Posts Tagged ‘european debt’
European Debt Crisis Threatens the Dollar
The global economic situation is becoming more dire every day. Approximately half of all US banks have significant exposure to the debt crisis in Europe. Much more dangerous for the US taxpayer is the dollar’s status as reserve currency for the world, and the US Federal Reserve’s status as the lender of last resort. As we’ve learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble. Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb. Greece is set to be the first domino to fall in the string of European economies at risk. Rather than learning from Greece’s terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.
The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks. Greece is technically small enough to bail out. Italy is not. Germany is not. France is not. It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks. Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent. Will the Fed be held responsible if the Euro brings the US dollar down with it?
The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world. This is untrue. Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone. Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable. Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks. In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them. Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other. No banker, no politician can stop that by destroying one medium of exchange. People will find or create another medium of exchange.
Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected. Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes. The losses should be limited and liquidated, rather than perpetuated and rewarded. This is the only way we can recover.
Government debt is often considered rock solid because it is backed by a government’s ability to forcibly extract interest payments out of the public. The public is increasingly unwilling to be bilked to make bankers whole. The riots and the violence in Greece should tell us something about the sustainability of this system.
If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.
Ron Paul
Budget-Busting Bailouts in Europe to Drive Global Debt Burden Higher!
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I’ve been out in Las Vegas this week for the MoneyShow. So naturally, I have gaming on the brain. My conclusion after reading the latest news out of Europe?
The European Central Bank (ECB) and European Union (EU) policymakers are going “all in” to head off the sovereign debt crisis there. Specifically …
• The 16 countries that share the euro currency and the International Monetary Fund (IMF) are going to offer as much as 750 billion euros ($953 billion) in loans and aid to nations who are struggling with massive debts and deficits.
Individual euro-zone governments will pay 440 billion euros ($559 billion), while the EU will pay 60 billion euros ($76 billion) and the IMF will cough up as much as 250 billion euros ($318 billion).
• The ECB, for its part, is going to purchase billions of dollars in government and private debt. Central banks in Germany, France and Italy all are buying government debt. And the ECB is going to start offering three-month loans at fixed rates to institutions which need them. The cap on this program? None.
• Finally, the Federal Reserve will throw a few chips onto the table by reopening its currency swap line with the ECB. The Fed will get euros in exchange for dollars so the ECB can then extend dollar-based loans to euro-zone banks that need them.
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| The Fed has agreed to trade our dollars for euros. |
The program won’t have any cap, meaning the Fed’s exposure could theoretically be unlimited! The last time the Fed allowed ECB swaps, activity peaked at $583 billion in December 2008.
The Bank of Japan, Swiss National Bank and Bank of England will also have access to an unlimited amount of dollar swaps. Up to $30 billion will be made available to the Bank of Canada, too.
Good and Bad News in Wake of
Europe’s Major Wager
The immediate impact of the move? Stocks soared around the world. The gains were particularly noteworthy in the PIIGS countries — Portugal, Ireland, Italy, Greece, and Spain.
We also saw the difference, or spread, in yield between “core” German 10-year debt and debt in the PIIGS countries collapse. That spread tightened to 343 basis points (3.43 percentage points) from 973 points in Greece. It also narrowed to 201 points from 254 points in Portugal and to 94 points from 173 points in Spain.
The drawback?
By bailing out the worst offenders, the more well-behaved European nations are handicapping themselves. They’re exposing themselves to more risk. And they’re going to have to foot the bill for the massive rescue package, driving up their own debts and deficits!
That’s not exactly something the euro-zone nations can afford, by the way. The region-wide budget deficit is on track to hit 6.6 percent of GDP in 2010 — more than twice the so-called “cap” of 3 percent. Next year won’t be any better, with the current forecast calling for a deficit of 6.1 percent.
Result: German bond yields surged 18 basis points after the rescue was announced.
What about the U.S.?
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| While we help finance another bailout, our deficit continues to skyrocket. |
Our deficit could be as much as $1.6 trillion this year, or almost 11 percent of GDP.
Our debt load is soaring and on track to double to $18.6 trillion over the next decade.
Our Treasury is borrowing more than $375,000 per SECOND in certain weeks.
Our politicians have shown zero willpower to get the deficit under control, beyond a few token “window dressing” moves. And now, via the IMF and the Fed, we’re going to be ponying up untold billions of dollars more to bail out profligate European nations.
Is it any wonder that U.S. Treasury bonds also got clubbed after the bailout was announced? Bond futures prices plunged more than three points from their recent high, while 10-year Treasury note yields surged more than 30 basis points.
The Most Important Question to Ask:
“Where’s All this Bailout Money Going to Come From?”
What about the longer-term outlook for interest rates? Well, investors need to ask themselves a simple question: Where the heck is all the bailout money going to come from? It’s not like we have it sitting around in some national piggy bank somewhere.
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| To pay for it all, government printing presses will shift into overdrive. |
The answer is that policymakers at the Fed and ECB are going to print some of it out of thin air. And government officials are going to borrow hundreds of billions of dollars more in the bond market both here and in Europe.
All the money printing raises serious inflation concerns. And all the borrowing will drive up bond supply. Both are downright bearish for bond prices.
Oh, and now that the sovereign debt crisis has been temporarily tamped down in continental Europe, what do you think is going to happen next?
I’ll tell you what …
Investors are going to start searching for the next major victim. I believe they’re going to focus their ire on two of the biggest debt and deficit offenders on the planet — the U.K. and the U.S.
So if you are still exposed to long-term government, corporate, junk, or municipal debt here, now is the time to sell — and not look back! Or you can use specific vehicles such as inverse bond ETFs to profit or hedge yourself against an upward move in interest rates.
