Tag Archive | "Sovereign Debt"

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Greece Wins For Now


Late Monday night, euro zone finance ministers and the International Monetary Fund (IMF) reached an agreement that gives Greece more breathing room than expected. The agreement came after weeks of tense negotiations and for the time being appears to have thwarted the possibility of an unstructured default by Greece.

Greece’s Prime Minister, Antonis Samaras, was quick to applaud the deal and promised that “a new day for Greece” will commence on Tuesday. Greece has endured stern austerity cuts and has been unable to realize full value on several asset sales. The agreement has both short and long-term consequences for the ailing economy that has suffered seven recessions in recent years.

The central stipulation of the deal is that lenders agreed to reduce Greek debt by more than 40 billion euros, which should cut the sovereign debt to 124 percent of GDP by 2020. By 2022, Greek debt could fall to 110 percent of GDP if the finance ministers take the actions they agreed to on Monday.

2016 Could Provide First Budget Surplus

The 2022 goal reflects what many analysts project as an inevitable write-off of obligations due in 2016. It is in this year that Greece is projected to achieve its first primary budget surplus in many years. The idea of a projected write-off may be a stumbling block when the deal is presented to the Finnish, German and Dutch parliaments. German Finance Minister Wolfgang Schaeuble has already asked the German Parliament to consider the deal.

The entire agreement is scheduled to be approved and signed on December 16, 2012. Several international leaders praised Greece for its austerity measures, but there are serious questions about how the ailing nation can regain its economic footing.

Zero Interest for 10 Years

Among the terms of the agreement, finance ministers agreed to trim interest rates on sovereign debt loans and extend the term of the loan from 15 to 30 years. Interest on European Financial Stability Facility loans will be waived for ten years. If Greece cannot succeed under these generous concessions, there is no out in sight for the country.

Greece is set to receive 43.7 billion euro in for installments, but must meet the stringent austerity conditions. 34.4 billion euros will be advanced to the government in December. 10.8 billion euros will be allocated to  sustain the budget. Another 23.8 billion euros will be used to shore up the country’s ailing banking sector.

In a separate section of the agreement, the finance ministers agreed to return about 11 billion euros in profits accrued in their central banks which were prompted by actions taken by the European Central Bank (ECB). The IMF agreed to honor the deal after taking a different stance over the past few months. If the IMF had halted lending to Greece, the deal would not have been viable.

One portion of the deal dealt with handling hedge funds. The finance ministers agreed to deter hedge funds from manipulating interest rates by entering into a 10 billion euro program. This program will be used to purchase outstanding debt from hedge funds and private investors at $0.35 on the euro.

Samaras faces his own internal battles at home where the Greek Parliament is now controlled by a rival party, SYRIZA. This part has already renounced the deal as woefully inadequate in making Greece’s debt affordable.

Germany’s approval of the plan hinges on convincing Parliament that the country’s contributions will not be subject to a write-off. To ensure this, German funds will be earmarked into a strengthened “segregated account” that will prevent default.

The IMF came on board because it believes the extended term and favorable interest rate makes a Greek recovery possible. Some negotiators pointed out that the body would consider additional write-off if Greece continued to sustain its austerity budget. This new agreement is definitely a step in the right direction, but will come under close scrutiny from the Dutch, Finns and Germans.

 

 

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Germany Won’t Let ECB Yield Cap Pass


The euro traded slightly higher against the US dollar as a result of speculation surrounding a Der Spiegel article that surfaced during the session.  According to the infamous German magazine, European Central Bank officials were mulling over a potential bond yield cap for indebted EU members, with particular emphasis on Spain and Italy.  The decision would be ultimately made in September – a month when some traders are expecting another rate cut of 25 basis points by European policymakers.

Although potentially effective, the measure is unlikely to materialize for more than a handful of reasons.

Germany, for one, will continue to remain a staunch advocate against a potential bond buying scheme.  German officials, from the beginning, have been vehemently against any type of asset purchase measure as it would increase the specter of future inflation and add sovereign debt to the region’s balance sheet.  Policymakers are no doubt making comparisons to the Federal Reserve in the US, which has amassed a total balance sheet of about $2.9 trillion in assets.  This is a little more than 3 times the amount seen before the onset of the financial crisis in 2007 and is definitely worrisome for Bundesbank policy heads.

