European Debt Crisis

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3 Ways to Play the European Central Bank Easy Money Madness

By Jim Bach, Associate Editor, Money Morning • @JimBach22 - March 5, 2015
The European Central Bank meeting today (Thursday) stuck to the Eurozone's easy money script.
European Central Bank president Mario Draghi's commitment to super accommodative monetary policy in a sluggish Eurozone is certainly not the medicine Europe needs right now.
But it is has made some already enticing investment opportunities all the more attractive...

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3 Ways to Play the European Central Bank Easy Money Madness

By Jim Bach, Associate Editor, Money Morning • @JimBach22 - March 5, 2015

The European Central Bank meeting today (Thursday) stuck to the Eurozone's easy money script.

European Central Bank president Mario Draghi's commitment to super accommodative monetary policy in a sluggish Eurozone is certainly not the medicine Europe needs right now.

But it is has made some already enticing investment opportunities all the more attractive...

Eurozone Conflict Will Bring a Major Buying Opportunity

By Peter Krauth, Resource Specialist, Money Morning - December 16, 2014

As the European Central Bank (ECB) top brass battle it out on quantitative easing, the stakes couldn't be higher.

Europe's at the precipice of deflation, despite European Central Bank President Mario Draghi attempting to do "whatever it takes" to avoid that fate.

But dissent at the highest levels could quickly change the winds of investment in Europe.

The problems are getting deeper as three of the European Central Bank's board members are throwing a wrench into his plans.

This seemingly trivial ECB stalemate could quickly trigger recession, or worse. Europe's monetary union is feeling the pressure, and that's adding further stress to its political union because, after all, it's always about the money.

Here's the inside story on how this could play out, and a way we can profit amid the confusion...

Eurozone Debt Crisis: Now It's a Hopeless Game of Whac-a-Mole

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - April 12, 2013

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

By Martin Hutchinson, Global Investing Specialist, Money Morning - February 28, 2013

Four days after the Italian elections, only one thing is really 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.
Here’s why that's likely bad news for us all...

Berlusconi is Back, and So Is the Eurozone Debt Crisis

By Martin Hutchinson, Global Investing Specialist, Money Morning - February 11, 2013

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 and 24.
The reason is summed up in two words: Silvio Berlusconi.

Even the Eurozone Debt Crisis Gets a Vacation …But Not For Long

By Martin Hutchinson, Global Investing Specialist, Money Morning - August 24, 2012

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 Won't Be Fixed by "Bailout Lite"

By Dr. Kent Moors, Global Energy Strategist, Oil & Energy Investor • @KentMoors_OEI - July 23, 2012

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 Córdoba (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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How the European Debt Crisis Could Smother Fiat S.p.A. (PINK: FIATY)

By Jack Barnes, Global Macro Trends Specialist, Money Morning - December 22, 2011

Around this time last year I warned you that the Eurozone debt crisis would trample the Italian economy and take carmaker Fiat S.p.A. (PINK: FIATY) down with it.

To profit from this debacle, I told you to short Fiat. Since then, the stock has tumbled 76%, from $19 a share to yesterday's (Wednesday's) closing price of $4.66.

Fiat is a perfect example of how an unstable home market - like Italy - will kill a struggling company's stock. Fiat is Italy's largest private sector employer, and the past year's market performance mirrors the weakness unleashed by the European debt crisis.

Sadly, Fiat won't be the only company whose shares will plunge.

TheEuropean debt crisis has grown from a problem on the edge of Europe to a problem inside the region's core. You only have to look at the series of bank stress tests that Europe has rolled out to see that things are getting worse, not better.

In fact, the European Central Bank (ECB) announced yesterday that it would provide $638 billion (489 billion euros) in three-year loans to more than 500 banks in the Eurozone. More than a dozen Italian banks borrowed $143.52 billion (116 billion euros).

But the solution is only short term, and the region's grim long-term outlook hasn't changed. We're heading toward a point of maximum pessimism - one I think we'll reach sooner rather than later.

So, it's time to thank the Eurozone, Italy, and Fiat S.p.A. for a great short trade and close it out. While the stock could go all the way to $0, the meat of the move is over, and we want to take profits before a major short-covering event gives the share price a temporary boost.

Fiat S.p.A.: Stung by the European Debt Crisis

The European Central Bank forecasts Eurozone growth will slow to a near standstill next year, with gross domestic product (GDP) only expanding 0.3%. The ECB said area-wide inflation will reach 2.7% in 2011.

This slow-growth, higher-priced environment won't bode well for the region's automakers, which are already feeling the effects.

Automobile registrations in Europe in November dropped 3% to 1.07 million vehicles from 1.10 million a year earlier. That's the biggest decline since June, according to the Brussels-based European Automobile Manufacturers Association. The Italian auto sales market led the region's declines, slipping 9.2%. France was close behind at 7.7%.

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Read More…

Latest Eurozone Debt Crisis Plan "Another Grand Illusion"

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - December 12, 2011

As European leaders celebrated a tentative agreement to accept tougher budgetary rules among its members, critics expressed doubts the plan would cure the two-year-old Eurozone debt crisis.

Last week's highly anticipated two-day summit resulted in 26 of the 27 European Union (EU) nations - the United Kingdom objected - agreeing to create a new treaty that would require members to keep budget deficits to within 0.5% of gross domestic product (GDP) in good economic times and within 3% of GDP in bad times.

EU governments would need to submit their budgets to a central fiscal authority, and violations would carry automatic penalties. The nations agreed to hammer out the details by March of next year.

World stock markets reacted positively, but many experts remain unconvinced that the EU has finally delivered the silver bullet needed to slay its monstrous debt crisis.

