euro crisis
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The Eurozone Hangs On By a Whisker
Four days after the Italian elections only one thing is clear: A majority of Italian voters have rejected austerity.
The problem is their victory came up short by the slimmest of margins.
0.36%. That's the difference between a firm new government that could move Italy out of the Eurozone and the constitutional logjam Italian voters woke up to the next day.As it is, they could roll the dice on a new election, but that could also make matters worse.
Since Italy's a big country with a chunky economy, that's likely bad news for us all.
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Berlusconi is Back, and So Is the Eurozone Debt Crisis
Since the beginning of the year, the markets have been behaving as if the Eurozone debt crisis has been magically solved.
Yields on Spanish and Italian debt are trading more than 1% lower than at their peak, while world stock markets have soared close to all-time highs.
Unfortunately, you can expect that all of this euphoria will fade when the Italian elections take place on February 23-24.
Why?...It's summed up in two words: Silvio Berlusconi.
That's because until recently a win by the former Prime Minister wasn't seen as very likely. Not long ago, The EU establishment believed they had the Italian elections completely wired.
The socialist "Democratic party" led by Pier Luigi Bersani was expected to win and be supported by a coalition of center parties led by the EU's favorite, Mario Monti, imposed as prime minister in November 2011.
Both of these candidates were safely pro-euro, and prepared to put Italy through a fair amount of "austerity" to keep it, provided the handouts kept flowing from Germany and the European Central Bank. The status quo wouldn't be threatened.
Meanwhile, the two anti-euro candidates were supposed to be comedians.
One is an actual comedian named Beppe Grillo, leading an eccentric "Five Star Movement," while the other is the aforementioned Silvio Berlusconi, who is currently under indictment for sex with under-age prostitutes and therefore (in the eyes of the EU bureaucracy) not seen as a serious threat.
At best it was thought Berlusconi and Grillo might get as much as 30% of the vote between them, but it wouldn't give them any significant power.
Well, let's just say things have changed.
A Defeat for the Eurozone?
According to the latest polls, Berlusconi's party would get 30% of the vote on its own, while Grillo's would earn a solid 15%. Not bad for a couple of comedians.As for the establishment picks, Bersani's party still leads with about 34%, while Monti's supporters trail with around 12%.
That suggests a very close vote, or possibly (if as sometimes happens, voters are falsely claiming to opinion pollsters that they support the "respectable" parties) even a Berlusconi victory, provided he could come to a satisfactory arrangement with Grillo.
But here's where it gets slippery for the EU: Anything but a solid Bersani/Monti majority is bad news for the euro, or at least for Italy's participation in it.
Here's why...
Italy's budget is in fact quite close to balanced (Berlusconi had repaired much of the damage done by his leftist predecessors) which means an Italian exit from the euro -- getting cut off from EU handouts and austerity programs -- would be pretty painless.
However, if Italy left the euro, it's likely that Spain, Greece, Portugal and very likely France would also be forced out.
But a Berlusconi return to power is not the threat faced by the euro these days.
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Why a Rising Euro is Likely Despite Draghi Comments
European Central Bank President Mario Draghi warned about excessive euro strength at a press conference today (Thursday) following his announcement that the ECB had left interest rates unchanged, as expected.
In response to a reporter's question on whether there was a currency war in progress, Draghi said, "I think we should have in mind one thing: changes in the exchange rates that we see today are not really deliberate competitive devaluations. They are more the effect of macroeconomic policies that are meant to revamp the economies - for example, very low interest rates, promises to stay low for a very long time.
"However, if these policies produce consequences on the exchange rates that do not reflect the G20 consensus, we will have to discuss this."
Draghi said the exchange rate is not a "policy target" but is "important for growth and price stability," adding, "We certainly want to see whether the appreciation - if sustained - will alter our risk assessment as far as price stability is concerned."
Observers blogging and tweeting from the room where the press conference was being held felt Draghi was being very careful in choosing his words and interpreted this as a sign that he was, in fact, attempting to talk down the euro or at least slow its rise against other major currencies.