The same policymakers would also question whether or not the European Central Bank even has the power to overstep its mandate of price stability – and move into sovereign maintenance territory.  Although the European Central Bank may ultimately find a workaround to purchase short dated securities or issue loans, it may not possess the lawful ability to buy short and medium dated securities ad infinitum.  Such a move would have not only German, but other more fiscally conservative member countries like Finland questioning the constitutionality of the ECB’s decision.

And, finally, the logistics of a plan could be more than ECB bankers are willing to take on.  Should the European Central Bank decide to implement a bond yield cap, central bankers would not only decide the appropriate adjusted yield for Italian and Spanish bonds (as well as other indebted nations) but also how to effectively deal with speculators.  The Swiss National Bank has been in a similar situation, defending a domestic currency peg with the Euro.  However, the Swiss franc market is smaller when compared to the Euro, and that could cause a lot of headaches and foreign exchange losses for the central bank.  Not to mention, if benchmarks are set and the ECB fails to defend, the monetary body could lose all credibility in the market.

Although the measure could potentially be good for the Euro and the EU, the likelihood of such a plan coming to fruition is next to nil.  Political and monetary scenarios, as well as Germany, are likely to make sure of that.  As a result, even more focus will now be placed on the ECB’s September meeting in weighing the single currency’s short term future prospects.  But, for now, expect a bit more range bound trading as we head into the tail end of the summer.

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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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Euro Leaps Higher


For followers of market driven data, the news from the euro zone presents puzzling trends.  The European Union and the euro zone are struggling with high unemployment, low manufacturing, low consumer confidence, a debt crisis that expands every day and a volatile euro that defies logic.  Most of the economies in the region suffering their 3rd, 4th or 5th recession in the last six years.

Citizens are walking away from metropolitan areas and returning to the countryside soil, much of which has been neglected for 50 years or more. Unemployment among the young is more ten 30 percent.  For university graduates or young persons with expertise in a trade, the only unemployment solution is to escape.  Only one euro zone political leader has held office since 2008.  And, that leader, Angela Merkel, has lost the confidence of her constituents.

Investors want the euro zone to succeed but they are out of patience.  Feeding off baseless political rhetoric, sophisticated investors are shying away from most of the region’s bond markets.  Italy and Spain have been forced to offer unsustainable yields on both short and long-term bonds. Spain is in the midst of a banking crisis that could collapse at any time.  The euro zone has committed more than 100 billion euros to rescue Spain’s banks, but thus far it appears as more idle talk rather than anything else.

Euro zone finance ministers have lost their credibility while the European Central Bank and the International Monetary Fund and the European Union have poured more than 1.5 trillion euros into losing propositions. Having gone about as far as possible, sovereign debt originators are now turning to international and private investors to keep the region functional.

The G20     

At this week’s G20 summit in Mexico, the positive spin continued.  European leaders told anxious economies that a plan was in the works to develop “concrete steps to integrate its banking sectors.”  Throughout the debt crisis, the only consistent behavioral pattern for the euro zone has been to assess what international investors want and then announce a remedy along those lines.  Time after time, these announcements have hit a roadblock and been left for dead.

President Barrack Obama and Treasury Secretary Timothy Geithner echoed support for this initiative but Obama was quick to emphasize that this plan did not resemble a silver bullet.

IMF chief Christine Lagarde, whose bank just pledge 1.4 billion euros to struggling Ireland, was enthusiastic about the announcement. “It doesn’t matter if it takes a long timer.  It has got to be done well.”  Lagarde added that all short term remedies had to be consistent with the long-term plan. This is the prototype that advocates of growth have been awaiting. This strategy could also come to the aid of Greece and Portugal who may receive extended terms to their bailout packages.  This sounds more like the plan that France’s Francois Hollande recommends than the pan Germany’s Merkel supports.

After pain received a pledge to capitalize the Spanish banks, it has become apparent that the country needs a more comprehensive bailout because the government cannot meet its obligations. While the euro zone could survive a Greek default, it will not survive a Spanish default.

