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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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Euro Zone Supranational After Greece and Spain?

One day after Greece’s Prime Minister, Antonis Samaras, announced that Greece was in a Great Depression similar to the US depression of the 1930’s, fears that Spain would need a full scale government bailout, sent the euro spiraling down.  At one point Monday, the euro touched the 1.2073USD mark before settling at 1.2118USD, the lowest mark in more than two-years.  Samaras projected that Greece’s GDP will shrink another 20 percent before year’s end.

The Prime Minister spoke two days before a team of international lenders are expected to meet in Athens to discuss a last gasp attempt to avoid an unstructured default. Under the terms of the country’s bailout agreement, Greece must reduce its budget deficit to 3 percent of GDP by the conclusion of 2014. By today’s standards, that translates to additional cuts and/or tax increases amounting to 12 billion euros. Currently, Greece’s debt is 9.3 percent of GDP.

Adding to the instability of the country, the IMF appears to be pulling back from negotiations. The IMF’s resistance is based on Greece’s inability to meet already agreed upon terms. Germany economy minister, Phillip Roseler, reiterated Germany’s hard line that Greece could receive no further bailout funds until promised obligations were met.

Former President Bill Clinton met with Samaras on Sunday and told reporters that Greece’s financial planners were making a mistake on focusing strictly on austerity. He recommended that Greece continue to pursue privatization of state-owned assets and new pro-growth initiatives to get the workforce back to work.

Greece’s woes have been predictable, but the rain of bad news from Spain fueled the fire for euro zone doubters. With a bank bailout in hand, Greece appears to need what many analysts have said all along, a massive sovereign bailout. Spain was late to arrive at the bailout table and the delays have proved very costly. Spain’s ten-year bonds topped 7 percent today and the country finds itself embroiled in controversy.

Spain’s provincial governments are strapped for operating funds. Valencia has already applied to the government for assistance and Murcia appears ready to apply for aid. Estimates for the magnitude of the government bailout are in the range of 100 billion euros. If the euro zone bailout in Greece continues and if Spain is granted the already agreed-upon bank bailout and the new funds for government operations, the European Stability Mechanism will be virtually depleted.

On Saturday the ECB head, Mario Draghi told France’s newspaper that the euro was safe. He suggested that the public was unaware of the political capital expended on preserving the euro. Draghi added that the ECB had no weapons left. As he has said for months, it is time for the euro zone members to rise to the fore.

Draghi referred to the creation of “supranational bodies.” The euro zone and the euro may survive but there are no guarantees for Greece and Spain.




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German Court Stay Isn’t The End of the Euro

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

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

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

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

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

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Investors Poised For Greece Exit

This week’s meeting of euro zone members in Brussels was another unproductive dance around the sticky issues of Greece, Portugal, Spain, Italy, Ireland, growth and austerity. There is a certain air of defiance in the euro zone as supporters of growth, led by France, square off against Germany and its austerity policy. In the front and center stage of the euro zone crisis stands Greece, a nation conflicted by heavy debt, massive unemployment, no central government, 5 years of recession and riots in the street.

In mid-morning Friday, the word from Brussels was to prepare for Greece leaving the euro zone and returning to its own currency. This possibility gained traction because of Germany’s resistance to euro bonds and because Greece is on the verge of defaulting on all its obligations, including agreements to repay bailout funding.  Both the IMF and Germany are adamant about Greece living up to its obligations.

By midday, the euro was at $1.2511 USD and trending below the $1.25 resistance level. The euro is at its 20year low. Many Forex advisers believe that if Greece is out of the euro zone, the euro will fall to the $1.23 level and finish the second quarter at $1.20 falling to $1.15 in quarter 3, 2012.

Euro uncertainty has boosted the dollar as a safe haven. Against a basket of currencies, the dollar held firm at 82.411, the highest level since 2010.

The euro zone unrest will affect US exports.  19 percent of US exports are delivered to members of the 27-nation European Union. Euro zone exports account for 13 percent of total exports. Euro zone members.

Deutsche Bank issued a statement indicating that in 2010, Europe comprises 25 percent of world trade. The continent is a major importer for both the US and China.

