Tag Archive | "German Chancellor Angela Merkel"

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Germany And France Data Prompts Equities Growth

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

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

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

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

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

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

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

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

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

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

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

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Spain Needs Bailout, India Needs Investors

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

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

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

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

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

India Pushes For Growth    

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

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

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

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

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

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

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Europe In Turmoil

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

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

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

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

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

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

Italy Enters Stage Right  

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

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

Greece Elections On Sunday   

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

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

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

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

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

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Merkel, Sarkozy And Body Language

The world listened carefully to the joint statement made by French President Nicolas Sarkozy and German Chancellor Angela Merkel on Monday.  Transcribed, the announcement had legs but if body language means anything, it was noticeably absent and in fact reflects the strain that has existed between the euro zone’s largest economies.

On Friday, the news was positive and equity markets responded in kind.  On Monday, reality once again spoiled the warm and cozy feeling.  A strong US equity bounce was tampered when Merkel and Sarkozy took to the stage.  On the surface, everything sounded encouraging.  In reality, there is little reason to feel cozy in the euro zone.

With the European Union, which consists of 27 member nations, meeting this weekend, the world is hoping for positive strategies and commitments to come from the members.  However, the UK does not use the euro as its currency and has already voiced pessimistic support.

Merkel and Sarkozy will present their plan on Wednesday.  Merkel stated that if the UK is not on board, the German – French plan will be submitted to the 17-member euro zone. The appearance of France and Germany working toward a positive result that would include any euro zone members or EU members who wanted to participate boosted lowered the yields on Italian and Spanish bonds significantly.

But, there is much negotiating to accomplish.  Merkel and Sarkozy seem to have fashioned a plan to free the European Central Bank from its mandate so that the central bank can expand its purchase of sovereign debt.

However, the ECB cannot fund the rescue of the euro zone or even Italy alone.  To set common standards for euro zone members, France and Germany will require all members to meet preset austerity cuts.  

Coincidentally, Italy’s new Prime Minister Mario Monti announced acceptance of his 30-billion euro austerity plan.  The market reacted enthusiastically to his balanced budget.  Monti has increased taxes and trimmed government spending.  Naturally, Italians are not happy and a labor strike is readying.

Italian 2-year bonds shed 85 basis points and fell to 5.78 percent.  Ireland also released details of its 60 percent spending reduction in next year’s 3 billion euro budget.  Lenders were briefly encouraged.

Merkel has won on one front because France’s proposal to issue Eurobonds has been tabled.  Germany was insistent that euro bonds issued after 2013 must have language to investors that “the bondholder may have to share the burden of future bailouts.”

The Merkel-Sarkozy proposal may well include participation of the IMF and request that the IMF take action.  However, the US has declined to participate in funding this rescue either directly or indirectly.  All one has to do to understand the Administration’s position is to see the malfunctioning body that is Congress.

S&P Serves Notice

On Monday, the S&P served notice to France, Germany and 13 other euro zone members that their credit ratings were under review.  If the zone’s talks do not lead to changes, the credit rating fro each member will suffer. 

Greece is already sporting a CCC credit rating.  Basically, Greek bonds are junk bonds.  Cyprus has already had a credit rating fall.

One of the strict covenants of the new plan will require that members cannot carry a debt level of more than 3 percent of GDP.  Sarkozy and Merkel agreed that for the time being, Greece would be the only exception.  This would also be true if Greece had to default on its debt, which is almost a sure thing. 

When one considers the euro zone media events, everything seems laughable.  Are Germany and France leading the euro zone or is the euro zone leading its two biggest economies?  Either way, the US should be on the sidelines in this one.

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Central Banks To The Rescue!

In one of the most productive meetings between G20 finance ministers, central bankers from the European Central Bank, Canada, the UK, Japan, Switzerland and the U.S. agreed to lower the cost of existing dollar swap lines by 50 basis points.  In a surprisingly harmonious unified effort, the central bankers agreed on this strategy to combat the anticipated liquidity crunch.

