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

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

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

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

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

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

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

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

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

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

Wednesday’s devastating auctions in Italy and Spain added more wind to the swelling perfect storm that is pummeling the populations and financial security of all investors in the region.  Today, Morgan Stanley issued a report indicating that a run on Greece’s banks would ignite a ferocious series of bank failures across the continent. From the first day of the euro zone crisis until today, euro zone politicians and financial chiefs have said contagion would be contained.

Meeting after meeting resulted in plenty of positive spin, but no initiatives close to meeting the financial terms necessary to quell or sooth the toxic debt that characterizes the euro zone.  On Wednesday, the euro tumbled 1 percent against the USD, settling at a two-year low. The pillage continued on Thursday touching $1.2345 before closing at $1.2365.

There are many triggers in this fall from grace. On Wednesday, Italy’s ten-year bonds crossed the dangerous 6 percent mark as Spain was forced to pay more than seven percent for their 10-year notes. Add the confusion about Greece and throw in a worsening recession plaguing almost all the euro zone and the positive spin has stopped.

Today the head of the European Central Bank (ECB), Mario Draghi, built his case for immediate action to calm the markets.  Draghi said it was time for euro zone leaders to step forward, halt the step-by-step austerity approach and enact new strategies that are comprehensive and sweeping.  The ECB has been throwing lifelines to its members in the form of favorable LTRO’s, participation in bond sales and three-year loans that are uncharacteristic and possibly outside the scope of the region’s central bank.

This strategy has proved ineffective because it was only designed as a temporary lifeline until such time as the euro zone policymakers devised a sold plan.  The largest obstacle to resolution is Germany, whose economy is relatively strong.  To pave the way for support, Chancellor Merkel announced a healthy 4 percent wage increase in Germany.

Also influencing investors is a poll revealing that Greece’s radical left SYRIZA party was now favored to win the mid-June elections. SYRIZA’s stance is opposition to the bailout and the accompanying terms to which the country agreed.  Greece was slow to commit to repayment and presumably has made behind  closed door terms to exit the euro zone.  Support for anti-bailout factions has increased as the euro zone asserts it is preparing for Greece to exit the single currency.  Greece’s senior citizens do not share this point of view but the country’s youth is firmly committed to oppose anti further repayment plans.

In Spain, it is expected that the government will recapitalize Bankia, which has filed a request for 18 billion euros to meet operation costs. Deposits to Spain’s banking system are shrinking every day. Most banks cannot meet their daily needs. It is suspected that businesses and individuals are hoarding their euros, which will be far more valuable than the national currency if the euro zone collapses or if Spain leaves the euro zone.

The ECB’s Draghi said that the euro zone’s solvent banks would survive run on banks if a European guaranteed deposit fund was increased. This is another idea that has gained some traction but no commitments.  Just one more final gasp that would need Germany to change its position.  With Merkel’s tenuous grip on the country is in jeopardy, she is forced to follow the lead of taxpayers.

On Thursday, Draghi informed a packed European Parliament that the meter was ticking.  He said the single currency could collapse and the central bank does not have the financial resources to continue supporting bankrupt countries. The most outspoken critic of current policymakers was voiced by a governor from the central bank of Italy, Ignacio Visco who said, “political inertia and bad economic decisions had put the European edifice at risk and only a coordinated political union could reverse the trend.”

European Union Intervenes     

Spain received some unexpected help late in the day.  The European Union threw two lifelines to the region’s forth biggest economy.  EU Economic and Monetary Affairs Commission leader, Olli Rehn said the EU was willing to give an extra year, until 2014 to reduce its debt to EU standards or 3 percent of GDP. Spain’s equity markets hit a nine year low.  However, good intentions aside, Germany has been unwilling to rise to Spain’s defense.

The second lifeline came in the form of a statement indicating that the European Stability Mechanism (ESM) might make direct deposits to insolvent banks.  This would appear to counter German’s policy.  Once again, it’s more euro zone spin until something actually happens.

