Tag Archive | "Crisis Mode"

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USD Confidence Falls: UK Hits Highs


US equity and currency markets turned lower overnight in the face of political bickering about whether the US government should pay its bills. All three major equity markets turned down at the open on Friday and were poised to give back Thursday’s gains by 10:00 a.m. The dollar also gave ground against a number of currencies despite weakening banking news in Europe and uneasiness in Japan.

In the US, Senators Ted Cruz and Mike Lee continued their stall tactics, defying Republican leadership, and slowed the vote on the debt ceiling-Obamacare defunding bill forwarded by the House. This, in turn, will slow appropriate revisions to be returned to the House that would keep the government open. The delay tactic increased the likelihood of a government shutdown and put the debt ceiling, which will expire on October 17th, into crisis mode.

Investors are not amused. After good employment news on Thursday, The Consumer Confidence Index missed expectations on Friday coming in at 77.5, the lowest level since April 2013. Meanwhile, consumer confidence in the UK was at its highest level since 2007 and even uneasiness in the European banking sector kept consumer confidence in the euro zone higher than in the US.

In early morning trading, the Dow was off 95.05. The S&P 50  was down 9.86 and Nasdaq was 16.33 points lower.

Discord Over European Bank Stress Tests

The euro zone intends to submit its banks to controversial stress tests as a first step in solidifying the region’s banking sector. Capital infusions enabled US banks to reboot their capital reserves but in Europe there is no backstop to ensure that banks are adequately capitalized. This has caused a general tightening of credit markets in the euro zone’s more tenuous economies.

Credit markets in Greece, Italy, Portugal and Spain are frozen. As a result there is virtually no growth in these countries and unemployment remains at record highs.

The stress tests are regarded as important to stabilize international markets and currencies. However, after the stress tests are performed, there is no plan in place to remedy shortfalls. Many banks in the region have insufficient reserves. The net effect of the stress tests will be to highlight weaknesses in the banking sector with no plan to remedy the reserve shortfalls.

The tests administered by the ECB, the European Banking Authority (EBA) and the EU will reportedly be stringent. The ECB will be focused on the euro zone’s biggest banks. The model will be used by the EBA to test the remaining banks in the euro zone through a program known as the Asset Quality Review.

Europe’s top 42 banks are 70 billion euros below new international capital norms. However, analysts suspect that the problems are much bigger ion the euro zone’s smaller banks.

Euro zone purse strings are controlled by Germany who is opposed to the construction on a region-wide re-capitalization plan. Without such a plan, the stress tests will put pressure on governments in the area to boost the banks.

The prognosis is that the absence of testing gives the banks a grace period but the day of reckoning is on the horizon.

Currencies

The USD was down 0.1 percent against a basket of currencies. After gaining 0.3 percent on Thursday.

The biggest move of the day came from the UK where British sterling was up 0.4 percent at $1.6096. The UK recovery appears to be gaining momentum.

The dollar did not fare well against the euro ($1.3558) or the yen 98.280.

Yield on the 10-year Treasury continued its trend toward 2.5 percent and was at 2.62 percent early Friday.

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Republicans Reeling, Boehner Surrenders


Republicans Reeling, Boehner Surrenders

House Majority Speaker, John Boehner, supposedly the most powerful Republican politician in the country, met his match Thursday in an embarrassing non-vote that once again demonstrates the ineptitude of the conflicted GOP. Boehner did not absorb the humiliating lack of support for his Plan B solution well. To put an end to the Republicans self-destruction mode, Boehner dismissed the House for the Christmas Holiday burying his head in the sand and leaving a concerned middle class wondering “who are those guys?”

Boehner turned the reins over to the Senate and President Obama and left middle class taxpayers hanging out to dry. The conservative Tea Party refused to support Boehner in his hour of need, making very clear that there are at least three political factions working against each other in Congress. While it is easy to criticize the politics, the middle class will pay their dues for not ousting Republicans from the House and Senate in the 2012 elections. The price will be a self-inflicted recession.

It is painfully clear that the majority of Republicans are more interested in standing behind Grover Norquist and the wealthiest 0.005 percent of the voting public than they are about preserving the nation’s credit rating or preventing a recession that could make the 2008 recession pale.

If there was ever doubt about the mechanics of Washington, they should be eliminated now. The international community appears a smoothly operating engine compared to the dysfunction that threatens to take the country apart. On the heels of the tragedy in Newtownn, Ct. Americans are struggling for identity socially, economically and financially. The morale of the country is low and the state of mind for middle class America, the apparent conscience of the country, is distraught. Soon to be bombarded by irresponsible tax increases, massive layoffs and more irresponsible politics, American consumers will hit the crisis mode when the bills for holiday shopping arrive. The middle class can soon look forward to working half the year to pay new taxes and new healthcare levies.

It’s a disaster. A disaster caused by political subsidies, self-interest and the absence of moderate politicians.

Senate Republican Leader, Mitch McConnell had the audacity to call the failure of his party to embrace a real problem, the President’s fault. In another self-serving, stumbling statement from the aged Republican, the Republican leader continued the rhetoric that has accomplished nothing in three years.

The Republican Party is broken and the sooner Americans fight back, the better. This is an inexcusable breach of the public’s trust. Last Monday, Boehner and Obama came to a sweeping tentative agreement. When Boehner returned to the dark corners of the House offices, the deal fell apart rapidly.

Boehner has no control He has fallen from the most powerful Republican in Washington to the depths of an impotent fraud, like the party he represents. Wake up America! This is a disgrace and if you do not pick up the phone and ruin Christmas and New Year’s for your representative, you have no one but yourself to blame.

