meetings give cause for an optimistic spin but in reality just buy time.

There appear no plans to announce any new programs to deal with the region’s debt crisis.  Meanwhile, Greece muddles along mired in the worst economic downturn in the euro zone and worst since World War II. What becomes clear with every national strike is that the working people of Greece cannot survive under the current austerity plan. There is no future, no incentive to excel and little hope for resolution.

This means that the majority of the country’s workforce does not feel the abuse of credit by past governments is their problem. The workforce appears willing to return to their own currency and bid farewell to the Troika and the nation’s investors.

To avoid default next month, the government must push through more austerity cuts or cease to operate. If Greece were standing alone, EU and euro zone members would most likely let the country fail. The problem is that such a failure may take more robust economies down. The largest investors in Greece are France, Germany and the ECB. Yet, it is Spain and Italy that stand most threatened by a failure in Greece.

In support of saving Greece, Italy’s Finance Minister, Vittorio Grilli, told reporters that, “It certainly can be saved and it will be saved.” Grilli indicated that he understood the plight of the nation’s working persons and hinted that more time was needed to allow for a recovery.

In Brussels, France and Germany went toe to toe over differing views of how European Union members should control their budgets and shift to a single banking supervisor.  As expected, German Chancellor Angela Merkel seeks stronger authority by the European Commission with the power to veto national budgets that are non-compliant with stated EU guidelines. President Francois Hollande of France said that this was not on the EU agenda for this meeting and should be tabled until a discussion of the creation of a European Banking Union was addressed.

Germany’s position is that the only banks that required supervision are large “cross-border banks.” Merkel rejects the idea that banks in rich countries must prop up deposits to prepare to assist weaker economies.

“We have made good progress on strengthening fiscal discipline with the fiscal pact but we are of the opinion, and I speak for the whole German government on this, that we could go a step further by giving Europe real rights of intervention in national budgets,” Merkel told the Bundestag.

Germany’s proposal to empower a European super-charged European currency commissioner along with a stronger European Parliament is resisted by Hollande because it would call for restructuring of existing treaties.

Another German proposal has been agreed upon by 11 of 17 euro zone members and calls for creation of a European fund to invest in specific projects in member states. The fund would be created by implementation of a “transaction tax.”

If there was good news to be had in the euro zone, it came from an unlikely source, Spain. Moody’s determined that Spain’s debt could maintain its rating as “investment grade.”  The 10-year bonds immediately went to their lowest yield since February at 4.61 percent.

The focus of this week’s meeting in Brussels was ostensibly to further the development of a viable central bank for the EU. However, as the pages turn on this concept, there is political theater that will prevent to bank until at least 2014.



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Spain’s Budget Preempts Bank Stress Test Results

Spain’s Prime Minister Mariano Rajoy unveiled his much anticipated 2013 budget that was quickly billed a crisis budget to lift the country from crisis.  The Euro gained some strength based on what appears to be severe budget cuts and far less severe tax increases than expected.

Spain’s 2013 budget relies heavily on an increased Value Added Tax (VAT) to increase revenues.  The budget has 43 moving parts that will make today’s distressed economy looks like a comfort zone by the end of 2013.  The 43 new reform laws will be introduced over the next six months. The budget includes mandated reforms to the labor market, public administrations, energy services and telecommunications sectors.  The most immediate question is how Spain can expect to reach a positive growth rate. This budget projects a 0.5 percent recession year.  That would be a dramatic reversal of form.

The manufacturing sector is down, housing values are down as much as 60% in some areas. There is large scale social unrest throughout the country.  There appears no hope for improvement of the 25% unemployment rate and this budget may very well expand that figure.

Under the Prime Minister’s plan, the central government will reduce spending or €13bn next year.  Spending, not including Social Security and interest payments, will be down 7.3%.  Revenues will increase 4% based on approval of a 15% increase in the country’s VAT.

Prime Minister Rajoy has come under fire from euro zone members because he has resisted applying for bailout funding.  However, in the tenuous political position the Prime Minister finds himself, the formal application may well lead to his immediate ouster.  Spain appears determined to grind out some form of recovery based on seemingly whimsical hopes of foreign investment.  Whether it is a matter of convenience or from some source of unannounced insight, Germany believes that Spain does not need assistance.

However, on Friday a report on the state of the country’s banking system will be released. Analysts project a minimum of 60 billion euros will be needed to stabilize the country’s banking and financial industry.