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.

More mixed messages from the G8 about the euro zone crisis and Greece were the results of an unproductive summit.  Sometimes it is hard to justify all the conferences and meetings that produce absolutely no concrete course of action and usually raise more questions than they answer.

The USA, Germany, France, Canada, Italy, Japan, Russia and Britain comprise the G8. Italy and France are enduring serious economic turmoil.  It was hoped that this weekend get-together would produce something encouraging.  No such luck.

Sometimes it is impossible to relate to all the spin from world leaders.  Interpreting the spin from the G8 summit at Camp David boils down to one word; growth.

President Barrack Obama wants growth at home and growth in the euro zone.  Newly elected French President Francois Hollande wants growth in France.  If anyone can figure out what Greece wants, other than have the rest of the world support them ad infinitum, please send it in.

The results of the weekend G8 summit at Camp David seem to reflect a quiet desperation.  Now that it seems austerity will not work, the G8 is recommending growth.  That sounds simple enough but how does a continent that is mired in recession go about growing its GDP?

Quantitative easing.  That is how it is done.

Germany and Chancellor Merkel want austerity.  If a country wants Germany’s money, they must meet Germany’s demand for austerity.  Sometimes Germany sounds more flexible than its taxpayers which cannot understand why Greece would receive any German funding.

If these countries had the demand, they would not be in recession. Demand is slow, bond yields are at unsustainable levels and the public is taking to the streets.  Obama summarized his take on the meeting as follows. “As all the leaders here today agreed, growth and jobs must be our top priority.  A stable, growing European economy is in everybody’s best interest, including America.  Put simply, if a company is forced to cut back in Paris and Madrid that might mean less business for manufacturers in Pittsburgh or Milwaukee.”

Try to figure that message out. How does that series of events help to grow Europe’s teetering GDP?  Is Obama so concerned about his re-election that he cannot relate to anything outside his re-election. One underlying theme is that the G8 believes the euro zone has the funds to overcome it financial challenges.  In other words, good luck to you across the pond because we cannot help.

The positive spin from this G8 summit is that world leaders understand Greece’s plight.  Everyone wants the country to remain in the euro zone.  That could happen were it not for the Greeks themselves.

Besd9ies the wish to keep Greece in the euro zone, the only significant policy announcement was a recommendation that austerity should be tempered and some form of quantitative easing be put in motion to add the possibility of growth into the equation.

The Group of Eight leaders issued a statement saying that they supported Greece remaining in the euro zone but asserting that they must meet the bailout conditions. The UK seems like a disinterested third party but in reality, their economic structure relies heavily upon the global financial strength.  A series of international defaults will put the British economy in troubled waters.

Prime Minister Cameron told reporters, “Contingency plans need to be put in place and the strengthening of bans, governance, firewalls, all of those things need to take place very fast.”

The G8 will move from Camp David to a NATO meeting in Chicago where Afghanistan will be the central topic. Chicago can expect a rash of protests this week.

The question is no longer whether Spain can avoid default.  Rather, the question is when will Spain default or be forced to pursue a bailout package that will make Greece look like a toddler cousin.  Euro zone financial ministers have said all along that there was not enough support to keep Spain above water.

The Spanish unemployment rate dwarfs unemployment in Greece.  By all accounts, Spain has had no bounce since the recession began.  Until today, yields on Spain’s bonds were unsustainable.  ECB bond activity may have temporarily eased Spain and Italy but private investors are remarkably disinterested.  Spain’s problems are inherent, systemic and there is no realistic remedy on the table.  Whatever is out there is nothing more than a wing and a prayer.

Like Greece, the natives are restless, angry and discouraged. Unemployment for youthful workers exceeds 50 percent.  The national unemployment exceeds 27 percent.  True unemployment cannot be tabulated.  One of the core components of Spain’s demise is the housing market.  Banks are literally giving away properties as quickly as possible.