Traders immediately sold the euro against the U.S. dollar and against the Japanese yen. The euro is currently trading down about 200 pips against the U.S. dollar and is off more than 150 pips against the Japanese yen.
There is no doubt Draghi succeeded in halting the rise of the euro, at least for today. But if the ECB is serious about putting a lid on the euro's strength, its options are limited.
Because the ECB must take into account the laws and preferences of its constituent national central banks, it would not be easy to intervene in the foreign exchanges market - except in extreme circumstances - or to undertake a competitive expansion of the ECB balance sheet as the Fed and the Bank of Japan are doing.
The ECB could create new credit by purchasing private-sector assets, as the Bank of England and the Bank of Japan have done, but it is unclear how the conservative Germans would react to such a plan.
Or Draghi could just keep talking.
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Why the ECB's Plan Can't Save Europe
So, Thursday was a big deal. Did you get that?
Markets rallied around the globe, especially European markets and U.S. markets.
But did you get what really happened?
I know you saw the rally, and I'm sure it lifted your spirits. It lifted mine for about a day - that is, until I lifted up the ECB's skirt to see if their provocative language would leave Europe's knickers in a twist or not.
If you're not the kind of person to look at such intimate things too closely, don't worry. I love all that stuff and am driven to know how all the bits and pieces come together or apart. So, I'll tell you what I saw up there.
Europe's knickers certainly are twisted. So much so that if an ill wind blows, everyone is going to see the naked truth.
Let me show you what I mean...
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Even the Eurozone Debt Crisis Gets a Vacation …But Not For Long
The Eurozone debt crisis has taken a late summer vacation. Since it would be very inconvenient for a disaster to erupt while everyone is on holiday, it doesn't.
That's not to say this rule is infallible. One year, all the decision-makers went on holiday in late July, and came back to find themselves embroiled in World War I.
What traders and decision makers will find waiting for them when they get home from the beach could be almost as serious. Here's why...
A Laundry List of Problems
Greece has done nothing to redeem its position other than prepare an application for more money. Italy's GDP declined by 0.7% in the second quarter, and we are shortly to enter the run-up to the next Italian election.
What's more, Spain is trying desperately to avoid asking for a bailout, and may just succeed in doing so, but one more hiccup in its recalcitrant provincial governments will push it over the edge.
Then there's Portugal, which has entered a deep recession, and is showing signs of missing its budget targets again.
And that laundry list of potential problems doesn't include the biggest one of them all.
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Eurozone Debt Crisis: Will The Grexit Finally Become Reality?
The Eurozone debt crisis has long needed a "Grexit" or some other landmark event to occur to change the direction the beleaguered continent is headed.
When Mario Draghi announced that he would do whatever he can to preserve the euro, it seemed that moment was imminent. Since he uttered those words on July 26, the IBEX 35 in Spain has gained 17%, while Italy's FTSE Milano Italia Borsa is up 13%.
But the rally may quickly fade.
Draghi and the European Central Bank have not taken any drastic measures since then and investors will most likely have to wait until the September 6 meeting to hear what's next.
On Monday ECB policy maker Joerg Asmussen played to the sentiment felt by many German officials that it might be time to let Greece go from the euro.
"Firstly, my clear preference is that Greece should remain in the currency union," Asmussen said in Germany's Frankfurter Rundschau."Secondly, it is in Greece's hands to ensure that. Thirdly, a Greek exit would be manageable."
However, Asmussen warned that a Grexit would be costly, not just to Greece but to the entire continent as well. "It would be associated with a loss of growth and higher unemployment and it would be very expensive - in Greece, Europe as a whole and even in Germany," Asmussen said.
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Eurozone Debt Crisis Won't Be Fixed by "Bailout Lite"
The market red ink this morning (Monday) around the globe is the result of a usual suspect - Spain.
These days, if someone even sneezes in Madrid, Barcelona, or Crdoba (one of my favorite places, actually), investors go into intensive care all over the world.
This new Spanish influenza has been wiping out paper value from one end of Europe to the other. This morning came word that many of the regions in the country will need help. Attention is now directed from focused support for banks to wider calls for a sovereign bailout.