To complicate the landscape further, Italy has now asked the European Union for assistance with its sovereign debt obligations.  These funds could conceivably be issued by either the European Financial Stability Facility (EFSF) or the European Stability Mechanism. The funds would be invested in the purchase of Italian bonds and thus reduce the yield for short and long-term debt.

Italy’s president Mario Monti said the EFSF or ESM investments were only to be deployed to countries that are compliant with the austerity cutting measures required by the euro zone members.  Monti does not want these investments considered as part of a bailout package. Between the ESM and the EFSF, there would be nearly one trillion euros ready for investment by the end of this month.

The fate of the euro and the euro zone falls into the hands of Germany’s Merkel. The Chancellor must explain why her vision of the euro zone has changed from pro-austerity to pro-growth.  This strategy is not popular with Germans who are the cornerstone of Europe, the world’s richest economic entity.

Merkel received heated feedback for her announcement earlier in the month that supported extending Spain’s time frame to reach the country’s targeted deficit reduction targets.  The success of this new, long-term initiative will certainly determine Merkel’s legacy and political future.

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Spain Down Euro Up


With Spain on the brink of collapse and poor investor appetite for Italy’s bonds, a May Day rally moved the euro and the Swiss franc to one-month highs against the USD.  The euro climbed by 0.2 percent settling at $1.3274.  The dollar gave back 0.2 percent to the Swiss franc closing at 0.90500 francs.  Given the instability in the euro zone, the currency has not fallen below the $1.30 mark since December 20th.

The April fall of the euro by 0.8 percent seems more realistic. The currency finished April with its worst monthly performance since December 2011. The rise of the euro is based on unsettling economic developments in the US.  Data released on Monday lent to concerns about the strength and depth of the US recovery.  Poor consumer sentiment and disappointing manufacturing data from the Midwest caused a lowering of GDP projections to 2.2 percent.

Both the euro and the dollar fell against the yen.  The euro hit 2-weeks lows against the yen as the US fell to 2-month lows at 79.10.  In anticipation to Tuesday’s meeting of the Reserve Bank of Australia, the AUD fell 5 percent to $1.0418 USD.

In the US, equity markets look for relief from the Federal Reserve, but several of the Fed Governor’s have been vocal in dissent of a possible QE3 stimulus package. The demand for US exports has been diminished by the crisis in Europe, the USA’s largest importer.

Spain Fighting The Inevitable

Last week, S&P lowered Spain’s credit rating to BBB+, regarded as generous by many investors.  On Monday, the axe fell for 9 of the country’s 10 largest banks that were lowered to junk rating.  Spain has pushed for consolidation of the country’s banks.  The result of this has put undue pressure on the 10 banks.

The country’s banks have taken on large pools of distressed and defaulted assets and are finding dwindling deposits and skeptical investors.  The country’s banks are the largest holder’s of sovereign debt. 

Greece was spared because the region’s two largest economies, France and Germany, were heavily vested in the struggling economy.  Spain does not have that luxury.  The only elements that can help Spain are the continuation of the ECB to purchase Spain’s debt.  Technically, Spain does not meet the IMF’s stringent requirements.  Spain’s Prime Minister and his cabinet remain steadfast that Spain does not need outside support.

Without a rescue plan, the question is no longer will Spain default but rather when will Spain default. The populace wants change and a loosening of the austerity programs that are shrinking GDP.

A Monday report regarding Spain’s 24.4 percent unemployment rate eerily resembles US unemployment during the Great Depression in the 1930’s.  A study of the US unemployment rate in the 30’s suggests that Spain has not seen the worst.   Since July 2007, Spain’s unemployment rate has been a vertical climb without any plateaus of relief.

There appears no relief for Spain.  Unlike Greece, Spain’s default could easily be unstructured. This event may trigger a domino effect for nations like Portugal, Ireland and Italy. The European Stability Mechanism (ESM) is underfunded to meet these cumulative needs.

Spain’s ten-year bonds are yielding 6 percent, an unsustainable rate. While the country has implemented austerity cuts, they appear too little, too late.