If Greece puts a government in place in June, it is very possible the country will default on everything. The country will run out of money and will have to print its own currency.  The country will be in internal chaos.

What did emerge from Brussels is a variety of ideas about surviving the exit and default of Greece. Contingency plans are already in the works.  The member nations are trying to shield Portugal and Spain.

However, the biggest challenge facing the region is investor confidence. Greece is in a vulnerable position.  The country has little leverage and a history of breached agreements. The country accounts for about 2 percent of the region’s GDP. The exit of Greece would have minor consequences for the US but larger ones for Germany, France and its allies.  If other nations follow Greece’s example, the euro zone could disintegrate. That would be a serious problem.

Today, CNBC reported that a large concern in the euro zone is the scarcity of investors. There is no confidence that the members can negotiate a balanced remedy involving both austerity and growth.

When it rains it pours. S&P downgraded five Spanish banks on Friday. At the same time, Banksia, a conglomeration of failing banks assembled by the government, said it needed 15 billion euros to stay afloat. A failure in Spain carries much more serious consequences than the failure of Greece and would most likely trigger a series of international defaults.

A crash of the European Union banks would cause a crisis larger than the fall of Lehman Bros.


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In Greece The Dogs Are Out

After a weeks of endless haggling that would do the US congress proud, Greece’s Socialist leader, Evangelos Venizelos, fired one, last and tired salvo declaring that the effort to form a coalition government had failed.  Incumbent technocrat leader, Karolos Papoulias, immediately ordered all parties in parliament other than the far right extremist groups to continue the process on Tuesday.  Venizelos’ frustration marked a week of behind closed door bickering that appears to point the country toward another election sometime in June.

Pushback from the euro zone has been negative.  Shaken by a lack of confidence in Greece, in the euro zone and in the European Central Bank’s efforts to intervene, investors drove the yields on short-term Spanish and Italian bonds to unsustainable costs.  Italy is not far behind.

The reaction in Greece should not be a surprise.  Even before the May 6 elections, there was strong anti-austerity and anti-euro zone sentiment.  At Monday’s meetings in Brussels, the IMF’s Christine LaGarde stood helpless to intervene.

Greece is not alone in its resistance of the austerity cuts imposed by the troika of regional lenders and euro zone paymaster Germany. At the close of Monday’s business, Greece is well on its way to becoming the first country to exit the euro zone and return to its own currency. There is not only fear that Greece will stagger fragile markets but that other nations will follow suit.

Greece’s failure will be unstructured and send financial shock waves around the globe. Greece is set to exhaust its operating capital early next month.  In a reversal of last week’s show of support, the pressure is now on Greece to form a viable government prior to the next tranche of funds that would meet the country’s debt obligations and provide enough funding to operate.

Suffering from euro zone and Greek over-exposure, exhausted investors are expecting the worst.  If Greece is separated from the euro zone, there is no evidence that the country can support itself and emerge from a devastating five years of recession and years of irresponsible spending.  With no prospects of increasing GDP, it appears the powers that be appear to choose confrontation with no options.

This is high stakes chicken. Investors are unimpressed.  It is one thing to be courageous but quite another to be foolhardy.  The scars of a Greek failure will be deep-rooted.

To create a functional coalition, Greece needs the approval of one of the two left parties.  SYRIZA is the strongest party and the largest left party.  It refused to attend Tuesday’s last ditch efforts.  The other left party refused to attend if SYRIZA did not attend.

German Chancellor, Angela Merkel has been a force throughout the euro zone crisis. Merkel has suffered her own political disappointments lately.  Chancellor Merkel could well become the next political leader to be felled by the euro zone contagion. Merkel lost her one vote majority in parliament over the weekend.

On Monday, Merkel brought the possibility of Greek default and Greece’s exit from the euro zone to light.  Merkel is the strongest advocate of austerity because that is the will of the German taxpayer.  Merkel announced that a Greek failure could occur.  She deemed it unlikely that Greece would not honor their commitments but she was not convincing.  If Greece receives another tranche without compliance, it will most likely tarnish the euro zone’s loudest voice.