The harsh real estate reality is that housing prices have already fallen as much as 50 percent and are expected to hit bottom after another 20 – 30 percent fall.  Banks are holding their own auctions.  Some are offering apartments at 70 percent below 2007 values, just a hair less than Greece’s private investors recouped.  Many have resorted to 100 percent financing.  The number of housing transactions is 50 percent less than in 2007 and 26 percent last month.

Many of Spain’s banks are operating at negative cash flow.  As the unemployed withdraw from their savings, banks are hard-pressed to meet their obligations.  For the majority of banks, the wholesale window is closed.  Credit rating firm, Fitch, has “blacklisted” Spanish debt right alongside Greece, Portugal and Ireland.  Not exactly the company that the euro zone’s fourth largest economy likes to keep.

Spain’s banks hold an estimated 176 billion euros of distressed real estate.  The government has forced the banking sector to write down a mere 50 billion euros.  In efforts to bring stability, the government has directed the merger of a number of banks.  The merger will reduce the country’s banking institutions to just 10 banks.

However, Bankia was created from the merger of seven regional banks.  The bank is writing down 3.4 billion euros in distressed loans.  That write-off is 11 times the bank’s net profit in 2011.  The bank has placed 1400 homes in the real estate market with prices 50% below their value.

The best description of the quandary in Spain was offered by a London analyst who said, “The way banks are raising capital, through accounting, merging and amortizing losses over two years is a kind of capital-less raising.”  Neither the euro zone, nor the global marketplaces need anymore, creative accounting from the region.

Spain has two choices.  The country must find private investors or ask the euro zone for a substantial bailout that will dwarf the Greek bailout. Then, the ECB will have to provide bridge financing.  Sound familiar?

Private investors are not buying.  Last week’s auction was embarrassingly under subscribed.  Through aggressive lending and purchasing strategies, the ECB has already pumped more than 1 trillion euros into the euro zone’s failing economies and banks.  As a result of the housing crash, Spanish banks are laden with bad debt. 

Prime Minister, Mariano Rajoy, has said that a bailout package was not an option.  However, he is implementing the most stringent austerity cuts in Spanish history. The cuts are modeled after recommendations by the euro zone. Looks like Rajoy is paving the way for assistance, but talking a brave game in the meantime.

Spain, like every euro zone entity, is practicing positive rhetoric instead of offering tangible solutions.  According to Raja, the spending cuts will solve a myriad of problems, unless the economy recedes more than 1.7 percent GDP in 2012.  Apparently, negative 1.7 GDP is a good thing.  However, even negative 1.7 percent GDP is an overly optimistic projection.  The euro zone media circus is prey to these strategically timed releases, but private lenders see handwriting on the tombstone.  The only good bets in Spain are short.  If Spain goes, Italy may also go.  If Italy goes, the euro zone will dismantle.

The euro zone appears to be leaning on additional funding from the IMF.  China said earlier in the month that they “could not buy Europe.”  China appears to be supporting the euro zone by staying invested.  China is facing a slower GDP growth than projected and the country is attempting to stabilize the ascending inflation rate.

The US has said it would not increase contributions to the IMF.  In an election year, such a move would be disastrous.  The euro zone will have their hands out to the IMF when the finance ministers arrive in Washington next week.

Despite all this negativism, the euro caught a wave on Wednesday and came off weekly lows of $1.30.  Even that bit of encouraging news is farcical.  Had the ECB not intervened, the bond sales in Italy and Spain would likely have failed.

Amidst this news, troubling political developments that could well end the single currency alliance are taking shape.  In Greece, new elections will take place at the end of the month.  There is a strong possibility that the change in leadership will result in relaxation of the severe austerity program that was a condition of the euro bailout package.

