Tag Archive | "Debt Crisis"

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Step Aside Washington Let The Economy Work


Despite Washington’s dysfunction, the US Labor Department’s Non-Farm Payroll report showed 155,000 jobs were added in December. Additionally, another 15,000 jobs were adjusted to the November total. By all accounts, the figure continued a steady progressive trend.

Based on the antics of a devastatingly dysfunctional 112th Congress, many analysts feared for the worst. Over the last 60 years, the unemployment rate has averaged 6.0 percent. Today, the unemployment rate is 7.8 percent and there are few reasons to think the economy can re-create more prosperous times. The December unemployment rate is one percent less than 12 months ago.

There are many theories about the direction of the US recovery. However, analysts all agree that the dysfunction in Washington may be the nation’s biggest hurdle.  With momentum leaning forward, the economy received no lift from the pitiful resolution of the fiscal cliff. There is not one provision in this divisive piece of legislation that gives the economy direction much less the much needed stability to know where the country is headed. Lacking than a clear direction of financial policy, the government has engulfed the business community with instability. Business leaders have learned very little about what demands a resolution to the debt crisis will make.

The end result of the first leg of the self-imposed fiscal cliff is that business leaders know less about the direction of the solution than before negotiations commenced. Businesses are again forced to hoard their capital in preparation for the next Congressional debacle. It is a sorry state and not one worthy of the world’s largest economy.

In December, average hourly earnings increased by 0.3 percent. Two important sectors that have been gutter-bound since the outset of the recession, construction and manufacturing, reflect progress as new jobs increased in both sectors.

To many observers, new job creation in December is disappointing. To others, it is a miracle that the economy has withstood a government seemingly on a path of self-destruction. Retail sales over the holidays were below expectations. Consumers started the holiday buying season at a good pace but as the fiscal cliff approached, many consumers applied the brakes. Now, facing several more agonizing fiscal negotiations and when the country needs the full power of the American consumer, it becomes difficult to see positive growth and new job creation.

Will the Congress Remove the Shackles?

The politicians will be negotiating the debt ceiling, and the pending portion of the fiscal cliff in upcoming months. If that isn’t enough to dim the economy, consider it a miracle.

On a positive side, automakers have achieved great success in 2012. And, local, state and national payrolls cut 13,000 jobs in December.

What the country needs is a well-considered debt reduction plan. Only the development of such a plan will encourage corporate investment and return consumers to open pocketbooks. The chances for a resounding debt resolution plan are cloudy at best.

Richard Gilhooly, an interest rate strategist for TD Securities, New York, offered a sound observation regarding the current job marketplace. “Private sector payrolls at 168,000 were fairly robust in December and the general view is that the recent numbers were likely depressed by fiscal cliff issues, such that improvement should be seen in coming months.

“The household survey was weaker, with only 28,000 jobs, while 192,000 people entered the labor force, pushing the unemployment rate 0.1% higher. Bonds initially traded higher on the unemployment rate and the idea that QE is pegged to at least 6.5 percent, but the market has traded back to the lows subsequently on what is generally a firm report and likely better ahead.”

Imagine where the economy would be if Washington stopped presenting obstacles to a motivated environment.

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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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IMF Lowers Boom On International Economies


Christine Lagarde of the IMF is not one to mince words. Known to be critical of the US Treasury’s handling of the Lehman Brothers collapse, the tenacious tigress let her feelings be known just before the IMF’s semi-annual meeting in Japan.

Calling the euro zone debt crisis progress “critically incomplete,” Lagarde used some staggering numbers to support her assessment.  Citing the euro zone’s unwillingness to construct a politically and financially coordinated effort to address the debt problem, Lagarde correctly identified the crisis as the biggest economic obstacle to market stability.

Lagarde projected that euro zone banks will be offloading $2.8 trillion over the next two years and unless some permanent resolution is reached the figure could balloon to $4.5 trillion. The $2.8 trillion in losses is an increase of Lagarde’s assessment of $2.6 trillion made in the IMF’s last meeting six months ago.  The immediate effect of these losses will shrink credit markets by about 9 percent by the close of 2013..

Lagarde also admonished the US and Japan, recommending that both governments get their financial houses in order. The IMF says that the euro zone crisis is the core issue but that staggering debt in the US and Japan is causing a general lack of consumer and commercial confidence.