Until next time,
Euro; the Worst Is Yet To Come
By: Sol Palha, Tactical Investor
If the thunder is not loud, the peasant forgets to cross himself.
Russian proverb
I think it is a given that Greece will have to default, everyone knows this, but they are just playing cat and mouse for now. Most Greeks are dead set against the new Austerity measures and they will likely throw this government out of power for the new changes they have instilled. The next government will cater to the people’s needs for fear of receiving the same treatment. Change is not wanted in Greece. The only way to fix this problem is if the nation as a whole understands that they have to go through a painful period of cuts, but as evidenced from the past riots this is not the case. The story below further substantiates our claims.
Greek unions announced on Wednesday that they would stage a 24-hour nationwide strike on May 20, the second major protest against tough austerity measures pledged in exchange for billions of euros in aid. The main public and private sector led a 50,000-strong march a week ago in which hundreds of angry Greeks fought pitched battles with police in the streets of central Athens and three people were killed in a petrol bomb attack on a local bank.
They are due to march in the capital on Wednesday from 6 p.m. (1500 GMT), in a rally which will give indications about the public mood before the big walkout next week. Investors are closely watching public reaction to government wage and pension cuts amid concerns broader unrest could hit Prime Minister George Papandreou’s resolve in pushing them through. New figures published on Wednesday showed Greece’s economy contracted 0.8 percent in the first quarter compared to the last three months of 2009.
The austerity measures, pledged in return for 110 billion euros ($139.7 billion) in emergency aid from the European Union and International Monetary Fund, are expected to keep the economy in recession through 2011.”The IMF will not stop thirsting for workers’ blood,” said Yannis Panagopoulos, chairman of Greece’s main private sector labor union GSEE. “Its recipes are a disaster and the government must turn them down.”
The country’s socialist government on Monday unveiled a draft law to raise the average retirement age and cuts benefits, which further angered unions already opposed to previous steps including public wage cuts and tax hikes. Full story
Adding to the host of problems is the fact that Greece is now officially in a recession. Painful cuts have to be implemented and maintained or Greece will default. Sometimes markets should be allowed to settle matters, intervention only delays the inevitable. Our stance has been that the Euro is going to trade down to the 115 ranges and could possibly trade down to the 110 ranges. The massive 1 trillion Package had no lasting impact on the Euro, after mounting a brief rally, the Euro crumbled and is now on its way to putting in another series of new lows.
Spain’s new austerity measures, too little too late
Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. “We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover,” he told parliament. The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a $1 trillion (674 billion pound) rescue package to stabilise the euro in exchange for pledges by highly indebted countries to pare down their deficits. Full story
We think this is action is a little late as Spain had ample time to address these difficult changes, but instead decided to sit on its fat rear and do nothing. The current recommendations are just too little to produce any meaningful change. Unofficially the employment rate is well past 20%, the housing sector has crashed, fiscal debt is roughly 112% of GDP and Rising and estimates put private debt between 160-180% of GDP. Thus unless they put forth some bone crushing changes, the odds are that Spain will be joining the Greeks sooner than later. Furthermore, this 1 trillion euro aid package is more of a band aid than a fix because the nations that are spending beyond their means are still doing so. Nothing has changed other than the day of reckoning.
Financial markets are showing they have their doubts, with markets in Europe and Asian drifting lower Wednesday after Monday’s initial euphoria over the initial 750 billion euro package announced by European Union officials over the weekend.”Is the package big enough?” asked Paul Lambert, the current director of currency and macro strategies at Polar Capital who’s also held roles at Deutsche Asset Management, UBS, Citibank and the Bank of England. “That depends on the success of the debt consolidation in the periphery [and] whether they’re ultimately able to have falling real wages so that they can come back in line with the core.”
Much criticism has been lobbed at places such as Greece for high public sector wages, which will now be brought down sharply by the government as part of the agreement for its bailout package. That’s also been one of the key reasons Greeks have taken to the streets over weeks that have turned violent at times. On Wednesday, Spain announced a plan to reduce public wages 5% this year and freeze them in 2011 while suspending a pension hike. The moves come as the government there fears being dragged into a situation similar to Greece’s.
“I’ve observed that if any country in the emerging markets had been offered a loan package like the Greeks were offered before they got the eventual loan package they got, people wouldn’t have been rioting on the streets, they would have been saying thank you,” said Lambert at a Morningstar Investment Conference in London.
“The fact they’re rioting on the streets means ultimately there may not be the ability of the Greeks to see a 20% fall in real wages,” he said. Full Story
Yeah we would like to see how long individuals are willing to keep quiet once the government starts to cut their salaries, increase taxes and cut benefits. People used to the good life do not take kindly to such measures, they are going to get rid of the existing government, (Greece is the lead candidate for such a move) and replace it with one that is more sympathetic to their cause. The only way to solve this is by the properly (instead of the miserably program called shock and awe, more like shock and shake) is for the Euro zone to set an example. They need to let one country default; this will send a strong message to the others that if they don’t wake up, a sledge hammer is going to fall right on their heads and snap them out of their coma.
In the short term this is a very painful strategy, but long term this would be very beneficial to the Euro, as it would give it credibility and make it a true front runner as a challenger to the US dollar. Investor will have more faith in a nation that is willing to take strong measures to protect its currency. While these brain surgeons run around trying to figure out what is the best approach, make sure you have some of your money parked in Bullion (Gold, Silver, Palladium and or Platinum). In troubled times the best hedge way to protect oneself is via precious metals.
The enemy of my enemy is my friend.
Arabian Proverb