The resounding voice of a 70-year old one-time Greek pharmacist, Maria Kampita, told Reuters, “We have to stay in the euro. I’ve lived the poverty of the drachma and don’t want to go back.  Never!  God Help Us!”

Against the USD, the euro fell sharply to four month lows.

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Euro Choosing Growth Over Austerity

In a long past due scenario, the euro zone members are weighing the German policy of austerity against GDP growth.  The controversy jeopardizes the euro as a single currency and even the survival of the euro zone.  The weekend did not produce the results that the IMF’s leader, Christine Lagarde, had hoped to accomplish in her fund raising initiative.  Compounded with weekend activities in the region, the euro zone looks to be on tenuous footing.

 Dutch Prime Minister, Mark Rutte, resigned as the Dutch Coalition submitted their collective resignations to Queen Beatrix.  The resignations are the result of a split with the populist Freedom Party, which had supported the coalition until the recent austerity legislation.  Queen Beatrix has requested that the coalition continue to serve until such time as new elections can be held.  That may not be occluded until late Summer.

The Dutch crisis preceded the results of the first round of French presidential voting.  The biggest winner in the surprising elections was not the winner, Socialist Francois Holland, or incumbent Nicolas Sarkozy, but Maine Le Pen, the far right activist who succeeded her father as head of the National Front. Le Pen capture a sunning 19 percent of the popular vote.  Although the margin was not enough to qualify for the two-way runoff in the next round, it assured the Front Line of a significant voice in the upcoming second round.

It is projected that Sarkosy, the first incumbent to not win the first round of elections, would be the more significant benefactor of the Le Pen followers.  However, Le Pen has repeatedly attacked Sarkosy for enabling the euro zone crisis to affect the country’s economic stability. 

Both Le Pen and Holland have been critical of Sarkosy’s willingness to implement severe austerity cuts to meet the euro zone’s budget restrictions.  LE Pen is well positioned to increase her coalition’s influence.  Her platform stresses returning a national currency and terminating France’s subscription to the euro zone.

The magnitude of the Le Pen, Holland vote is emblematic of the anti-establishment posture that is sweeping across the euro zone.  This sentiment clearly jeopardizes the investors in the Greece bailout.  With Greek elections scheduled for May 6th, there is real concern that the new government will not comply with the terms of the bailout.

As other euro zone countries have discovered, the austerity cuts are too large and too quick.  Most nations implementing these restraints will be unable to grow economically.  Although not strictly a quantitative easing mechanism, the participation of the ECB comes about as close as possible to quantitative easing. 

To further underscore the euro zone crisis, Spain has rejected further austerity cuts.  Instead, the government has sided with its populace that is opposed to further constraints.

The news does not get any better.  In addition to all the negativism about the euro zone austerity and lack of growth, Germany reported its lowest manufacturing data in three years.  The euro zone paymaster looks to be a big loser if the Dutch, Greece, Spain and France reject austerity programs.

The biggest political loser could well be Germen Chancellor Angela Merkel, the driving force behind the euro zone negotiates to date.  The Dutch are a favored trading partner with Germany.  As one of the few euro zone members with a triple A credit rating, the economic differences ion the Netherlands could well result in a lowering of The country’s credit rating.

In early trading, the euro gave away some ground to the dollar, settling at $1.3129, down 7 percent over the weekend.  ING projects that the euro will fall to $1.20 by the end of the second quarter. That marks some serious volatility.

To cut to the chase, the continuation of the euro zone is going to boil down to which nations are willing to comply with the budget cuts necessary to contain spending to 3 percent of GDP.  It is growth versus austerity and while the politicians may talk the talk, the people have the power and they seem poised to act at the polls.

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Euro Zone Sounds Good, But…

On the surface, it appears the euro zone concluded a tumultuous week with a bit of uncommon harmony.  The zone’s finance ministers agreed to increase their emergency firewall to 700 billion euros.  The move comes at a fortuitous time, just ahead of the upcoming G20 Summit in Mexico.