The Director of the IMF’s monetary fund, Jose Vinals, stressed the urgency for the euro zone to engage a comprehensive program with a centrally controlled bank, a role the ECB is playing in a limited capacity. In its newsletter, the IMF said, “Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline.”

ECB President, Mario Draghi, is expected to inform the IMF that the central bank’s bond buying spree, which has yet to begin, will bring stability to the region.  Draghi’s challenge is to convince the IMF that the tools are in place and working.  Given the dysfunctional composition of the euro zone, that will be a difficult sale.

Lagarde indicated that the debris from the euro zone fallout was already surfacing in emerging markets. Growth has slowed in all emerging economies, including China. Lagarde’s assessment identified both Japan and the US as sources for safe-haven investors. The problem is that Lagarde does not feel these economies are stable and may lose their favored status.

The US “fiscal cliff” and the pending tax increases and budget cuts pose an intimidating milestone for the US consumer. The political rhetoric has heightened global anxiety as to exactly how the US will trim its substantial debt burden.

Japan now holds the largest debt to GDP ratio of all industrialized nations. Debt is twice the size of the $5 trillion GDP. Japan is still reeling from national disasters and also is caught short with an ever-increasing life expectancy rate which in turn pressures the government further.

The political and financial stress in the euro zone was in full display yesterday when German Chancellor Angela Merkel visited Greece.  Anti-Germany protests dominated the media coverage but these demonstrators do not represent the majority of the populace.

What has become clear is that the euro zone is a failed unit. It is hard to imagine that Germany will approve future funding for Greece and this in turn calls into question the fate of Portugal, Spain and Italy and the structure of the 17-member alliance.

Greece has no room to move. Real unemployment is estimated to be around 50 percent. Analysts are beginning to think that Greece is out of options and will most likely default and return to its own currency. This will send shock waves through the southern tier and other casualties may follow.

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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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Slow Growth, Euro Crisis Hits Home


The unnerving euro debt crisis has clearly crossed the big water and landed solidly on US turf.  Friday’s US Commerce Department report revealed wavering consumer confidence and 2nd quarter GDP growth of 1.5 percent. The Commerce Department’s first quarter GDP report increased first quarter growth from 1.9 percent to 2.0.

Many analysts were surprised by the 2nd quarter results which were expected to fall to 1 percent.  Analysts quickly jumped on the bandwagon for another round of quantitative easing by the Federal Reserve. The call for action by Wall Street is ironic. Capitalists that hold no regard for financial regulation and strongly oppose government intervention are new appealing for a third round of quantitative easing.

The Fed has already supplied $2.3 trillion in easing initiatives.  The central bank does not have the bazooka capabilities that it once possessed. The fluttering economy will be the subject of the next Federal Reserve’s two-day meeting next week but no easing could be implemented before September.  In the meantime, early July figures indicate a slow start for the traditionally underperforming third quarter.

Many analysts suggest that while a weak GDP 2nd quarter showing, there is not enough evidence to support another round of easing. The theory is that the Fed has limited resources remaining and will holster the easing until it is time to pull the trigger.  Those triggers will be a worsening unemployment rate or lack of GDP growth.

Consumer Spending Turns Cautious

Whether attributable to high gas prices or to unrest about the European theater, the USA’a biggest importer, consumers turned to saving rather than spending. Americans saved more money in the second quarter than was saved in the last year.

Consumer spending comprises approximately 70 percent of the GDP. Spending increased at 1.5 percent compared to 2.4 percent in the first quarter. A report from Reuters indicated that consumer spending in July fell 1 percent from June.

New jobs fell to an average of 75,000 in the second quarter. In the previous three months job growth averaged 225,000 per month. Stalled or expanding unemployment figures could be the incentive the Fed needs to unleash QE3.

Combining reduced consumer spending with stalled demand from Europe has led to a substantial 1.2 percent increase in US inventories.  Mired in a prolonged drought, Midwestern farm production is stagnant. Exports have fallen off sharply. The 2nd quarter export – import ratio trimmed GDP by one third of one percentage point.

Some Positive Data      

The volatile housing market, demand for housing rose 9.7 percent. The industry is aided by low, long-term interest rates.  However, the first quarter increase in residential sales was an outstanding 20.4 percent.

Personal spending rose 0.7 percent in the second quarter, the lowest rate since the 2nd quarter of 2010.

Interestingly, housing rentals in the 2nd quarter increased to post-recession highs. The vacancy rate is 8.6 percent, the lowest level since 2002. As foreclosures continue, the number of unqualified homeowners continues to create a strong and active rental market.