The biggest political problem may be taking place in France.  With elections scheduled for May 6, presiding president Nicolas Sarkozy faces a stiff challenge from Socialist Francois Hollande.  The challenger has lost a little ground but is still favored to derail Sarkozy.  Hollande’s platform includes a review of France’s alliance to the single currency.  If France reneges on its neighbors, kiss the euro zone goodbye.

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.

Creditors unexpectedly walked away from the bargaining table after late Friday night negotiations came to a halt.  The news is likely to reshape the Monday meeting of finance ministers from the euro zone.  At stake is the fate of billions of euro Greek bonds and very possibly the future of the euro alliance.

The plan on the table would require investors to accept a 65 – 70- percent loss on current Greek obligations.  Greece would take the remaining balance and convert the balances to 30-year bonds that would yield an average of 4 percent.  The plan also calls for a 15 percent cash sweetener from  

Private investors left town but agreed to further discussions via telephone.  The private investors have retained The Institute of International Finance (IIF) handle their negotiations.  Charles Dallara is the chief negotiator.

While this general remedy creates an outline, there are many conditions and aspects of the negotiations that need to be resolved.  Drawing of the mere paperwork is tedious and could not be completed in less than three weeks from acceptance.

One of the big concerns is what role the European Central Bank, (ECB), the European Union (EU) and the International Monetary Fund (IMF) will play in the rescue plan.  Greece has an upcoming 14.5 billion euro call that is covered by the European Finance Stability Fund (EFSF).  All agreements are contingent upon that infusion.  The total bailout package consists of 130 billion euros.

The IMF has stated that no funds will be extended to Greece unless a plan is in place to reduce the debt from 160 percent of GDP to 120 percent by 2020. With Greece in the midst of its fifth recession, there is little hope for GDP growth.     

The finance ministers meeting in Brussels would have to approve whatever plan is presented and the clock is clicking.

Greece Calls The Shots

The bailout of Greece is about as far from a win-win scenario as could be imagined.  The only winner is Greece, the country who cooked their books to gain admission into the euro zone.  It is anybody’s guess what financial condition accurately portrays the depth of the Greek crisis.

Despite the pitiful condition of Greece, the country holds a stacked deck. The creditors must decide between a ”voluntary structured” loss or a “coercive” exchange. Taking a 65-70 percent hit strikes a stale note, but the alternative could be worse with far reaching consequences.

However, Greece’s creditors face the reality that the Collective Action Clauses (CAC) that will be attached to their debt.  If Greece activates these clauses, hedge fund managers have little control over how the final deal will be shaped.  As the majority of Greek bonds are held by euro zone banks. Greece simply needs to appease the banks and the hedge funds will be forced to comply.

Greece can structure the CAC to a loss ratio that European finance ministers will accept.  That 65-70 percent ratio will settle bank resistance.  If the bonds were handled on a one-on-one formula, the hedge funds would have more clout.  As it is, Greece will need to negotiate further with hedge funds.  They can simply force the deal upon the funds. 

Watch Out For Portugal

After the Greek negotiations fell apart, the focus immediately shifted to Portugal, another euro zone member in a prolonged recession.  Standard & Poor’s has reduced Portugal debt to junk bond status. 

This has led to speculation that Portugal will be the next country to seek voluntary relief from its creditors.  Lloyds Bank in London issued a statement saying that the gap between 10-year Portuguese bonds and the 10-year German bunds will widen between 100 and 200 basis points.

Euro zone finance ministers have repeatedly said Greece was a one-time situation but evidence points to the contrary.  The region’s biggest fear is contagion but countries like Italy, Hungary, Spain and Portugal are mired in recession and there seems no clear path to GDP growth.  Everything in the euro zone points to negative growth.  The net effect is that no matter how much money is thrown at these countries, without growth the crisis will only intensify.

On Wednesday the Spanish and Italian six-month bond sales were successful as yields were cut in half.  The interest on Spain’s short-term auction lowered to 2.4 percent.  Interest on the two-year bonds lowered to 3.25 percent.  Italy’s six-month interest was the lowest rate since September 2011.  Italy successfully sold 9 billion euros in the six-month bonds.