The cost of these short terms loans will be the Overnight Index Swap (OIS) rate plus 50 points.  The program will be effective December 5, 2011 through February 1, 2013. Prior to this agreement, the short term borrowing rates was the OIS plus 100 points.

The bankers also established a working agreement for bilateral swaps for central banks to draw funds in their own currencies when needed.  This aggressive action is designed to assure global markets liquidity when central banks come under liquidity pressure.

In a joint statement the banks said, “The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help economic activity.”

The Federal Reserve of the U.S. issued another statement relaying that U.S. banks are not experiencing liquidity issues at this time.  If the U.S. economy turns down, the central bank said it has tools at its disposal that could alleviate a credit freeze.

European Union Weighs In

Late Tuesday night, the financial ministers of the euro zone set aside their political agendas and uniformly faced the banking and sovereign debt crises throughout the euro zone.  Economic and Affairs Commissioner Olli Rehn said, “We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.

Germany and France temporarily mended their fences as euro zone ministers came to grips with a plan to leverage the European Financial Stability Fund (EFSF).  Previously, German Chancellor Angela Merkel had rejected this option. 

However, the need for swift and immediate action to curtail the contagion in the region has magnified.  Italy and Spain are paying unsustainable yields and Germany was unable to sell more than 50 percent of its debt in the country’s most recent offering. Apparently Merkel got the message.

It has been two years since the euro zone crisis erupted.  Initially, it was hoped that by bailing out Greece the contagion would be checked.  Euro zone ministers seek more support from the ECB.  Financial ministers want the ECB to aggressively purchase regional bonds.

The finance ministers did not agree to beef up the EFSF.  Instead, they announced that even with successful leveraging of the rescue fund, they would have to ask the IMF for more assistance.

The Japan, the U.S. and several other Asian banks resisted adding funds to the IMF.  The countries will not consider boosting the IMF until the euro zone has exercised all their financial options.  

China Surprises Global Markets

Global markets received China’s policy change that lowered the capital reserves enthusiastically.  The requirement relaxed from 21.5 percent to 21.0 percent.  China’s banks have been required to meet high reserve standards without any easing for the past three years. 

China’s economy is slowing.  Inflation rates remain high.  In response to the euro zone crisis, central banks in China, Brazil, Thailand and Indonesia all agreed to ease monetary policy.

China economic growth has now eased for three consecutive months.  Demand from outside China and tight credit has handcuffed the GDP growth.  Manufacturing declined sharply in November

In Other News

Italy’s new prime minister submitted an austerity plan that the other euro zone members rejected.  Mario Monti was sent back to Rome to expand the cuts.  Italy has committed to a balanced budget by 2013.

The Eurogroup ministers did agree to release the 8 billion euros Greece needs to meet next week’s call.  The payment is the sixth installment of the 110 billon euros promised by the EU and IMF.

Germany formally finalized its authority to review budgets submitted by other nations.  The euro zone’s biggest economy reserves the right to insist upon tighter spending. This was a major consideration in holding the 17-member euro zone together.

The results of this G20 meeting appear a positive step.  Unified and coordinated central banks have taken the first step in stabilizing the euro zone.  However, there is work to do.  In the past, when facing the heavy lifting, the European Union and euro zone have both come up empty.

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Euro Zone The Great Divide

On Monday, German Chancellor Angela Merkel warned fellow Euro Zone members and the European Union Members that the continent faces its greatest threat since WWII.  The ominous analyses of the Euro Zone has paralyzed world credit markets and put immense pressure on the euro. 

As new “technocrat” led governments take over in Italy and Greece, there still remains lingering doubts about the real-time ability of Portugal, Italy, Ireland, Greece and Spain, affectionately called the PIIGS, to navigate the domestic waters and the economic turmoil on the continent.