And that is where the whole matter can turn nasty. Word is that we should now expect some Italian cities to be requesting money in the near future. Seems California and Pennsylvania are not the only locations where cities can go bankrupt.
The accord reached at the end of June by the Council of Europe (the EU member heads of government) to bail out Spanish banks is already derisively referred to as "bailout lite." As the beer commercials attest, this is going to be "less filling."
Unfortunately, it is the heavier version that Europe now needs.
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Eurozone Debt Crisis: Why Cyprus Needed the Fifth Bailout
U.S. stocks were rattled Monday as two more countries asked for bailout packages in the ongoing Eurozone debt crisis.
Shortly after word came that Spain had formally requested a bailout package for its ailing banks, Cyprus chimed in and also asked for aid.
The Mediterranean country has become the fifth Eurozone nation to hold out its hand for an international rescue. While the smallest of the bunch to seek relief, Cyprus highlights the European Union's increasingly stressed resources as it wrestles with weakening economic conditions.
The aid request followed Fitch's downgrade Monday of the island's stressed banks to "junk" status. The credit cut means the country has lost it investment status with the trio of the largest and most influential rating agencies.
Fitch said in a statement, "Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability."
Cyprus, saddled with Greek private sector debt, could need as much as 10 billion euros ($12 billion) in bailout funds.
"Classic contagion, "BBC's chief economics correspondent Hugh Pym said of Cyprus' troubles.
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Spain Bailout Package of $77 Billion Will Not be Enough
The Spain bailout package has a steep price, but still might not be enough to save the country's banking sector.
Spanish economy minister Luis de Guindos formally asked Eurozone partners for up to 62 billion euros ($77.4 billion) to recapitalize his country's ailing domestic banks. The financial institutions are weighed down by bad loans to property and construction companies, and by an ongoing Eurozone debt crisis.
In a letter to the Luxembourg Prime Minister Jean Claude Juncker, who serves as head of the 17-nation Eurozone finance ministers, Guindos explained he wanted to settle on details and conditions of the loan before the next euro group meeting on July 9.
Juncker acknowledged receipt of the letter and said that the ministers expect to give a go-ahead to the European Commission, the European Central Bank and the European Banking Authority to negotiate terms of the bailout.
The request was anticipated after the results of two independent audits were released last week. Financial consultants Oliver Wyman and Roland Berger made the first step in a two-part audit of the Spanish banking system.
Wyman found that worst-case scenario, Spain's banking sector would need a bailout package of between 51 billion euros ($63.6 billion) and 62 billion euros ($77.4 billion). Berger estimated on the lower end with 51.8 billion euros ($64.6 billion).
The formal request for a Spain bailout has made investors more nervous, and is driving the bond yields higher, making it increasingly likely Spain will need more money to try and resolve its debt crisis.
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Eurozone Bailout Package: What's Next for Greece
The question regarding whether or not Greece will stick with the Eurozone got at least a short-term answer after the country's elections Sunday, when the conservative, pro-bailout New Democracy party narrowly won the crucial vote.
But Greece's trials and tribulations are far from over, and the relief is temporary. Concerns are increasing over the global cost of a Eurozone bailout package as the mounting woes in Spain and Italy persist.
Citizens of Greece are clamoring for change, but many recognize that the election results are no quick fix. There was no cheering in Greece and global markets reacted cautiously following the vote.
Borrowing costs across Europe rose with Spain taking the lead. The yield on Spain's 10-year bonds spiked to a euro-era high of 7.18%. A reading above 7% raises a red flag that a nation may be approaching the need for a bailout.
Italian bonds also sold off on fears that if Spain is in need of a bailout, an Italy bailout package might not be far off. Italian bonds' 10-year yields are around 6%.
While the Greek election results staved off a calamity, they failed to fix the wider problems facing Greece and its struggling neighbors.
Moody's Analytics' chief economist Mark Zandi told USA Today, "We dodged a bullet, but they've got more bullets coming."
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