In essence, the increase amounts to a 200 billion euro increase.  The remaining 500 billion euros has already been pledged to two separate bailout mechanisms.  The newest strategy will combine resources in the European Financial Stability Facility (EFSF) with resources in the European Stability Mechanism (ESM) and include 200 billion euros pledged by the 17 members.

One must question the timing of the latest release.  The newfound cooperative spirit does not accurately reflect the existing euro zone culture. The European Commission has pushed for an increase to 940 billion euros but Germany, who bears the bulk of the funding, would not commit to the recommended increase.

Combining this unenthusiastic response to the European Commission with a position announced by the Netherlands does not soothe international request for assistance. In a surprising and telling statement, the Netherlands declared that it would not release the funds they have committed to help Greece unless Athens completely complied with the IMF requirements.

There is speculation that the new regime in Athens, to be elected later this month, is not committed to the austerity cuts imposed by their fellow euro zone members.  The political, social and economic climate in Greece is rowdy and volatile.  If the new government shows any signs of wavering, Greece will be out of business in the blink of an eye.

From here, the most recent gesture by the euro zone financial ministers appears to be little more than an effort to sway the G20 participants to bolster the IMF so that the bank can provide further assistance to the troubled region.  This sentiment was confirmed by EU Economic and Monetary Affairs spokesperson Olli Rehn, “The euro area has responded to calls from our global partners, the G20 and the BRIC countries.  I trust today’s decision will pave the way for an IMF decision at the spring meetings.”

If the euro zone has been consistent in any decision, it has been in its pursuit of outside help for the flailing economies, most of which are mired in recession r entering their third recession in the past 6 years. 

Both Washington and IMF Chairperson, Christine Lagarde, expressed approval of this long-awaited, perfectly timed verbal representation.  In the past, Washington, the IMF, China, Brazil and Britain have been unwilling to boost the IMF fund until the euro zone has demonstrated the willingness to increase the bailout funds.

In an election year, the likelihood of Washington sending more money to help the euro zone seems dim. The economic tension in the euro zone has shifted from Greece to Portugal, Spain, Italy and Ireland.  Most recently the desperate economies of Portugal and Spain have moved center stage.  

Amazingly, the euro gained traction Friday based on an announcement that the country was enacting a plan including austerity cuts and revenue increases from delinquent taxpayers.  The revenue component is similar to a tax amnesty opportunity.   It is believed that Spain has approximately 25 billion euros of uncollected taxes.  The new plan would offer tax violators a dramatic savings.  Spain projects that delinquent taxpayers will be able to settle at 10 percent as long as they remain current in the future.

The expected return of 2.5 billion euro seems trivial and has come under fire from conservative factions. Euro zone partners have imposed a goal on the ailing economy.  Spain is to trim debt level to 3.2 percent of GDP by 2013.  To get there, Spain must reduce debt to 5.7 percent this year, an unlikely outcome.

There are only two options for the euro zone’s 4th largest economy.  Spain will either have to request amnesty in the form of an extension or implement a sever tax hike which could well lead to violence and cripple the nation’s economy.

Meanwhile strikes and violent protests are taking on the familiar face of the Greek protests.  The country appears to have launched an aggressive marketing campaign to entice tourists.  However, tourists cannot be overly enthusiastic about visiting a country that is setting fires in the streets and strikes that hamper airports and trams. 

The euro zone continues to shy away from the stark reality that the region has no growth and little chance of growth in the next two or three years.  Until that time, the euro zone is on the dole and the possibility of a failing single currency is very real.

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Euro Zone Woes Continue

Compared to a few weeks ago, the euro zone debt crisis has taken on an eerie quiet.  Don’t be misled.  At least one and possibly as many as five euro zone nations are on the brink of financial ruin.  Despite the relative calm, investors are particularly wary of Portugal, Spain, Ireland and Italy.  Combined with Greece, the five nations comprise an entity commonly called the PIIGS.

And, there is not a lot of positive spin coming from any of these  entities.  In other words, stay tuned because the fate of the single currency will certainly come under question in the months to come.

