Tag Archive | "Portugal Spain"

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Greece, Portugal, Spain Wavering

Greece, Portugal and Spain headline separate financial woes in the euro zone’s southern tier but there are other stress points that the Troika (EU-IMF-ECB) will need to put to rest to keep the bailouts for the three countries intact. As usual, Greece faces the biggest and most immediate challenges.

Greece is scheduled to redeem 2.2 billion euros in bonds in August. If Athens fails, the IMF would have to violate its rules to standby its commitment to the 240-billion-euro bailout scheme. IMF rules require a borrower to be financed one year ahead of schedule.

An IMF pullout would be disastrous to the euro and euro zone. Lenders are unhappy about Greece’s faltering efforts, a missed June deadline and lack of austerity. But, other aspects of the southern tier countries are also falling apart.

In Portugal, highly regarded Finance Minister Vitor Gaspar, who has been in favor with the Troika and is the recognized architect of the country’s austerity program, resigned on Monday. The country had a strategy to exit the EU/IMF bailout but those plans may be dissipating.

In Italy, political tensions are heightened. Prime Minister Enrico Letta was forced to call a government meeting after a coalition partner threatened to withdraw support for the austerity plan. Investors are anxiously following Italy as are members of the Troika.

Greece’s recent efforts to close spending nearly closed another prolonged government shutdown. The closing of the public radio station, ERT, seemed the most sensible and painless means to meet a government reduction deadline.

Greece missed a June deadline to put 12,500 workers into a “mobility scheme,” whereby they would be transferred or terminated within 12 months. Adding to the problem is that the state-run health insurer, EOPYY, has suffered an unexpected 1 billion euro shortfall. Deeper spending cuts are the only means to reduce the shortfall.

Greece has also failed to liquidate certain public assets, most notably the sale of the government-run gas company. Amidst this chaos, Prime Minister Antonius Samaras has declared that no new austerity cuts will be implemented.

Greece’s unemployment rate is now 27 percent. The country has lost 33 percent of its disposable income. Despite all this data, the euro remains solid against the dollar and the yen.

Currency Shifts  

The dollar achieved four-week highs against a basket of currencies. US ten-year bonds were steady at 2.48 and luring investors back to the market.

The dollar also continued its climb against the yen. The yen remains under pressure from the Bank of Japan’s aggressive stimulus program but is also reflecting concerns about Asian economies and emerging economies in general. China’s slowdown is affecting all economies and currencies at emerging economies are suffering as a result. The dollar settled at 99.87 yen.

The euro held above the $1.30 mark settling at $1.3062, below the 200-day average of $1.3074. Against the yen, the euro reached a three-week high of 130.485.

The Australian dollar slumped 0.7 percent to $0.9172 upon news that the currency has fallen 13 percent against the USD. The cash rate set by the RBA stayed at 2.75 percent for the second month in succession.

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Does The Euro Zone Need Germany

For its leadership role in the region, Germany has received much criticism from other euro zone members and the international investment community.  At the same time, Chancellor Angela Merkel is walking a political tightrope while facing a strong challenge to hold a majority coalition in Parliament. Meanwhile, German taxpayers are not feeling the pain of the other euro zone nations and do not support financial assistance to irresponsible EZ members. Accordingly, Merkel has been confrontational about austerity demands and addressing growth through increasing or at least not reducing sovereign debt.

For many months, finance ministers and political leaders have nervously observed what will happen with Greece, Ireland, Portugal, Spain and Italy.  The urgency about Greece is the belief that a default would ignite a series of triggers that would have investors withdrawing from Spain, Portugal, Italy, Ireland and eventually France. This has led to questions about the dissolution of the euro zone.  It has never led to questions about a euro zone without Germany.  At this week’s summit, Merkel’s intransigency has led to speculation that this is a possibility.

This possibility seems to be gaining traction and serves Merkel well as she addresses stiff political pressure from a nation of taxpayers who do not think the euro zone crisis is their problem.  Germany’s economy is not what it was before the Lehman crash, but factories are busy and the economy is strong enough that taxpayers all received a bonus earlier in the year.

In its current structure, common practice dictates that all euro zone initiatives have to clear the paymaster, Germany. The current composition of the 17-member alliance pits Greece, Spain, Portugal, Spain, Italy and a number of other EZ members who are supported by the IMF, the US, the European Commission and the ECB against Germany. As these countries share similar economic symptoms, they have common, growth oriented strategies.  While Merkel has presented a positive spin to the media, when push comes to shove, she rejects economic revival plans that are not austerity- based.  With a wavering majority in the parliament, Merkel’s hands are tied.

All along, the premise has been that if Greece falters, contagion will spread, picking off one defaulting country after another. However, what would happen if Germany left or were ousted from the Euro Zone?  Surprisingly, there might well be real advantages for other members and very real problems for Germany.  Firstly, the struggling nations would work together to create a series of stability initiatives. Secondly, these at-risk economies would be capable of drafting longer-term austerity and growth strategies. Thirdly, the Euro Zone would present a brave, unified voice.

Most importantly, with Germany out of the way, the coalition of nations with common challenges could launch several initiatives, the countries have put on the table.

  • The ECB would be empowered to follow the strategies of quantitative easing that other Central Banks have implemented.


  • The euro zone could issue euro bonds.


  • Deposits up to 250,000 euros could be secured by the central bank and encourage domestic and foreign investors to keep money in the banking system.

Without Germany, the ability of the stressed euro zone members to right the ship increases significantly. Without the euro zone, Germany would revert to the mark.  The mark would be a strong currency that would hamper the nation’s export trade. German banks would need recapitalization and the Bundesbank’s recapitalization would dwarf the recapitalization of any American bank.