With France facing a downgrade of its AAA credit rating and Germany gingerly holding the rudder, the Euro Zone is now openly showing the tense internal and external challenges that are on the forefront.  Recent growth of the Euro Zone shows a treacherous downward spiral of the continent’s GDP.  The GDP for Europe is now projected to be closing in on no or negative growth in 2011.

France and Germany, the two largest economies in the Euro Zone, are holding billions of euro bonds from member nations.  With Greece and Italy considering the harsh reality of structured defaults, the bondholders can not expect more less than a 50 percent haircut and it could very well be worse by the time a plan is enacted.

On Tuesday, the euro slid to the $1.35 mark.  Many analysts feel the currency is filled with risk.  The Euro Zone does not have the ability to move swiftly.  By the time the politicians have raked each possible remedy over the coals, the plan is old news. 

Amidst the Euro Zone, there seems to be a growing tension between the Northern, more stable, economies and the troubled southern tier.  The bottom line is that the European Financial Stability Facility (EFSF) must be leveraged but probably needs another euro infusion. While the economies are considering leveraging the account to create a 1 trillion euro fund, there is disagreement on how the funds should be utilized.

Two months ago, the Euro Zone appeared settled on this course of action.  Things changed in a hurry when Italy suffered a deep downgrade and raised their debt service to an all-time high over 7 percent.  Italy is the region’s third largest economy and the eighth largest economy in the world.

Financial ministers have worked to perfect the leveraging. Under on plan, the investor will be issued a guarantee by the EFSF that a defined percentage of the investment will be assured.  If there is a default, the investor can control their loss and thus their exposure.  Under this plan, there remain questions as to whether the bond or certificate can be traded independently.

An option that is not creating much noise is the Co-Investment Fund (CIF).  This investment vehicle is geared for the individual investor.  The CIF would acquire sovereign bonds in primary or secondary markets. The Euro Zone is rushing to detail a third option.

China has been approached by several financial ministers.  To date, China is awaiting the EFSF options before deciding their strategy.

In other developments, a new book released by a reporter from the BBC indicates that Goldman Sachs invested heavily in Greece and manipulated the currency and the economy with full knowledge of former Prime Minister George Papandreou.  When Goldman had to reveal their strategy, they halted investments in the country and suddenly appeared to have a deep debt problem.  In reality, the debt existed all along.  When Goldman halted, Papandreou was forced to reveal the depths of the country real economy.

In Monday’s address, Merkel called for the 17-member Euro Zone to come together and save the euro.  However, the German populace is critical of Merkel who holds the slimmest of margins in her Parliament.

As Italy and Greece build new cabinets, the citizens have become unruly and are holding violent, destructive protests.  Merkel had it right that the continent faced grave challenges.  However, the northern tier members are losing their appetite for the exposure their economies face. 

Look for the Euro to tailspin.  Even if Greece and Italy approve the austerity plans set by the Euro Zone, Europe seems to be facing more severe contagion than previously predicted.  The risk looks like a bottomless pit and it is unlikely that Merkel can receive support to any additional exposure from her Parliament.  Stay tuned for market-claiming media reports that carry little substance.  Without Germany, the Euro Zone is dead in the water.

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Papandreou and Greek Surprise

Greece has 10 million residents.  The country contributes 3 percent to the Euro Zone GDP.  The weakness in the global economy has kept this country on center stage for the past two years.  While the other 16 members of the Euro Zone have supported this illegitimate member of their economy, the tenuous nature of the region’s political and economic climate surfaced one more time on Thursday.

This week’s G20 Summit in Cannes was expected to deal with global economy and currency issues. Instead, the meeting of the world’s 20 largest economies has been pushed to the back page in favor of high stakes gamblers German Chancellor Angela Merkel, France’s President Nicolas Sarkozy and Greek Prime Minister George Papandreou. 

The Euro Zone must admire Greece’s flare for the dramatic.  After being ruled economically ineligible for admittance to the Euro Zone, Greece showed their creative style by cooking the books.  Supported by a vivid misrepresentation of the country’s financial position, Greece successfully applied for Euro Zone membership in 2004 and converted to the euro.