Two big concerns from the European Commission are how Spain will handle its pensions and what it will do about the retirement age.  Treasury minister Cristobal Montoro said pensions will increase by 1% in 2013.  He refused to answer questions as to whether the government would pay a rate of inflation on previous pension payments.  The possibility seems doubtful as it would add another six billion euros to the national debt.

The budget is based on a 0.5% recession rate for the upcoming year.  This, in itself, would be a major financial and economic turnaround.  The immediate response to the new budget was positive as the euro rebounded from two-week lows.  Any gains could well be overshadowed by tomorrow’s bank stress test results.

Expected tax increases were not included on the revenue side. This may ease some of the tension in Madrid streets but will certainly cause concern with foreign investors.

Ministry expenditures will be cut 8.9% across the board.  The budget will pressure provincial governments to increase their income according to preset limits.  This is very likely to cause a spike in unemployment during 2013.

Spain’s frustrated workforce may have expected even deeper cuts and higher taxes.  In order to qualify for bailout funding, Spain must formally apply for help.  The precursor to receipt of the money will impose the same limitations placed on Greece, Ireland and Portugal.  At this time, the euro zones fourth largest economy is trying to keep its independence and appease both frustrated euro zone neighbors and a hostile electorate.  While the Prime Minister’s budget will make progress, a lack of growth will only lead to more unemployment and more hostile protests.  Spain’s Prime Minister is in no-win situation.  Tomorrow’s bank stress test results may well be the final blow to Rajoy’s hopes for financial independence.

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For Euro The Trend is Down

Once again what was perceived to be an encouraging remedy offered by the ECB last week is muddled in political and financial theater, causing the Euro to reverse last week’s positive trend. This time Spain looks to be the culprit.  Further hindering the Euro was a release from Germany indicating that the Euro Zone’s strongest economy may be heading into recession.

The news from Spain was predictable.  But, the message from Germany may have far-reaching ramifications for the region.  September marks the fifth consecutive month that German business sentiment has trended down.  The lack of confidence in Germany increased investor concerns concerning a stalling global economy.

In Spain, Prime Minister Mariano Rajoy is holding firm that the request for bailout funding is not necessary at this time.  It is believed that the Prime Minister will eventually apply for rescue funds after a regional election to be held on October 21.  Spain’s resistance is puzzling because the country was active in pushing Ireland and Portugal to pursue a Euro Zone bailout deal.  Now, it is Ireland that is pushing Spain to apply and accept the bailout financing.

Countries like Ireland rely upon a stable euro to attract outside investment and are nervously awaiting Lisbon’s decision.  Rajoy became Prime Minister just nine months ago.  His policy is completely opposite from the posture of the previous administration. So, the message appears clear. If Rajoy applies for bailout funding, he will be voted out of office. Let’s be charitable and say that the Prime Minister is in over his head

In addition to Portugal and Ireland, France and Italy are also applying pressure to Spain to proceed immediately.  However, the Euro Zone’s paymaster, Germany, is not in any hurry to support a request from Lisbon.  France and Italy need investor confidence in the Euro zone to stabilize so as to reduce their yields on their bonds.

In Germany, 2013 is a critical election year.  Public sentiment opposes underwriting bailout funding for other Euro Zone states.  Germany’s financial leaders do not view the European Financial Stability Facility (DFSF) and the European Stability Mechanism (ESM) as a means for governments to obtain inexpensive funding for governmental operations.

For Germany and Austria, it is clear that the use of these funds is a last resort. They are determined to not make it easy for Euro zone members to access these funds until every other resource has been exhausted.  Austrian finance minister stated that position last week saying, “The goal is not to get as many countries as possible under the program, but to keep them stable enough so that they do not need a program.”

Last week, the ECB said it would buy potentially unlimited quantities of short-term bonds in secondary markets.  However for the ECB to act, nations must apply for Euro Zone bailout funds and agree to implement related fiscal and economic reforms which are monitored by an international supervisory committee.  Rajoy feels the austerity conditions accompanying bailout funding are prohibitive and contrary to any opportunity Spain would have to grow its economy.  Spain is scheduled to submit a new package of reforms at the end of this week at the same time that the prime minister submits his 2013 Budget.

Disappointing economic new-age from Germany

The lack of business confidence in Germany spread quickly across global equity and currency markets.  The immediate future does not look good for the Euro which made a pretty spectacular rally last week.

On the US equity front, the S&P 500 had climbed 6% on expectations that central banks would provide strong stimulus to assist the recovery. It appears that the ECB initiative is temporarily blocked.  Investors are also concerned about the Federal Reserve’s newest buying spree.  Many analysts thought the Fed would implement more direct investment to reduce the unemployment rate.

