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The "Gnomes of Zürich" Created a Financial Nightmare

Stock market futures On Halloween, the Bank of Japan unleashed a massive quantitative easing program that included the purchase of bonds, stocks and ETFs in a desperate attempt to revive the terminally ill Japanese economy. This coincided with the end of the Federal Reserve's third round of QE in October. At that point, the world entered the terminal […]

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Why a Rising Euro is Likely Despite Draghi Comments

Currency Euro symbol

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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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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Stock Market Today: This Bank Stock Faces More Backlash

The Greek elections did not generate any significant movement in the stock market today, which is especially bad news for one particular bank stock that's taking a lot of heat from investors.

Greece decided not to leave the euro Sunday as the pro-bailout New Democracy party narrowly won elections tallying just over 30% of the vote. Investors had feared a win by an anti-austerity movement could lead to a breakup of the euro and possibly the European Union.

That's all good news except stock markets opened lower Monday following the announcement.

Maybe investors really wanted the worst to happen concerning Greece, insuring more action by the Federal Reserve when they meet later this week. QE3 is still a possibility but it seems that some are disappointed by the Greek elections, which could just be a postponement to Greece's eventual "Grexit" from the euro.

European markets rallied following the election results, but by the time U.S. markets opened investor sentiment had become neutral. It seems that until the Fed's meeting concludes on Wednesday investors will be stuck waiting for more news out of Europe to guide them.

One sector that has been vilified recently is financial stocks, and today's headliner is Morgan Stanley (NYSE: MS).

The Wall Street Journal this morning highlighted Morgan Stanley for its leading role in Facebook's IPO debacle.

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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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Why an Italy Bailout Package is on the Way

With news of the Spain bailout package still fresh, and Greece's crucial elections on Sunday, the next event in the Eurozone debt crisis is already brewing.

An Italy bailout package is likely to be the next costly move in the spiraling contagion.

Italy on Thursday held its first bond auction since European finance ministers came to Spain's rescue, willing to give the ailing country up to 100 billion euro ($126 billion) to shore up its beleaguered banks.

The auction raised a heap of concerns.

Italy's borrowing costs soared following a Treasury sale of 4.5 billion euros of debt, including 3 billion euros of its 3-year benchmark bond that yields a lofty 5.3%. That was the highest yield since December and an increase of nearly 1.4 percentage points from the last sale just a month ago.

In addition, Fitch Ratings reported May 23 that foreign ownership of Italian debt slipped from 50% in 2008 to a current 32%.

"I think Italy could well be a problem, because its current government isn't very good and has no legitimacy, having been imposed by the EU - and it hasn't cut spending as it needs to," said Money Morning Global Investing Strategist Martin Hutchinson. "I'd put it a few weeks away though - market's focused on Greece and Spain at present."

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