Over the summer, several meetings were held at the highest levels in Euro Zone.  Germany’s Merkel and France’s Sarkozy were caught in the hard reality that their banks have too much exposure to Greek debt. 

German voters were opposed to their tax money being spent in Greece where lavishly unrealistic lifestyles had led to this crisis.  Add to this dangerous formula the very real threat of contagion throughout the southern tier and the Euro Zone crisis became more ominous than the collapse of Lehman Brothers.

On Wednesday, Papandreou shocked the world and the 16 other Euro Zone nations by insisting that the most recent bailout of Greece would have to be put to a popular referendum vote. Such a vote could not be held until early January.

Currency markets, equity markets and comm. oddities all fell with the news.  Meanwhile, talks in Greece’s parliament became animated and Papandreou’s leadership will now need to survive a tense vote of confidence on Friday.

As events began to unfold, Sarkozy, Merkel and Papandreou met in Cannes to discuss the situation in Greece. However, the European Central Bank also weighed in with some unexpected news.

The ECB reduced their interest rate by 0.25 percent.  In announcing the interest rate decrease, the ECB explained the move because the Euro Zone is entering another recession.  While this news can hardly surprise the regions financial leaders, it caused uneasiness at the G20.

Two factors seemed to influence the rallies at U.S. equity markets as all three major exchanges climbed significantly.  The euro held firm because of Papandreou’s agreement to withdraw the call for a referendum.  A better than expected preliminary unemployment report in the U.S. seemed to drive the market.

The meeting between Sarkozy, Papandreou and Merkel were described as tense and heated.  Merkel made it clear that not one euro would be forthcoming before the current plan was accepted.  With a 9 billion euro debt service payment due next week, Papandreou eventually agreed to accept the plan.

However, even this announcement was loaded with surprises.  The opposition leader to PASOK, Papandreou’s party, agreed to support the bailout but claimed that his support was based on Papandreou’s promise to resign.

In Greece’s 300-member Parliament, PAS has 152 members.  One supporter has already announced she will not support Papandreou in tomorrow confidence vote.  Several of Papandreou’s cabinet members have opposed the confidence vote until Greece receives the 9 billion installment next week.

What is once more painfully clear is that the currency markets and the equity markets are quickly influence by media reports.  In a region that relies on 17 different Parliament to agree to direction, every headline can move or halt the markets.

The press clippings from the Euro Zone are classically overstated and somehow lack the most basic journalistic support. In the Euro Zone, it is one rumor followed by another rumor; one insinuation and a counter insinuation.  And, here we though the US had cornered the market on that kind of rhetoric.

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Greece Says Not So Fast

Greek Prime Minister George Papandreou shocked the global economic powers by announcing that before Greece would proceed with the Euro Zone bailout plan, the plan would be subject to a Greek referendum vote.  In affect, Papandreou’s surprising action places the future of Greece and the Euro Zone in jeopardy.

Once again, Papandreou has demonstrated the tense balance between economic and political interests.  Papandreou may well be voted out of office before the referendum, vote is held.  The referendum will either support the 130 billion euro bailout with deep austerity cuts or will reject the plan developed in Brussels just last week.

Greece has a 9 billion euro call this month and a larger obligation in January.  Included in the newest bailout plan was a call for Greek bondholders to agree to a 50 percent write-down.

Germany and France reacted with shock to Papandreou’s announcement.  Germany went so far as to say that if Greece did not accept the plan, they would be voted out of the Euro Zone.  Considering the country falsified its financial condition in order to join the Euro Zone, there is much bitterness among citizens of all Euro nations. 

If the Greek people vote against the bailout plan, Greece would be expelled from the Euro Zone and revert to its own national currency, the drachma.  It will take years for Greece to rebuild itself economically and there will not be much help from the global financial markets.