As the politicians and economic brain trust take their leave, the numbers from the PIIGS depict a grizzly picture.  Greece may have been fortunate because it was not too big to fail and in dire enough straits that their plight could well have caused massive turbulence in global markets.  The truth is that the country’s investors are not enthusiastic about Greece’s future.

Unfortunately, austerity good girl, Portugal, has done everything asked of her.  Yet, it becomes increasingly clear that Portugal needs more than a hatchet to fix its mounting debt crisis.  Germany has connected to Portugal and set ambitious austerity programs in motion.  The real issue with all the PIIGS is a lack of economic growth or even the unrealistic projections of growth.  Growth is not going to happen in the PIIGS.

According to the Greek model, the action plan is to impose super tough austerity cuts, then find investors and eventually to find buyers for the country’s assets.  The structured default strategy is a very real possibility with all the PIIGS. 

The euro zone could rescue Portugal and Ireland, both of who received substantial aid packages earlier in the recession.  For Spain and Italy, the scale of the crisis eliminates bailout funding.  With the European Central Bank, the IMF and the EU refraining from entering the bond market, the PIIGS are flying solo.  Banks inside the failing nations are attempting to throw a life rope but investors are guarded because of the 75 percent hit private investors took with Greece.

There now exists a war weary mentality about the troubled euro zone economies.  This resistance is well founded but does increase the need for liquidating assets, especially public utilities.  However, the demand for these assets is not inspired.  This causes a trickle down effect whereby the assets are purchased below market value and thus create a deeper strain on the economy.

Compared to Greece, the populations in Portugal and Spain have shown determination.  These countries seem to acknowledge their reckless spending and for the most part have accepted the price to pay will be steep. Yet, Portugal’s unemployment rate is closing in on Greece’s record unemployment.

The relatively calm protests have been directed at the Troika of financial institutions, the IMF, the ECB and the EU.  These institutions have been devising a plan to expand the region’s Emergency Stability Fund.  But, facts are facts.  Portugal is Western Europe’s poorest nation.  Portugal’s socialist faction is represented by the country’s second largest labor union, UGT.  Amenio Carlos is the head of the country’s largest union, CGTP, a communist labor union.

Under Germany’s guidance, a course of action has been suggested to increase the nation’s GDP, which in prosperous times did not exceed .07 percent growth.  Laboring under deflated prices, Portugal has taken a dreadful toll on the economy.  Goldman Sachs recently released a report indicating that Portugal needed to increase prices by 35 percent.  Of course, such an increase could well be disastrous in terms of exports.

Portugal does have some successful export enterprises, including Volkswagen and other car manufacturers.  Successful entrepreneurs credit the country’s resilient labor force.  And, Germany has publicly commended Portugal for its approach to resolving the heavy debt load.  The harsh reality is that the clock is ticking on Portugal, which must enter the bond market in the middle of 2013.  A failure in the bonds will spell doom for private investors.

The German-Portugal strategy projects the debt burden peaking at about the same time.  If projections are correct, Portugal would reach its goal of debt at 3 percent of GDP by the end of 2013.  Investors are privately preparing for the worst outcome, another big dent in investor equity.  On the bright side, Portugal was able to cut its deficit by a crisp 35 percent during 2011. This has led euro zone nations to applaud the country’s commitment to constructive resolution.

The Spain debt experience is drawing comparisons the Japan’s plight in the 1990’s.  Unsustainable and rising bond yields are not being received with optimism by the investment community.  Other euro zone nations are pointing the finger at Spain saying that it will be Spain that could sink the single currency standard.

Spain is increasing taxes and reducing services to the taxpaying population.  Tax collection enforcement must also improve.  Even then, pay cuts and lay-offs run rampant throughout the country.  Credit is reduced to a mere dribble.  Growth is non-existent and banks are investing outside the country.

In other words, the PIIGS are a mess. The possibility that the euro is stabilizing is an illusion and investment here is not for the feint of heart.

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Greece Summit Tomorrow

Greece has done everything it can to meet the IMF, ECB, EU and euro zone demands for trimming the budget.  Interim Prime Minister Lucas Papademos flew to Brussels on Sunday in anticipation of meeting with the finance ministers from the 16 other members of the euro zone on Monday.