On Monday, the Euro hit a session low old 1.289 USB, its lowest valuation since September 13th.  Against the yen, the Euro traded at 100.54 yen, down 0.8%.  It is clear that the rally in the Euro spawned by the ECB’s new policy has already lost its momentum.

Don’t overlook Greece

Greece has made some progress in managing its debt by implementing some pretty severe austerity programs.  The question is whether the EU/IMF report on November 6 will qualify the country for the next round of bailout funding.

Greece has steadfastly insisted that they will meet the EU/IMF qualifications to entitle the country to the next round of funding.  Most analysts do not see how Greece can meet the overwhelming conditions.

Greece will not only have to trim programs, but will also have to show some growth.  There is no indication that Greece, which has been in and out of recession five times in the last seven years, can possibly generate growth.  This means that stronger austerity cuts are the only way for the country to meet its deadline terms.

So, where does that leave investors?  Investors seem to be attracted to reliable U.S. stock performers.  With U.S. bonds at historically low rates, certain US equity opportunities are in strong demand.  And, of course, if the dollar weakens, the U.S. may well increase its export trade.  Stay tuned, there’s a lot to come before the end of the week.

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ECB and Non-Farm Payroll Boost Euro

Momentum from Mario Draghi’s announcement regarding the ECB’s upcoming bond buying spree helped take the euro to four month highs against the dollar. A weaker than expected Non-Farm Payroll Report neutralized US equities and sent the dollar lower. The Labor Department’s report fell far short of ADP data submitted Thursday and below analyst expectations.

The economy generated 96,000 new private sector jobs in August. The projected number of new jobs was 125,000.  ADP had indicated the addition of 225,000 jobs by the private sector in August. Number of hours worked was also down. New claims for weekly benefits fell to the lowest level in a month.

The upbeat focus yesterday was dimmed on Friday but many investors feel the most recent job report gives credence to the need for QE3. The Federal Open Market Committee will hold a two-day meeting starting on Wednesday. The likelihood of new stimulus will be the featured topic. Investors believe that the program could be announced as early as Thursday.  QE3 is a highly controversial package.  The stimulus will weaken the dollar, boost equity markets and may not have enough clout to influence the overall economy.

The euro climbed to $1.2806 before settling at $1.2782 at midday. The USD fell to 80.263 against a basket of currencies. European equities continued to rise as the FTSEurofirst 300 rose to 1105.73. Yield on the 10-year US bond was up the 1.6215 percent.

In the wake of Draghi’s announcement, both the yields on Spanish and Italian debt hit 4-month lows as gold futures climbed to $1,737.30, another four-month high.

In the euro zone, a critical decision from Germany’s high court regarding the legality of the Bailout funds for euro zone members will be announced next week. Experts predict the court will vote to support the release of much needed funds but it is remain a hot topic of debate in the homeland. Germany was the lone dissenting nation in the ECB’s vote for unlimited bond buying.

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German Court Stay Isn’t The End of the Euro

In the beginning of the week, it was announced that the German Federal Constitutional Court, a German version of the US Supreme Court, was delaying its ruling on the legality of the ESM until mid September.  The shocking news now delays the implementation of the European Stability Mechanism, which was slated for this summer.  And, although it does pose some complications for current measures put forth by Euro finance ministers, it isn’t likely to spell disaster for the European Union or its currency.

Initially, the delayed ruling won’t suspend the already scheduled 30 billion euro injection to Spanish national banks.  The amount, which is directly being deposited into banks bypassing the Spanish recapitalization fund, will now be surely covered by the European Financial Stability Facility.  There was speculation that the funds would be covered by either bailout fund, or a combination thereof.  But, even without ESM backing, the EFSF retains enough funding and guarantees to make sure Euro finance ministers don’t renege on their July 9th commitments.

With a majority of the EFSF’s 440 billion euros already being spoken for by bailouts to Portugal, Greece and Ireland, the fund is still able to tap guarantees of up to approximately 750 billion euros – through IMF and EU member channels.  This would be enough in buying confidence for the next two months until the German court reconvenes.

In addition, the new measure will be upheld now that Finland has tentatively allowed the acceptance of Spanish collateral.  The proposal would allow Finland’s government to hold approximately 800 million euros in collateral in order to fund about 40% of the country’s overall allotment towards the bailout.  The measure is now onto the Finnish parliament at the end of the week for approval – which will most likely pass.  Remember, this was one of the most contentious issues for Finland’s bailout participation, which may have prevented a bailout from even happening.  And, now that it’s likely to pass through, the measure increases the chances of the European Union surviving the recent financial debacle.