At the same time, persons owning underwater mortgages are turning to the rental market for temporary remedies. There is demand for rental homes. Rental housing vacancies fell to 2.1 percent, the lowest rate since 2006.

Consumer confidence is not solely economically linked. Politics often influences consumer confidence. Consumers are being bombarded by negative advertising in the presidential race.  Adding the lowest congressional approval rating in country’s history to what promises to be a bitter and negative election cycle, it would be hard to explain why the American consumer would have a positive outlook.

 

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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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US and Euro Unemployment Hit Markets Hard


The one-two punch of dismal euro zone unemployment figures released on Thursday followed by a disappointing US non-farm payroll report on Friday sent global equity markets, commodity markets and the euro into a downward spiral with momentum. Combining the slow job growth with equally disappointing manufacturing data pressured markets as the UK and China announced another round of quantitative easing.

Only 80 thousand jobs were created in June and May’s new jobs were trimmed to 77,000. While it is not believed that the Federal Reserve will acquiesce to a 3rd round of quantitative easing, there exists more than enough data to prove the economy is at a standstill.  At the root of the slowdown, is the debt crisis in the euro zone where there are no significant initiatives to stabilize the region.

After Friday’s Labor Department non-farm payroll report, the Dow Jones, Nasdaq and the S&P all lost ground.  The DJIA shed 124.2 points or 0.96 percent settling At 12, 772.47. Nasdaq lost 38.79 (1.30 percent) to 2,937.33. The S&P fell 0.94 percent to 1,354.68.

As the payroll report rippled through Europe, equities turned sharply down. The FTSEurofirst 300 index fell 1 percent to 1,033.77 in the worst day of trading in two weeks. The ripple effect sent Spain’s borrowing costs above the unsustainable 7 percent level. US 10-year treasuries rose to 1.541 percent, the lowest rate since early June. The two-year German bond settled in the negative for the first time in the country’s history.

Commodity markets also turned down as the need for raw materials slowed. Oil prices dipped 3 percent as copper fell 2 percent and gold dipped 1 percent.

Following the ECB’s lowering of interest rates on Thursday, the euro slumped to $1.2296 USD, a two-year low.

Despite the overall weakness in job growth, there were some positives in the payroll report.

  • Temporary jobs increased more than in the previous three months.
  •  Average hourly wages increases six cents.
  •  Number of hours worked rose to its highest level since November 2008.
  •  Household labor increased to its highest level in 2012.

Upon a close look, the payroll report showed a consistent trend. Private employers added 84,000 jobs but the public sector lost 4,000 jobs. The public sector is trimming budgets and jobs. As the attached chart reflects, since January 2010 government has shed 536,000 jobs. During that time, the private sector has created 4.3 million jobs. In most cases, private sector jobs do not provide the benefits that the private sector offers. In the tiresome political theater that is holding the economy and entrepreneurs hostage, the federal government has shrunk by 612,000 persons since President Obama took office. That shakes out to be a savings of $30 billion per year.

The Obama administration has proposed much-needed infrastructure sending to boost employment. This would raise private sector employment.  However, if the public sector slows job trimming, government will no longer negate the payroll report.

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BoE, ECB and The People’s Bank Act


In response to data suggesting a global slowdown, the Bank of England, the People’s Bank of China and the European Central Bank made conventional moves to attempt to breathe life into staggering markets.  The People’s Bank lowered its interest rate by 31 basis points to 6 percent.  The ECB trimmed rates to 0.75 percent, a historic low. The Bank of England left its interest rate at 0.50 percent but announced, the bank would begin another round of quantitative easing.

Britain is expected to print 50 billion pounds and use the funds to purchase distressed assets.  Previously, the Bank of England used quantitative easing to flood the market with 325 billion pounds.  Flooded with negative economic data, the ECB vowed to maintain their interest rate but stopped short of investing in upcoming bond markets or putting any cohesive remedies on the table.

ECB president Mario Draghi has continually stressed the need for a comprehensive overhaul of the euro zone debt crisis. Draghi appeared to be delivering a call to unified action to euro zone members. At this time, the ECB has no plans to revisit national bond markets.

Draghi’s frustration with the euro zone’s unwillingness to put a long-term program in place has come to a head.  On Thursday, Draghi told the media that new information pointed to deepening financial difficulties in the region. “We see now a weakening basically of growth in the whole of the euro zone including the country or the countries that had not experienced that before.”