France And Greece

Two key elections this week may shape the trajectory of the euro zone.  Incumbent French President Nicolas Sarkozy is a distinct underdog to keep his job.  Socialist Francois Hollande is the favorite and has run on a platform calling for reform in the euro zone treaty.

In Greece, the outcome to the elections is not clear.  However, there are undertones that Greece will not comply with its bailout agreement deemed unacceptable by the citizenry.

Austerity Programs

What has been increasingly apparent is that austerity cuts alone do not work.  The better formula for growth involves well-considered cuts and support by the ECB and IMF.  These loans are not quantitative easing, which would be the best way to proceed.  However, the ECB funds are low interest and fairly loose terms.

Austerity cuts only address one side of the problem.  Economists advocate a balanced approach that can lead to growth, the most important component in a recovery. The euro zone’s paymaster does not see it that way.  Germans have difficulty funding poorly administered economies.

No matter how you slice the pie, euro zone’s recovery must have a path for growth.  If Spain, or any other euro zone nation, were as focused on growth as they are on austerity, the economy would have broader appeal to investors.  There is no way standalone austerity cuts can accomplish the job.

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EU Take Make Progress


The European Union (EU) reached agreement on a plan to capitalize Europe’s struggling banks and show a united front to the rest of the world.  26 of the 27 EU members agreed to treaty changes that would create more responsible guidelines for budget discipline. 

Britain was the sole dissenting member. The UK refused to agree to treaty modifications.  After two days of tense negotiations, Britain was unable to receive the concessions necessary to participate in proposed changes to the existing EU treaty.

All 17 members of the Euro Zone agreed to the new terms for a stronger, more harmonious and more disciplined treaty. Nine states that are not members of the Euro Zone but are members of the EU supported the move to a new treaty with tighter debt standards that are designed to prevent future collapses. 

Europe has re-entered the treacherous waters of a second recession. As the largest importer of American goods, Europe’s never-ending woes continue to haunt US markets as well as markets around the world.  Originally, it was believed that a failure in the Euro Zone would have a minimal impact on the US economy.  That theory has been dashed.

The US needs a strong Europe.  Both President Obama and Treasury Secretary Timothy Geithner have offered encouragement to EU members.  However, President Obama has made it clear that the US could not participate in EU loans or larger contributions to the IMF.

European Central Bank President (ECB), Mario Draghi, expressed approval for the tighter budget restraints that the 26 EU members.  One day earlier, Draghi dashed hopes for broader ECB investment.  Draghi maintains that the ECB can continue to purchase sovereign debt but was not chartered to loan money to regional banks.

Instead, Draghi suggested that the European Financial Stability Fund (EFSF) was the correct vehicle to assist Euro Zone banks.  France had proposed that the ECB could lend money to the IMF so that the IMF would have the resources to help banks. 

Draghi’s clarification necessitated a shift for EU members.  On Thursday the ECB’s governing council agreed to continue purchasing member nation bonds in the amount of 25 billion euros per week.

Germany Chancellor, Angela Merkel, threw her support behind the proposed treaty changes.  As Germany is the largest economy in the region, German endorsement carries weight.  If Merkel were not in agreement, no plan could proceed.

However, Merkel is walking a fine line in her homeland.  Her party holds a one-member majority in the Parliament.  Some party members reject Merkel’s commitment to other EU members.  To get approval, Merkel needs help from outside her party.

Herein lies a large part of the Euro Zone and EU problem. First the members must agree upon policies to avert collapse and then they must secure approval from their national parliaments.  This is no easy feat.

With Friday’s announcement, the 17 Euro Zone members and the 9 members in the EU but not in the Euro Zone must submit the bill to their own legislative bodies.  This process would take a minimum of three months.  Countries like Ireland, Portugal, Spain, Italy and Greece need help now.  Despite aggressive participation in the bond markets, Italian bonds are yielding 6.5 percent, which is unsustainable.

The interactions between media releases and actual decisions never seem to happen.  One day’s good news is followed by three days of bad news.  There are endless meetings but no action plan. By the time various parliaments consider solutions, the situation has already intensified.