 

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Davos Summit Confident


Regardless of how the Euro Zone finance members really think about the economic and financial matters of its 17 members, the word from the finance ministers assembled in Davos was inordinately optimistic.  The cause for that optimism is difficult to understand and might lead one to wonder if this is simply another effort to stabilize the economies whose demise has now spread to the heart of Europe.

The Euro Zone’s well-orchestrated damage control went in to a full court press, including a two-part interview with CNBC by former ECB President Jean-Claude Trichet.  In the first leg of the interview, Trichet touched upon general observations saying the Euro Zone Crisis is a serious and global problem.  Trichet added that Euro Zone finance ministers were operating on a round the clock crisis mode. 

The former ECB president described the current situation as progressive, but that market conditions inspired no confidence.  On a day when Spain, Portugal and Ireland came under closer scrutiny, the euro remarkably crossed the $1.32 barrier settling at its highest value since early December.  The concept of a global crisis serves the Euro Zone well because it infers that external forces should enter the fray.

Trichet indicated that the progress made in the last 5 months was an indication of how the Euro Zone members are committed to reversing the crisis.  However, under questioning, Trichet did say the investors in Greece would take a significant hit but admitted that he did not believe losses would be incurred by the ECB.

Like every release from the region, the statements from Davos were muddled.  An unidentified finance minister said that the deal with Greece’s private investors was ready to proceed.  The losses suffered by these investors will be painful.  European Economic and Monetary Affairs Commissioner Olli Rehn said he expected the deal to close before February and probably over the weekend.

The response was swift.  Italian 6-moth bonds fell by 2 percent to the lowest level since May 2011.  Germany’s auction also offered lower yields. 

A default by Greece seems unlikely, but there will be a significant shortfall of 12 -15 billion euros to reach the mandated goal of 120 percent debt to GDP.  This is the level that the IMF has designated as sustainable.  The current ration is 160 percent of GDP.

In a later segment of the CNBC, Rehn was adamant that Greece would not enter into an unstructured default.  When asked what effect the default of Greece would mean, Rehn did everything possible to avoid the “C” word, contagion.  It is clear that the fear of massive default is what is prompting such a concentrated effort.

One of the features of a renewed optimism is an expansion of the income stream.  German finance minister, Wolfgang Schauble, supports the new transaction tax on all financial transactions.  Currently every other type of transaction has a use tax. 

Virtually every type of austerity cut has been discussed with Greece, but as happens often in the Euro Zone, the austerity cuts have been resisted by the Greek populace.  One of the purposes of this summit is to identify the promised cuts and address their implementation as swiftly as possible.

While all eyes have been focused on the resolution of the private investors, these promised cuts have slid off the table.  These are precisely the administrative commitments that seem to falter when they are applied to the real life environment. 

One of the most important examples of this laxness is Greece’s unwillingness to address the reform of the supplementary pension program.  This has already been met with numerous demonstrations but has been promised as a condition of approved austerity cuts.

Other important promises by Greece that have not been implemented include: 

  • Spending cuts on defense.
  • Spending cuts on health provisions.
  • Elimination of superfluous governmental agencies.
  • Improved tax collection initiatives.
  • Trim the number of workers leaving the workforce to 1 in every five persons compared to the 5 of 5 current support plan.
  • Open job markets for professions such a lawyers and pharmacists that have been sealed for years.
  • The Bank of Greece is charged to complete an assessment of the country’s banking capital shortfalls.
  • Greece is charged to improve wage flexibility and open service sectors that have been heavily regulated and thus are non-competitive.

Good luck with that!  Greece has only agreed to negotiate some of those requirements.  To supply funding to Greece without strict compliance is the equivalent of kicking the can down the road. 

Originally these conditions were contingencies for receiving any further funding.  The IMF is firm in its position that Greece must enact these conditions.  The IMF, ECB and EU are all firm that Greece must pass the 2012 budget that includes these actions.

Greece has agreed in principle but has not enacted their austerity programs.  With private investors taking painful losses, Greece somehow seems to think that life can go on as before the crisis.  It is this mindset that is the cause for alarm.  Neither private nor public lenders will extend any further funding if these terms are not met.

Geithner Urges Caution 

U.S. Secretary of the Treasury, Timothy Geithner, has delivered his thoughts about the Greek and Euro Zone Crisis.  He cautioned investors that extraordinary austerity cuts would be reflected in GDP.

Geithner urged the Euro Zone members to solidify the EFSF.  Geithner believes that without bigger commitments to the European Financial Stability Facility, the crisis will worsen because the funds for future bailouts will be depleted.  In his mind, Greece is only one piece in a 17-piece puzzle.    

The U.S. does not standalone on this stage. China and other major economies have strongly suggested that the Euro Zone needs to come up with their own funding to stabilize the market.  Both China and the U.S. praised the ECB for its low interest loan program.

Spain and Portugal

Spain’s plans to avoid the need for billions of euro funds appear to be crumbling at this moment.  Reports from the country’s banks indicate that the administration has significantly underestimated the capital needs of the nation’s banks.  Since the outset of the global recession, Spanish banks are carrying billions of euros of unsalable assets and billions more of impaired loans.

Spain has joined Greece as another country in need of outside cash infusions.  The fact is that nobody has an accurate estimate of the amount but it is substantial.  The government has previously asked its banks to come up with about $66 billion to stabilize unstable financial institutions.

The Bank of Spain estimates that Spanish foreclosures account for about 175 billion euros. Of this amount only about 58 billion has been accepted as losses.  These figures do not include losses incurred by local lenders.

Spain’s Deposit Guarantee Fund has already received some additional funds after being depleted of its 5.2 billion euros when the CAM savings bank was rescued. Spain is preparing to approach the EFSF for cash infusions.  This is precisely the contagion that the Euro Zone finance ministers have feared.

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