Ultimately, there is still the potential for another risk event to delay a turn in the fortunes of the European Union and its currency.  But, given the monetary backing and resources still available, a postponement by the German high court shouldn’t derail the Euro from seeking support near 1.2000.

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Spain’s Rajoy Scores With Fiscal Conservatives

With his crushing new austerity program, Spain’s Prime Minister, Mariano Rajoy, scored big with fiscal conservatives, but taxpayer enthusiasm rated the initiative much differently. In a rare display of political honesty, a commodity lacking throughout the euro zone debt crisis, Rajoy informed Parliament that while he had run on a program of lower taxes, circumstances mandated this was not the time to cut taxes and, in fact, taxes must be raised, imposing far-reaching cuts in spending. In his new proposal, no component of the income or expense budget was spared.

The immediate reaction by labor and taxpayers was a swelling protest march that had begun 350 miles from Madrid in the mining community of Asturias.  The legions of striking miners were received with loud vocal support as they entered the capital with helmets aglow last night. The ranks were expanded as supporters and protestors outside the mining profession joined in.

One supporter, Manuel Corte, a security worker, summed up the protestor’s position, “I thought the previous cuts on medicines and pensioners and on education were the worst possible thing but now it is disaster.”  His inference was to the fact that there would be deeper cuts and higher taxes under the latest program.

Rajoy has played his cards close to the vest.  In trying to protect his campaign promises, he vehemently opposed euro zone support before finally acknowledging Spain was in  a deeper than expected banking crisis.  He was forced to apply for bailout funding to avert a run the nation’s banks.

As part of the agreement, the euro zone extended Spain an extra year, until 2014, to bring the public deficit. In negotiating the terms of the new rescue package with euro zone finance ministers, Rajoy won several important concessions.  Among the most significant are:

  • A line of credit up to 100 billion euros.
  • An agreement to give Spain an extra year, up to 2014, to bring the public deficit down to 3 percent of GDP of gross domestic product.
  • An acceptance by euro zone finance ministers to allow this year’s deficit to be 6.3 percent.

The Brussels commission did stipulate that further concessions would be extremely difficult to obtain.  Prior to Spain’s new initiatives, euro zone ministers had chastised Rajoy and Spain for falling to address the banking and national debt crisis.

Rajoy’s new budget completely revamped his previous budget, which was deemed oppressive by taxpayers but pales in comparison to the new budget. Rajoy explained to Parliament that the new austerity cuts and tax increases were necessary to slash 65 billion euros from the country’s deficit. Some of the relevant new budget items include:

  • A 3-point hike in the Value Added Tax (VAT) bringing the new rate to a whopping 21 percent.
  • New direct taxes on energy.
  • Initiatives to privatize public facilities such as airports, ports, and railways.
  • Reversal of property tax breaks implemented in December legislation.
  • Reforms to the nation’s city halls.
  • Shutdowns of public companies.
  • Reduced benefits to public servants.
  • Budget cuts for political parties.
  • Labor Union reforms.

These public policy changes were immediately met with protest as the civil service trade unions announced a schedule of strategic July work stoppages and a possible nation-wide strike in September.

Carefully drawing his words, Rajoy informed Parliament that the only alternative was a national bankruptcy.  This option would create far worse repercussions as banks would be unable to meet customer demands in an expected run.

Rajoy’s presentation to Parliament drew jeers from opposition parties and a protest outside the Parliament building. Chants of “This is not a crisis, it’s a rip-off,” filled the air.

However, a July 2nd report from Eurostat showed that in 2011, the national unemployment rate was 21.2 percent. Youthful unemployment for workers between the ages of 15 and 24 was 46.4 percent and long-term unemployment, workers unemployed for more than 12 consecutive months stood at a staggering 41.6 percent. The government’s most recent unemployment report stated the current unemployment rate, not long-term unemployment, at 24.4 percent.

One of the few campaign promises Rajoy was able to salvage was his promise that he would not change pensions. The Prime Minister said he would discuss the possibility of linking the benefit packages to life expectancy, a move supported by the EU.

For the Prime Minister, the opposition will roar across the nation. To his credit, the Prime Minister stood his ground as long as he could and then negotiated a better deal than would have been received five months ago. Fiscal conservatives and analysts welcomed a courageous national leader who stepped outside the popular neutral position held by politicians in the US , other euro zone countries and the EU nations. Politicians who push painful, deficit reduction and tax policy increases can expect a short political life. For putting sound fiscal policy ahead of his personal agenda, kudos to Prime Minister Rajoy!


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