Banking Nightmare

The plight of Euro Zone banks is alarming. Earlier this year, the European Banking Authority (EBA) insisted upon new stress tests.  In this second round of testing, the EBA increased the requirements.  Observers agreed that the stress test formulas were far inferior to standards used by the US.

These flimsy tests have been challenged by the recession on the Continent.  The banks have come up far short of stated representations.

The banks will now need to raise capital, cut staff, reduce dividends, liquidate assets and lower employee pay. In October, the capital shortfall was 106.4 billion euros. On Thursday, the EBA cited the shortfall as 115 billion euros.

The EBA has set a Tier I capital requirement limit at 9 percent, which is higher than the 7 percent minimum.  Below are the capital needs of Germany and Spain and represent the donward spiral EU members are suffering.

Germany – 13.1 billion euros (5.2 billion in October)

Spain – 26.2 billion euros (from 6.3 billion in October)

This reflects the effects of the recession and the flawed stress tests.  To make matters worse, the Moody’s ratings agency announced a downgrade of three of France’s largest banks.  Societe Generale, BNP Paribas and Credit Agricole were downgraded because of their failed efforts to raise capital and their exposure to southern ties countries.

On Friday afternoon, British Prime Minister voiced his frustration by declaring that the EU would stand by its own currency and would never use the euro.  The lone dissident in the EU, Britain opts to stand alone.  There are several countries in Europe that wish that option was available.

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Merkel, Sarkozy And Body Language


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

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

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

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

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

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

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

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

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

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

S&P Serves Notice

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

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

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

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

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Central Banks To The Rescue!


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

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

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

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

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

European Union Weighs In

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

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

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

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

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

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

China Surprises Global Markets

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

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

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

In Other News

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

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

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

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

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US Bonds Attracting Investors


Despite a dysfunctional congress, the demand for US 10-year bonds has increased as investors shy away from euro zone bonds.  By Friday afternoon, the 10-year US bonds were yielding 2.01 percent in moderate trading.  Analysts predict the bonds could hit the 1.5 percent yield before the end of the year. 

Meanwhile, US investors are focused on the S&P 500, which is in jeopardy of falling below the 1200 mark. If the S&P does not find footing above 1200, triggers will kick in and a fall will be steep and fast.  The S&P could settle at 1100 but some analysts are projecting the floor could be in the 950 range. 

If the super committee fails to present a significant debt reduction package, the US dollar could take a hit.  Investors want the committee to create a meaningful reduction plan.

The European Central Bank (ECB) has aggressively invested in the sovereign debt in the euro zone.  The ECB’s investment has caused the Italian and Spanish bonds to lower interest rates but there is work to do.  By the end of day, the euro settled at $1.35.  

France and the Netherlands have been caught in the freefall throughout the euro zone.  Both countries are holding large quantities of euro zone sovereign debt. 

Germany’s Angela Merkel has held firm that there would be no more German money added to the European Financial Stability Facility.  The Chancellor has also opposed the idea that the ECB should play a larger role in the euro zone’s debt crisis. 

After meetings with Merkel, the UK Prime Minister, David Cameron, called for decisive action in the euro zone.  Germany has generally been regarded as the most stable bonds in the region but taxpayers are resisting investment in the euro zone. 

As the euro zone’s largest exporter, German bunds are off the year’s high of 3.5 percent and closed today at 1.97 percent.  However, analysts are not sold on Germany, who holds large amounts of Greek and Italian debt.  Worries that Germany may be sucked into the crisis have deepened since the country revised their GDP projections.

Asian appetite in bunds has also declined.  These countries are usually active in the euro zone, but the brakes are on.  Investors are looking at Germany through two perspectives:  that the euro zone will collapse or the possibility that Germany will create a new economic union.  Germany fears that their currency will cause their export market to suffer larger losses.

On Friday, a proposal that the ECB would invest in the IMF and the IMF would then invest in troubled economies.  Most investors would like the ECB to utilize quantitative easing.  Merkel rejects more action by the ECB saying that the central bank does not have the authority to print money.