Draghi emphasized that it is not just the southern tier of the euro zone that has economies fighting recession. The euro zone economies are no longer growing.  Most of the countries are either in recession or are headed there. Draghi appears to favor a combination of growth and more reasonable terms for floundering euro zone members.

The central banks of England and Europe were expected to act but China’s rate-cut surprised analysts.  The People’s Bank lowered rates last month, but in anticipation of next week’s data, the bank acted. It has been projected that China will suffer a six consecutive month of sliding growth.  It is believed that China’s second quarter will show the lowest growth since the collapse of Lehman Brothers.

Bank lending in China has experienced very little demand.  The interest rate decrease is intended to inspire businesses to grow.  The central bank previously lowered the reserve requirement ratio (RRR) to 20 percent.  This move freed more than 1.2 trillion yuan for new lending.  The bank is expected to lower the RRR to 19 percent before year’s end. However, analysts were quick to say that the central bank’s willingness to cut deposit and lending rates is more incentive than the RRR changes.

The People’s Bank launched a massive 4 trillion yuan spending bill in late 2009.  The spending policy has caused large volumes of bad debt that the country’s banks are struggling to retire.  However, it is believed that a continuation of poor economic data will spark some form of quantitative easing, which China has the resources to manage.

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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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Great Britain Not Waiting


Faced with a deepening recession and ever increasing unemployment, Great Britain is not waiting for the euro crisis and elections in Greece to deploy anti-recession tools.  Referring to the euro zone debt crisis as a “black cloud” which threatens the UK, Bank of England Governor Mervlyn King announced a plan to flood the country’s banks with low interest funds which the central bank hopes will be used to encourage borrowers and jobs.  King also said the Bank of England would activate an emergency liquidity tool.

Treasury officials revealed a separate plan that new funding would support up to 80 billion pounds in new loans. The Bank of England contributions will amount to 5 billion pounds per month for six-months.  King said the 110 billion pound injection should be used by businesses and civilians to “batten the hatches” before the crisis hits.

Finance Minister George Osborne supported echoed the global message that the euro zone put politics aside and solve the deepening crisis. Osborne stressed that the UK was not powerless to defend its economy or people.  Britain has not overcome the 2007-2008 recession that forced the Bank of England and Treasury to bailout the Nation’s banks.

Osborne has been criticized for implementing deep austerity cuts that have affected every walk of life in Britain. However, Osborne stated his case on Thursday saying that it was the austerity cuts that enabled the central bank to be able to assist in the current recession.  The austerity plan has come up a little short as the budget still runs at about a deficit equal to 8 percent of GDP.

Osborne and King have jointly developed strategies to spur growth, indicating that there is more assistance to come.  In the next few weeks, the BoE will be offering 3-4 year below current rate loans to the country’s banks. These loans will only be available to banks that have increased their lending to businesses and households.

The BoE will also commence using funds in the Extended Collateral Term Repo (ECTR) facility to help banks deal with liquidity issues caused by distressed loans. This facility was created in December for the specific purpose of offering banks six month relief from troubled loans.

In another area, King also hinted that there was a strong possibility of resuming quantitative easing, which was halted in May after the BoE had purchased 325 billion pounds in UK bonds.

While King emphasized the risk of the euro zone, he failed to mention that Britain’s economy is struggling with a new recession started in 2012. Britain’s Office for National Statistics reported that the trade deficit increased to 10.1 billion pounds in April 2012. This mark is the largest trade deficit since January 1988.  The biggest export gaps were recorded in the fields of chemicals and autos. Great Britain squeezed out a 0.1 percent growth 9in the first quarter of 2012 which appears to have been wiped out in the second quarter.

The Treasury and BoE moves have utilized the three weapons that Britain has moves available.  The first is the six-month liquidity loans issued by the Indexed Long-Term Repo (ILTR).  Through the Discount Window Facility (DWF) banks can swap stressed collateral for gilts for as long as one year.  The third tool is the Extended Collateral Term Repo facility which provides up to three years of financing for distressed assets which could come into play if Greece fails.

If Greece were to fail, the BoE has a large weapon, the UK Treasury’s Credit Guarantee Scheme, in reserve.  This plan was used to bailout banks to the tune of 250 billion pounds in 2008.  The majority of these funds have been repaid so this would be a stop gap available if Greece puts the nation’s banks under extreme pressure.

 

 

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