The success of the Italian bond sale was attributed to a rash of new austerity cuts and an injection of relatively inexpensive long-term funds from the European Central Bank (ECB).

Spain and Italy face more critical tests on Thursday when the countries will sell longer-term debt in its 3-year and 10-year bond auctions.  Italy seeks to sell longer-term bonds amounting to 8.5 billion euros on Thursday.

The immediate effect of the two-year bond sales was cause for optimism.  Since last month’s auctions, the ECB has pumped more than 500 billion euros into euro zone banks.  The success of the two short-term auctions gave a temporary boost to euro zone equities.

However, as the day wore on and as American markets fell in light trading, the 10-year Italian bonds jumped to 7 percent.  This does not bode well for tomorrow’s critical auction.

The 10-year bonds are more reflective of investor confidence.  Italy is under great pressure to sell bonds totaling 91 billion euros in the first four months of 2012.  One month ago, Italian 10-year bonds sold at an all-time high of 7.56 percent.

The ECB is anxious to help euro zone members.  15 of the zone’s 17 members states are subject to a review by ratings agency S&P. New Prime Minister Mario Monti received a vote of confidence when his austerity package was approved. However, the next milestone will be more pressing.  Italy must address its lagging GDP.

Slow GDP is a byproduct of the euro zone’s second recession. 

Deutsche Boerse and NYSE Move Merger Date

In an effort to buy time to convince European regulators that the $9 billion deal met anti-trust standards, Deutsche Boerse and NYSE Euronext extended their deadline from December 31^st 2011 to March 31^st, 2012.  The two exchanges had agreed to merge by February 14^th.

The Securities and Exchange Commission received the extension request.  In November, the exchanges had agreed to modifications.  NYSE Euronext agreed to spin off its futures trading and Deutsche Boerse agreed to provide open-access to its clearing unit. The concessions were designed to soothe Belgian regulators.

The regulators were unimpressed and two weeks ago pushed for limitations in deviated trading for the first three years.  The merger would combine forces that handle 90 percent of European trades.

The proposed merger has already received the blessing of the U.S. ant-trust authority buy must clear the European Commission standards.  The commission is expected to reach a ruling in early February.

As U.S. Equity markets prepared to close a volatile week of trading amidst historic transaction volume, the markets held on to post a second consecutive day of gains.  The tumultuous week will mark the third consecutive week of losses and many analysts are neutral about the direction and volatility of the marketplace.

By 2:00 p.m. Friday, only 6 billion shares had traded. The daily average for the week was 16 billion shared traded.  The three-week losing streak is the worst three-week decline since March 2009.

On Thursday, the market reacted positively to an unexpected jobs report.  Last week, the number of Americans fell to a four-month low.  Initial claims fell 7,000 to a seasonally adjusted rate of 395,000, 5,000 below projections.  Many analysts suggested that this improvement indicates the economy is not headed for a double dip.

In support of that possibility was another surprising statistic.  Retail sales climbed by 0.5 percent in July.  The biggest jump since March. The U. S. Commerce Department revised the June retail report showing a rise of 0.3 percent. 

On the downside, consumer confidence fell to the lowest level since 1980 when the country was in recession.  The factors contributing to the fall in consumer confidence are high unemployment, rising fuel costs and most importantly the lack of confidence in government elevated during the increase in the country’s credit limit and accompanying spending cuts.

75 percent of respondents expressed negative feelings about the state of the economy.  The level of disappointment was just below the 1980 level of 82 percent. Survey director, Richard Curtin, said, “Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role.”

The public display of the worst of Washington preceded the month long vacation by the House of Representatives. This particular wing of government constitutes the most ineffective House in the history of the country.  Consumers see the only hope for the country to enact positive legislation to deal with unemployment is a remote hope that certain Republicans will work together with Democrats against the Tea Party and pass responsible jobs programs.

