Eurozone
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Eurozone Risks Don't Rule Out These Solid Income Opportunities
Money Morning's Chief Investment Strategist, Keith Fitz-Gerald has kept our readers on the bleeding edge of developing financial stories for nearly a decade.
Keith's broad and deep knowledge of the global financial markets - he splits his time between residences in the U.S. and Japan and sees far more than your U.S.-locked analyst - gives him a unique perspective on how the macroeconomic patterns affect the micro environment in which individual investors make their decisions.
He recently returned from Europe and was featured on Fox Business with Stuart Varney. We caught up with Keith just as he returned from the studio with our own questions about his trip, and asked him to share his insights with Money Morning readers.
Keith sat down with Private Briefing's Executive Editor Bill Patalon over the weekend.
Here's what Keith had to say...
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Eurozone Debt Crisis: Now It's a Hopeless Game of Whac-a-Mole
The Eurozone debt crisis that was supposed to have blown over long ago instead has become more like an endless game of Whac-a-Mole, with both new and old problems popping up faster than European leaders can bop them.
As Europe's finance ministers gathered in Dublin today (Friday), they faced at least half a dozen major issues threatening the fiscal health of the Eurozone.
Although Europe's leaders, in concert with the International Monetary Fund (IMF), have succeeded in keeping a lid on each successive crisis over the past three years, that streak can't survive in the face of the new and old fiscal woes that have been peppering the Eurozone.
U.S. investors can't let those past successes deceive them into thinking the Eurozone is no longer a worry.
When the Eurozone debt crisis finally implodes - and sooner or later, it has to - it will hammer stock markets around the globe.
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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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2013 Eurozone Forecast: Why A Eurozone Breakup Is Now More Likely Than Ever
To the complete shock of several analysts, the Eurozone managed to make it through 2012 without breaking up. However, 2013 is another story.
Now that Italy's Prime Minister Mario Monti has resigned, there's a good chance that Italy will be in the forefront of a new Eurozone crisis.
That means 2013 doesn't look to be a good year for the euro, either-especially with new Italian elections likely to take place in February.
Of course, the EU establishment hopes that Monti can remain in office, but with four very different candidates now jockeying for position, Italy is one of the continent's great question marks.
Here's why...
The leading candidates in this crucial contest include:- Silvio Berlusconi, leading the remnants of his former rightist coalition,
- Monti himself, currently in negotiations with several centrist parties,
- Luigi Bersani, leading the left-wing Democrats, currently regarded as most likely to win
- And comedian Beppe Grillo, whose Five Star Movement is leftist and anti-authoritarian.
Meanwhile, the return of Berlusconi, whom the establishment forced out in 2011, would be a nightmare for the euro. That goes for the ascension of Grillo as well.
In the balance of this pivotal contest could be the fate of the Eurozone itself.
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Try as He Might, Mario Draghi Cannot Save the Euro
Of all the pyramid schemes that governments and banks have perpetrated in the last decade, the Eurozone debt crisis is the most damaging.
No amount of posturing by European Central Bank President Mario Draghi can change that fact.
The market may like what Draghi has to say about the fate of the euro, but tomorrow's big ECB meeting will change little.
The massive amount of money Draghi will need to print is far too great for the German taxpayer or the ECB's balance sheet.
Eventually, the Eurozone will break up and drag the global economy right down with it.
In the long run, that will mark the beginning of the recovery, but in the short run it will precipitate a banking and economic crisis that will make 2008 look like child's play.
As investors, we had better be prepared.
Politicians Doomed the Euro
The Euro was a reasonably sensible idea, although without political integration it was always likely to cause trouble.
What's more, the technical side of it was for the first ten years handled very well by Otmar Issing at the European Central Bank. Issing spent his career in the Deutsche Bundesbank and knew what a decent currency looked like.
However, two decisions taken by politicians doomed the currency.
One was to admit Greece into the union, which to any competent observer was a hopelessly corrupt and uncompetitive economy propped up by giant EU subsidies.
More important, though, was the design of the TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) payments system which was replaced in November 2007 by TARGET 2.
As I wrote in an earlier article, it is the secret system that blew another hole in the euro.
Target 2 requires all payments between banks in different countries to go through the national central banks (thus giving those otherwise redundant entities something to do).
Theoretically that's the same system as in the U.S., where many payments are made through the regional Federal Reserve Banks.
However, in the U.S. the larger banks deal direct, and outstanding payments in the regional Fed banks are cleared regularly. What that means is that if Alabama runs a payments deficit with New York, no large balances are allowed to build up.
Conversely, there has been no automatic clearing between the central banks in Europe. This may sound arcane and boring, but I promise you it is not.
These payment imbalances have two nasty side effects.
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Can the U.S Economy "de-couple" from the Eurozone Debt Crisis?
As the Eurozone teeters on the edge of a breakup, it begs the question: Can the U.S economy "de-couple" from the Eurozone debt crisis?
Ultimately, the answer comes down to fate of the euro. It's the linchpin to everything.
From the point of view of one who has travelled fairly frequently in the Eurozone I can tell you I find the euro very convenient indeed.
In my London merchant banking days, when I used to go on marketing trips around continental Europe, I found that while the excellent European train service was a pleasure to use, the proliferation of local currencies made travelling a pain.
There was nothing more annoying than to be on a long-distance train that had just crossed the border from Belgium to Germany at Aachen, only to discover that I could not enjoy the excellent Deutsche Bundesbahn bockwrst and fine local beer because I had only sterling and Belgian francs in my wallet, but no deutschemarks!
The other problem was that after a long trip I ended up with my wallet stuffed with small amounts of ten different currencies, none of which could be changed back into anything useful because the bank charges ate up their value.
In southern Europe, local exchange controls were a pain too.
Walking through Madrid airport with $25,000 of legitimately earned pesetas in bills which could not be transferred to Britain through the banking system was far too exciting for my liking.
From a British merchant banker's point of view, it was thus very convenient when all the local foreigners converted to the same currency, rather than lots of different ones.
After that, you needed only two compartments in your wallet: one for British money and the other for foreign money. Then you could travel all over Europe without worrying about changing currencies.
It was a very 19th century feeling, almost as good as being back on the gold standard!
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Jim Rogers: Market Surge from Eurozone Debt Crisis Deal Won't Last
Stock markets around the world soared Friday in reaction to the morning's Eurozone debt crisis deal, but noted investor Jim Rogers wasn't impressed.
"This is no more than just another temporary stopgap to make the market feel good for a few hours, days or even weeks," Rogers, Chairman of Rogers Holdings, told CNBC. "Then everybody's going to wake up and say, "This doesn't solve the problem.'"
Meeting in Brussels, European leaders announced a plan early Friday that would provide struggling banks with money directly from the bloc's bailout fund.
The leaders also said bailout funds could be used to stabilize European bond markets. But they did not tie such use to additional austerity measures, which have angered citizens in debt-troubled nations like Greece and Spain.
The summit is just the latest in a series of high-level attempts to resolve the 2-year-old Eurozone debt crisis, which has required bailouts of Greece, Portugal, Ireland, and most recently the Spanish banking system.
Markets around the world surged on the announcement, with some European indexes rising as much as 4%. In the United States, the Dow Jones Industrial Average shot up 200 points at the open. The Standard & Poor's 500 Index was up about 25 points, or just under 2%.
Don't get used to it, Rogers said.
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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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