The outcome of this meeting will likely affect all global currency and equity markets.  Meanwhile, the streets of the center of the world’s model for democracy were again filled with thousands of angry and violent protestors.

From an objective point-of-view, support for Greece is waning and patience is wearing thin.  According to the majority of euro zone members, the Greeks have failed promise after promise.  With each failure, the euro zone has set more severe austerity measures.  The streets of Athens resemble a war zone. Small shops have been set ablaze and shop owners have been plundered.

The country’s employment opportunities shrink every day.  Wages have been pared by as much as 25 percent. Pensions have been trimmed to the bone and 150 state workers will be cut in the next two years.  In their homeland, Greeks blame euro zone members for their plight. In reality, they should be looking at the people that put the country in this condition.

Germany remains uncommitted to the Greek bailout.  Without Germany, the bailout will not take place.  There also seems to be rising doubts in the IMF and ECB.  Once again, Greece’s creative bookkeeping has come under fire.  No bailout funds can be released unless there is a plan to close the debt and GDP ratio to 120 percent by 2020.  Just as it appeared the formula was set, it was determined that the starting ratio of 160 was unsustainable and was merely a broad estimate of the country’s position.

To complicate matters further, the elections for a new Prime Minister are set for April and euro zone members now question the commitment of the new government to honor the terms of the bailout.  There has been an increase of talks about the possibility of an unstructured default and the return of Greece to a national currency.

Jean-Claude Juncker will lead the Brussels summit and has made it clear that there were open ends.  Greece feels that the population cannot survive any more trimming.  Surprisingly, Germany agrees.

The two nations do not agree on much.  On Sunday Wolfgang Schaeuble asked Greece to accept administrative assistance from other euro zone members.  Schaeuble now asserts that Greece’s taxation policy is outdated.  He and other finance ministers have offered assistance in developing a more aggressive tax program.

This new will be received with distain in Greece, but it does clarify where the euro zone stands.  The finance ministers seem to agree that the GDP debt gap can only be closed with increased income and use taxes. This may well be the nail in Greece’s coffin.  The current plan to reduce the debt level is now more complex because the best projections for the Greek economy forecast negative GDP growth through 2014.

Germany and other nations are sure to slow the process tomorrow.  Most analysts agree that tomorrow’s will be another waste of time. Conjecture is that a deal will not be made until Germany is in agreement with the terms.  The IMF has found a way that Greece can claim euros that have been festering in their fund.  The amount appears sufficient to meet their March 20th deadline but Greece would have to comply with certain IMF terms.

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The IMF Weighs In

As Greece struggles to reach an agreement about future bailout funds, the private investor and public investors are distancing themselves from a viable solution that would enable the country to meet a critical short-term payment deadline.  More discouraging is the unwillingness of the two parties to pull together.

In a scene that resembles the gridlock in Washington, the likelihood of Greece continuing as a Euro Zone member looks dismal.  Rumors circulated today about the country’s dismal trajectory and the strong probability that regardless of what happens with these talks, Greece may not be a Euro Zone member 12 months from now.

That bitter dose of reality is cause for concern among potential investors.  The issue is as clear as the traditional bailout question, “Why pour good money after bad?”  Viewed in that perspective, who would invest in Greece?

What is remarkable is that this little country with a dreadful economy and track record and encumbered by a poor work ethic has positioned itself at the center of the economic universe.  Recently, the IMF presented compelling information and advice about the state of the global economy, the state of the Euro Zone economy and the impact of failure by the region to help its most desperate member. The greatest fear is that if Greece fails, other economies will also fail.

The private investors have retained Charles Dallara of the International Institute of Finance (IIF) to lead their negotiations with Greece and the other Euro Zone entities.  Private investors have offered a debt swap that calls for a 65 percent loss for current investments and a yield on 30-year rollover balances averaging 4 percent.  Greece has countered saying that the country cannot pay more than 3.5 percent.

Critics have begun to evaluate the consequences of an unstructured default.  If negotiators fail to cut a deal by the end of the month, there may not be any choice.