The relative quiet in Washington is greatly appreciated after the debacle that caused the country to lose its AAA credit rating.  At least the Cantor-Boehner media circus has stopped for a few weeks.

The desperation in Washington is equaled by the state of affairs in England and throughout the Euro Zone.  Citizens are in open revolt in London town as the economic crisis continues to escalate.

In Europe, French banks are under pressure because they hold a significant number of bonds in the Euro Zone’s southern tier.  The European Securities and Markets Authority pushed the European Union members to ban short sales. 

The ban against short selling was received with mixed feelings.  However, the STOXX Europe Index rose 4.5 percent as broader equity markets rose 3.7 percent. 

France, Spain, Italy and Belgium quickly imposed the ban against short selling.  Some of the major institutions rose sharply.  Societe Generale rose 5.7 percent, BNP Paribas climbed 4.2 percent and Credit Agricole added 2.1 percent. 

German Chancellor Angela Merkel, who is scheduled to meet with French President Nicolas Sarkozy, said the ban on short selling created the impression that the Euro Zone needed a rescue package.  Merkel is on the mark because the euro needs help. 

The current actions to help Italy and Spain fall far short of realistic bailouts.  The Euro Zone is in trouble and they members do not have the liquidity to reverse the situation.  It is difficult to imagine that a major austerity plan and some form of quantitative easing can be implemented.  Without these actions, the euro seems doomed.

A report from S&P Case Shiller reported that housing prices fell by 2% in March 2011 compared to February 2011.  Housing prices hit their lowest mark since  2009.  Over supply and decreased demand were the main reasons for the slump.

The S&P Case Shiller is a report that is based on the housing market in 20 metropolitan cities.  The 20-city index was at 138.16, more than one point lower than the 139.26 rate in April 2009.  David Blitzer, the chairman of the S&P indices explained the danger of the report. “This month’s report is marked by the conformation of a double-dip in home prices across much of the nation.  Home prices continue on their downward spiral with no relief in sight.”

Eight of the 20 cities showed more than a one percent decline in March.  Prices in all 20 cities dropped 3.6 percent in year-over-year comparisons.  Analysts had projected a drop of 3.3 percent.  The report points toward a double dip in the housing sector.

More importantly, the declines in the past 12 months erased the positive gains over the previous government-assisted 12 months.  Home prices have now returned to their 2002 levels.  Of the 20-cities in the report, only Washington reported monthly and annual increases.    

The Case Shiller report cites the components causing the slide to be tight credit, lack of demand, the soaring rate of foreclosure and the number of one-family homes for sale.  When these factors all come into play, the housing prices have only one direction to go.  Regionally, the northeast is the most stable housing market, but prices are fall below the 2006-2007 highs.

A year ago, housing prices were on the rise, up 4 to 4.5 percent.  Since their post recession high, prices have given back 4 percent.  CNBC reported that housing industry leaders acknowledge a steep decline in prices but did not feel the market had bottomed out.

To offset the demand for one-family homes, the residential rental prices have gained strength.  What was once a big part of the American Dream, owning a home, seems regarded as a risky dream.

It is no wonder that Consumer Confidence slid in May.  As Washington continues to bicker over raising the debt limit, consumers are spending less and saving more.  The mixed news from Washington where one party favors a pull back with Medicare and the other party paints a picture of increased taxes and the increased price of oil has caused a dip in Consumer Confidence.

As oil prices rise, Consumer Confidence lags.  43.9 percent of May job seekers say jobs are difficult to find.  That statistic reflects an increase of 1.5 percent in April.  Consumers have a dim view of the employment situation.  20.8 percent of consumers expect less jobs to be available in the next six months.  That figure tops the April outlook by 2.1 percent.

The housing report and the consumer confidence report appeared to have little impact on equity markets and the dollar remained unchanged Tuesday morning.