Merkel now opposes leveraging the EFSF.  This is a strategy that she supported 30 days ago.  With her party holding the narrowest of margins in the parliament, Merkel is treading on thin ice.

In Rome, Mario Monti achieved a second confidence vote in his parliament. In Athens, the new government put forth a budget that called for no more austerity cuts in 2012.  Cameron’s call for decisive action is on the mark, but without Merkel, the euro zone is at a standstill and teetering on the edge of a deep precipice. 

   

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Euro Tanking As US Mourns


The US markets will open soon.  The dollar will open lower.  The Dow will open lower.  The euro is at the brink.  European financial institutions are getting hammered.  Greece is on the verge of default.  Italy, Portugal and Spain are scrambling to attract investors.

Bank of America is ready to trim payroll by 40,000.  Wells Fargo is trimming projections.  Credit ratings of French banks are set to lower.  Germany has opted to save their crumbling banks and toss the euro zone’s sovereign debt to the wind.

Today, none of that matters.  After spending Sunday viewing the emotional 10th anniversary of the terrorist attacks of September 11th, 2001, America has every right to stand down for a moment and peer into the looking glass.

First glimpse: Aeriel view of Ground Zero taken from Washington Street the day before the official 9/11 memorial service

It is also time for the country to reflect about what has happened since those attacks. The noted Presidential Historian, Doris Kearns Goodwin, put it best when summarizing the effects of 9/11.

Yesterday, Kearns eloquently capsulized the last ten years as the most reckless decade in American history. She pointed to the nearly 6,000 troops that have recklessly been killed in reckless wars.  She emphasized her point by referring to the 40,000 wounded men and women who have been seriously injured with life-altering wounds.

Kearns raised the reckless conduct that has threatened the nation’s financial integrity.  She cited the reckless behavior recently exhibited by Congress.  Kearns made these statements in an NBC interview that had the backdrop of the names of victims being read at Ground Zero.

As wives, mothers, fathers and children drove an emotional message straight to the heart. Kearns’s message became more powerful by the minute.  So powerful that it was necessary to call a friend and hash it out.

I cried when my father died. I cried when my mother died.  I cried powerfully when I first faced the Wall at the National Mall in 1997. Visiting schoolchildren were hushed by my reaction.  The sensation was so powerful that I literally had to turn away from the Wall.  My wife was stunned by the response.

Caregivers at the Wall handed me tissues and patted my back.  I do not know how long the Wall paralyzed me by the power of an experience gone by.  Eventually, I turned back to the Wall for some amount of time before taking refuge near the Korean War Memorial. We sat for hours. Eventually, it eased.  I felt cleansed. It lasted for one or two years. Then, I had to go back.

When in the area, I visit my parent’s gravestones every week.  Suzanne goes by every day.  Sometimes, I just stand there.  Sometimes, it is comforting.  Sometimes, it is very sad.

Yesterday was powerful; more powerful than imagined.  I love America.  I realize the unrealistic way we have lived.  I believe that wars of hearts and minds are fruitless.

I am blessed with a new, robust heart.  I am blessed with 8 grandchildren; 6 boys 9 and under and 2 granddaughters aged 9 and 2. 

What have we done?  This is a question I asked 43 years ago and many times since.  As usual, Doris Kearns Goodwin got it right.  We have been reckless.  It would be more reckless to continue our national bickering, our political inaction and do something constructive, not destructive. 

Yesterday, I cried… a lot.  I cried for the tragic loss of life on September 11th.  This crying was different than what marked my first visit to the Wall almost 30 years after the fact; different too than the death of my parents.  Every now and then a tear would just roll down my cheek.  I kept a white towel around my neck all day.

I did cry for lost loved ones.  I did. 

But, I cried for our children and grandchildren.  And, it would not stop.  I cried because they will not enjoy the relatively safe and terror-free world we were afforded.  I cried because of the uneasiness our children will share with Pakistanis, Afghans and Iraqis and throughout the world. 

What was done on 9/11 was reckless.  Our response was reckless.  This recklessness must stop and we must begin to care for the lives our young will lead.

We know that is the best gift we can give.  When our children can age safely, laughingly and without having to look back over their shoulders, then and only then, will the crying stop.

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