On Tuesday, the IMF released disturbing projections that indicate the Euro Zone failure will cause a global recession.  Here are the IMF’s salient points. 

  • Global growth for 2012 was reduced to3.3 percent from 4.0 percent. 
  • Global growth could fall to 1.3 percent if the Euro Zone continues stalling for solutions. 
  • Growth in 2013 is expected to reach 3.9 percent. 
  • The Euro Zone economy will contract 0.5 percent this year. 
  • The U.S. GDP will grow by 1.8 percent in 2012. 
  • Japan’s GDP was trimmed from 2.3 percent to 1.7 percent. 
  • Overall growth in advanced economies will be 1.5 percent in 2012 and 2013. 
  • Growth projections in emerging economies were pared from 6.2 percent to 5.4 percent. 
  • 2012 Growth projections in China were trimmed from 9.0 percent to 8.2 percent but will bounce back to 8.8 percent in 2013. 
  • Asia’s emerging economies will be loser to7.3 percent compared to original projections of 8 percent. 
  • The area hit largest by the global slowdown will be evident in central and eastern Europe where 2012 growth may expand by a slim 1.21 percent. 
  • Non-oil commodities are projected to increase by a stunning 14 percent. 

A leading analyst, Olivier Blanchard, said that if Europe did not arrive at a collective agreement to deal with the recession that has gripped the region, the impact on global GDP will be even more dramatic.        

In a written statement, the IMF said, “The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation.”  While that is a formula for success, it sounds easier than it is.  

The elephant in the room is quantitative easing, the controversial printing of euros.  Quantitative easing is what enabled the U.S. and the UK to stay afloat at the outset of the recession.  It would result in lowering the value of the euro and faces some constitutional challenges, but given the traumatic state of politics and state economies there appears no other remedy.  To date, every other option has failed. 

If the Euro Zone fails, it is very possible the U.S. will trigger another round of quantitative easing.   

The Managing Director of the IMF and former finance minister for France has said that the failure to create a larger failsafe than currently exists in the European Financial Stability Facility will result in a 1930’s style global depression. 

The only recourse the Euro Zone has is to boost the bailout fund as soon as possible.  That is the only action that will quell investor doubts and show potential investors that the Euro Zone is serious about restoring confidence in the flamboyant market place that is under subscribing to the region’s bond auctions.

In the United States, what appears to be a recovering consumer confidence could be dashed if contagion in Europe is unchecked.    Japan’s projection for reduce debt was accompanied by a call for more stringent debt reduction.

The projections for 1.5 percent growth in advanced economies will not be enough to significantly ease high unemployment rates. 

The private investors in Greece have renewed their call for action by the Euro Zone’s public creditors.  Funds to meet Greece’s upcoming 14.5 billion euro call as part of the overall 130 billion relief fund recommended by the IMF are necessary to stem an unstructured default.    

Understanding the ESM and the EFSF 

The European Stability Mechanism (ESM) is a new and permanent platform that will swing into action in mid-2013.  The ESM was proposed and created under guidance by the European Union and is not restricted to act on behalf of the Euro Zone members.  Rather, the ESM is designed to service the 27 members of the European Union, except for Great Britain, whose finance ministers agreed to the concept on November 28, 2010. 

The ESM will expand the capabilities of the existing European Financial Stability Facility. This body will have wider enforcement and surveillance guidelines that will include the consenting EU members. 

Great Britain has declined to participate because the country uses its own currency rather than the euro.  The purpose of the ESM will be to prevent a recurrence of the ongoing crisis.  The agency will generate an evaluation of the EU by mid-2016 and to provide assistance to distressed economies. 

Private sector involvement will also be monitored by the EMS.  This activity will be studied on a case-by-case example.  Private investment will be consistent with guidelines established by the IMF. 

The hope is that stressed economies with liquidity issues will be relieved by the ESM.  When these economies seek assistance with investors, the ESM will help the troubled members negotiate a private solution that will encourage the investment.  Basically, this is a more transparent and comprehensive mechanism.  The ESM will not be available to interact with private investors until mid-2013.

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