The news is especially hurtful to France’s president Nicolas Sarkozy who has been actively pursuing Chinese and Indian backing for what would be a 1 trillion euro bailout facility.  The bailout plan called for Euro Zone members to boost the Emergency fund and then leverage the fund to raise a little more than 1 trillion euros.  Greece was to receive 130 billon euros to try to turn their nightmarish ship around.

Sarkozy appears to be cut off at the knees.  German Chancellor Angela Merkel, who has her own political issues to overcome, summoned Papandreou to a meeting prior to this weekend’s G20 summit. 

Ironically, Papandreou’s action did land some support from analysts and advisers who have long felt that the public should play a larger part in national financial decisions.  Since Greece has implemented the austerity cuts required by the Euro Zone, massive strikes have swept the nation. 

Merkel faces political unrest at home and other Euro Zone members have never favored their tax revenue being spent on Greece.  The possibility of a Euro Zone collapse is now very possible.  Banks are not capitalized well enough to deal with an outright failure of Greece.  German and French banks will be hardest hit but repercussions will ripple through every nation.  The Euro Zone represents a sector that has considerable buying power.

Greece expects to have the referendum in January.  Sarkozy has suggested that this should happen sooner rather than later and is pushing for a December decision. 

Caught in the crosshairs of the Greek change of position is Italy, whose credit rating is dropping and who is now paying six percent on its new debt.  That rate is sure to rise in the wake of Greece’s actions.  In fact, this may well end the Euro Zone as we know it now.

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Euro Zone Fix

Rather than throw in the towel, members of the EU announced a multi-tiered plan to solidify Greece and help Italy escape the depth of a financial meltdown.  Global markets reacted quickly to the release of the news that a plan was in place.

The latest agreement between the 17 Euro Zone members was reached after a meeting of the 27 European Union states in Brussels.  As expected German Chancellor Angela Merkel was a key voice in the negotiations.  All sectors of the Euro Zone were represented by state leaders, banking authorities and the IMF.

Under terms of the workout, holders of Greek debt would agree to accept a 50 percent write down on these bonds. This stipulation was met with some resistance and negotiations were very tense into the late hours of the evening.

The newest Euro Zone plan would permit Greece to meet its November debt payments and the 50 percent haircut would trim the country’s debt load by 100 billion euros.  The Greek goal is to have its debt equal to120 percent of GDP by 2020.  The current ratio is 160 percent.

In July, Greece was scheduled to receive a 109 billion euro bailout contribution. On Wednesday that amount was increase to 130 billion.  The zone’s second most troubled economy is Italy, which currently has a debt to GDP ratio of 120 percent.

Prime Minister Silvio Berlusconi of Italy has met with resistance to austerity moves necessary to procure money from the European Financial Stability Facility (EFSF).  Berlusconi issued a letter of intent to Euro Zone nations. Among the items was a commitment to increase the retirement age to 67.

An important part of the newest agreement would be to leverage 250 billion euros and raise about 1 trillion in euros.  French President Nicolas Sarkozy will speak with China’s President Hu Jintao. The Euro Zone is requesting that China participate in efforts to bolster the EFSF.

Even with 1 trillion euros, there are still questions as to the impact defaults by Italy and Spain would mean to the region.  Damien Boey is an equity strategist at Credit Swisse.  He expressed his concerns, “While the headlines look good, the devil is in the details.  We don’t actually know how they are planning to increase the bail-out fund size from 440 billion euros to1 trillion. On top of that, there are some questions as to whether one trillion euros is enough.”

Writing down the Greek debt was inevitable.  What is not clear is how much of an impact this write-down will have throughout the world banking system.

The Euro Zone members agreed to increase the amount of cash capital banks in the region had in reserve. The new rate will be 9 percent.  To reach these levels, banks are to have public offerings first.  If the offerings are not productive, they are to seek help from the own national government. If the banks still do not meet the 9 percent cap, the bank is to approach to EFSF.  