Unquestionably, a euro zone without Germany would hurt Germany and help the struggle economies in other member nations. Unless there is a dramatic shift in Germany’s policy, it will not be long before troubled euro zone nations unify and bump Germany.


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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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Greece Decision Looms

In an interview with CNBC on Wednesday morning, Jim O’Neill, Goldman’s head of its Asset Management Division, painted a bleak picture of the euro zone.  O’Neill is clearly making provisions for an exit by Greece from the euro zone and quite possibly the end of the single currency used in the 17-member euro zone.  O’Neill’s comments preceded what may be the most telling summit of euro zone leaders later today.

In today’s summit, German Chancellor Angel Merkel, the most powerful advocate of austerity, will faceoff with newly elected French President Francois Hollande who won on a platform of growth.  Merkel has come under intense pressure of late.  The Chancellor’s conservative party Christian Democrats (CDU) suffered another setback last week when the centrist-left Social Democrats (SPD) logged a decisive win in North Rhine-Westphalia (NRW), the country’s largest population center.  The CDU popular support dropped 4 points to 31 percent whole the SDP support rose 1 percent to 27 percent.

O’Neill reported that Germany recently increased the country’s pay rates by 4.3 percent.  This indicates that Germany is preparing to boost its GDP with this additional internal spending power.

O’Neill suggested that the loss of Greece to the euro zone would shake markets in the near-term but would not have the impact that a collapse of the euro zone would have.  O’Neill suggested that a failure in Greece might have a bullish effect on the investment community that is unenthusiastic about the euro zone and the contagion that is plaguing the region. The Goldman strategist repeated that it was time for a serious resolution about Greece, Ireland, Portugal, Spain and Italy.  There has been too much dialogue and not enough action.  The euro zone needs to set policies that cross geographic boundaries.

O’Neill emphasized that Greece is just one of many issues.  The EMS has the clout to save Greece and Portugal but not Spain and Italy.  In his opinion. France and Germany need to represent their region.  However, France represents France and Germany represents Germany. This is the formula that could topple the euro.

Realistically, Greece can ill afford a default and a withdrawal from the single currency alliance. In the immediate-term, Greece banks will run out of money, pensions will be raided and the GDP will drop significantly lower than the negative GDP the county experiences now.

At today’s summit in Brussels, the main item will be a discussion of the creation of euro zone bonds and whether these bonds could alleviate two-years of massive debt.  Today’s summit arks the first time in the past three years that Germany and France have not met prior to the summit.  These last minute meetings have enabled Merkel and former President Sarkozy to provide a united front.  The German Parliament issued a verdict yesterday that if Greece fails to commit to honor the terms of their bailout, the country should receive no further financial funding.

In early morning Forex activity, the euro fluttered at a two-year low and nearly sunk below $1.26 USD.  The US continues to rise against a basket of currencies.  O’Neill was quick to point out that he believes the US is on the way out of its muddled financial meltdown.



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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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Euro Bank Stress Tests Shaky

While the world has one eye on the extension of the U.S. debt ceiling, the euro zone has its own problems and they could well signal the exodus from a single currency system.  Eight of 90 banks that submitted to the stress tests failed to pass.  Participants are forced to reveal their profit forecasts, a listing of their sovereign bonds and their continuous funding costs.  While 8 banks absolutely failed the tests, another 7 are in need of capital.

The stress test utilized a 5 percent core capital level as the standard.  Banks were subjected to a theoretical dip in stocks, bonds and property prices during the recession.  The eight banks that failed must submit a plan to raise the needed capital by September of this year.  All these institutions will need to raise 2.5 billion euros to pass the test.

Five banks in Spain, 2 banks in Greece and one bank in Austria comprise the list of failing banks.  An additional 16 banks passed the test but by less than 1 percent.  Bank examiners wrestled with what to do about the sovereign debt held by all Euro zone banks.  These 16 on-the-edge banks have been advised to boost their pure capital.  If Greece, Ireland Portugal, Spain or Italy fails, there will be immense pain throughout the region.   Examiners requested that each bank list the volume and location of their euro zone bonds.

The European Banking Authority (EBA) estimates that if Greece fails the banks would have a 15 percent exposure to worthless bonds.  Germany attacked the EBA’s standards as one bank failed to participate in the stress test but all other 15 banks passed.  Germany and France hold most of the Greek debt.

Unrest In Germany

As was observed by a CNBC commentator, the euro zone is in dire straights.  There is not a sense of a one-for-all or all-for-one in the mix.  German taxpayers are especially vehement in their protests and they are disgruntled with their Chancellor, Angela Merkel.

German Banks expressed disagreement with the regulators from the EBA.  The bank’s complaint with the EBA is that the tests only instruct banks to mitigate cash shortfalls and implement either a mandatory restructuring or raise pure equity.

Germany’s financial institutions are regarded as the most solid in the region.  47 percent of Germans want Greece expelled from the euro zone.  However, Italy’s request for bailout funding has also met bitter resentment in Germany.  68 percent of the German taxpayers view Italy as a much bigger threat to the concept of a single currency.  Germany’s Finance Minister, Wolfgang Schaeuble reiterated his feeling that Greece was endangering the euro.

If Spain needs a bailout, the EU does not have the funding to avoid default.  Italy may have the same effect.  The Germans are tired of loaning their funds to Greece, Portugal and Ireland.  Early in the recession, the fear of contagion has never really been addressed.  It was always suspected that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) would be unable to implement enough austerity cuts to deal with their debt. 

The euro has fallen sharply to $1.41 this week.  At one point, the value was a slow as $1.38.  The conditions in the PIIGS may well cause the return to national currencies.

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