The European Central Bank went on record saying that time was of the essence.  To put the finishing touches on the plan and to implement it should be accomplished by the end of the year.

Greece has shown a consistency in rejecting the austerity cuts as labor strikes occur weekly. In Italy, the scandalous government of Berlusconi is already meeting resistance as the opposition party refers to the plan as a book of dreams.

However, despite the reservations, European equities rose about 12 percent and the euro surged over the $1.40 mark.  US equities jumped by 2 percent at then open.  The marketplace was further bolstered by a 2.5 percent rise in GDP in the third quarter.

For the time being, it appears this was the most productive Euro Zone meeting in years.  However, the documentation is likely to raise new fears.  And, the most sobering thought is that while these monetary fixes are saving the euro, Italy, Greece and Spain need to address growth.  If these economies continue on their flat lines, trouble is just around the corner.

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Euro Summit On or Off?

While German Chancellor Angela Merkel awaits a vote in Parliament, Italy shows signs of resistance to last Sunday’s summit meeting as Greece sits nervously on the edge of collapse.  The European Union is set to meet Wednesday with a multi-tiered platform.  On the table will be reducing Greece’s debt burden, increasing the region’s rescue fund and boosting capital reserves at Europe’s banks,

Amidst all this high drama, Italy enters center stage.  Italian Prime Minister, Silvio Berlusconi, was unable to get a key component of the Italian rescue plan through his own cabinet, much less through Parliament.  The issue is the retirement age in Italy.

The European Union wants the retirement age raised to 67 years of age from 65 years.  The ECB has been purchasing Italian bonds, but Italy needs to sell 600 billion in bonds over the next three years to meet refinancing of its existing debt.

The European Union cited the increased retirement age as one necessary contingency that could halt ECB’s support for Italy.  Italy’s Northern League coalition, led by Umberto Bossi is opposed to the increase and indicated that Berlusconi’s job could well be at stake.

Italy is the third largest economy in the European Union.  The country’s public debt is 120 percent of GDP.  It is the largest amount of public debt held by any country in the EU.  Italy has moved front and center of the political and financial chaos that typifies the region.    

Greece Talks Tense

There is no doubt that Greece will default on its debt.  The only question is how much investors will have to absorb. Greece is facing a 160 percent debt to GDP ration by year’s end.

The question now is how deep the investors will be asked to accept as a haircut.  Banks have offered a 40 percent write-down but in meetings leading up to tomorrow’s crucial meeting the figure most discussed is 50 percent.

Every component of life in Greece has been disrupted.  Prime Minister George Papandreou voiced support for any plan that would stabilize the region’s economies and calm the vast public unrest.

The ECB has been busy. While purchasing large segments of Spain’s debt and Italy’s debt, the bank has tried to stabilize markets. However, Spain’s short-term debt fell to its highest level since 2008.

Perhaps, the key element of Wednesday’s meeting will be presented by Germany’s Finance Minister, who is expected to detail how leveraging the 440 billion bailout facility will result in about one trillion euros to be used to fortify the region for the next wave.

Merkel Pressing Parliament

Chancellor Angela Merkel had the option to take action with the approval of her 41-member Budget Committee.  However, this step was effectively blocked by Parliament.  Merkel’s authority and plan for changes in the Euro Zone will be presented to Parliament early Wednesday morning.

It is not certain that Merkel will receive Parliamentary approval. The Chancellor has taken a leadership role in putting the bailout together.  Two methods of increasing the European Financial Stability Facility (EFSF) have been proposed.  One uses the fund as an insurance policy and the other converts the fund to a special investment vehicle (SIV).

Merkel is well aware of the consequences of inaction.  However, the region’s biggest economy has internal support issues and the vote in Parliament could bring the newest plan to a screeching halt.

On Wednesday, the entire 27 member EU will meet early in the day.  The 17 Euro Zone nations will have a separate meeting later in the day.  The world still awaits a concrete plan that addresses the many struggling economies in the southern tier.

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