"They needed to create grand plan that's really workable and not another grand illusion," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "I'm afraid what we're getting is just another grand illusion."

In fact, last week's meeting was the fifth summit called to deal with the European debt crisis since 2009. Each has produced its share of optimistic rhetoric, but no concrete solutions.

European leaders from France, Germany, the European Central Bank (ECB) and the International Monetary Fund all hailed the summit agreement as a major step toward getting the debt crisis under control.

"This is the breakthrough to the stability union," said German Chancellor Angela Merkel at the end of the summit. "We are using the crisis as an opportunity for a renewal."

"It's a very good outcome for the euro area, very good," added ECB President Mario Draghi "It is going to be the basis for much more disciplined economic policy for euro-area members."

Fitz-Gerald said Europe's leaders mean what they say, but ultimately the latest summit will do little more than spark a brief rally in the markets.

"These government officials still don't get it," Fitz-Gerald said. "They're still not addressing the underlying problems. We'll be having this conversation again next year."

A Tough Sell

Although enforcing budgetary austerity would help prevent current debt problems from getting worse, it's unlikely the citizenry of most EU member nations will allow it to happen.

"Their proposal is preposterous," writes Brett Arends of MarketWatch, likening the EU plan to the United States allowing its largest creditors, Japan and China, control over the federal budget.

"How would you feel if you opened the paper to be told that the new Sino-Japanese "Fiscal Stability Commission' in Washington had just slashed your grandma's Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?," Arends said. "That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland."

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S&P to Eurozone: Fix It or Else…

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - December 7, 2011

By timing its downgrade threat to the same week as a key European Union (EU) summit on the debt crisis, Standard & Poor's is essentially telling Europe's leaders to "Fix it or else."

The ratings agency said late Monday that it had put the credit of 15 Eurozone countries, including AAA-rated Germany, on a 90-day watch. The move means each affected country has 50% chance of a downgrade.

European leaders are scheduled to meet in Brussels Dec. 8 and 9 to discuss EU treaty changes that would mitigate the debt crisis, such as restrictions on budget deficits. German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled an outline of the plan Monday.

The timing of the S&P warning "could hold leaders' feet to the fire and force them to go through with a comprehensive solution," Peter Jankovskis, co-chief investment officer at OakBrook Investments, told Reuters.

Reaction of the world's stock and bond markets was muted, with investors apparently looking ahead to the summit.

Money Morning Capital Waves Strategist Shah Gilani said it was "about time" the ratings agencies started to get serious about credit ratings in the Eurozone, saying they were behind the curve on such problems as mortgage-backed securities.

"Now they're pushing their new "ahead of the tsunami' PR campaign," he said. "Their PR agenda aside, they're right to be knocking these credits down to reality."

They Had it Coming

S&P listed several reasons for its warning.

"After a good two years of trying to manage the crisis, the political efforts have not been able to arrest matters," Moritz Kraemer, head of European sovereign ratings at S&P, told the Financial Times. "It is our view that this is a systemic stress, a confidence crisis that affects the Eurozone as a whole."

Those "stresses" include tightening credit, rising government bond yields, squabbling among Eurozone leaders about how to cope with the crisis and the rising risk of a Eurozone recession next year.

"We are approaching a very important moment where the crisis could take a very significant turning point for the worse and we want to warn investors," Kraemer told The FT. "Considering how the crisis has deepened and the challenges that they are facing, [the summit] is the last good opportunity that policymakers have."

Although the S&P said it would take the results of this week's summit into consideration, no one should doubt the agency's resolve. This past summer S&P followed through on a similar threat to cut the credit rating of the United States to AA+ from AAA following the debt ceiling crisis debacle.

"S&P's view is that the political outcome will also drive creditworthiness, and I don't think anyone in their right mind would dispute this point," Ashok Parameswaran, an emerging-markets analyst at Invesco Advisers Inc., told Bloomberg News.

More Turmoil Ahead

Should this week's Eurozone summit fail to go far enough to please the S&P, the real fireworks will begin.

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Five Companies to Avoid Until the Eurozone Debt Crisis is Over

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - November 11, 2011

U.S. companies with significant exposure to Europe will take a profit hit regardless of how the Eurozone debt crisis shakes out.

The financial strain of Europe's efforts to avert default among its troubled members - Portugal, Italy, Ireland, Greece and Spain (PIIGS) - has set the Eurozone on course for a recession even if its efforts succeed.

Yesterday (Thursday) the European Commission dropped its forecast for growth in the Eurozone to just 0.5% from its previous estimate of 1.8% in May. The commission blamed austerity measures, which were aimed at lowering budget deficits, but ended up eroding investment and consumer confidence.

"The probability of a more protracted period of stagnation is high," said Marco Buti, head of the commission's economics division. "And, given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded."

Falling consumer demand has already begun to affect the bottom lines of many U.S. companies that derive large portions of their revenue from the Eurozone bloc.

"In light of cutbacks in government spending, tax increases and waning business confidence, there already has been some [company] commentary on slipping appliances, bearings and heavy-duty trucks demand," Citigroup equities analyst Tobias Levkovich told MarketWatch. "In many respects, these early remarks are a worrisome sign."

For example, General Motors Co. (NYSE: GM) on Wednesday said the debt crisis would prevent it from breaking even in Europe this year. And Rockwell Automation Inc. (NYSE: ROK) on Tuesday warned of declining capital spending in Europe next year.

Although sales to Europe account for only 10% of revenue for the Standard & Poor's 500 as a group, several sectors have far more exposure to the Eurozone.

The auto sector derives 27.6% of its sales from Europe, followed by the food, beverage and tobacco sector at 22%, the materials sector at 19.8%, the consumer durables and apparel sector at 16.2% and capital goods at 16.4%.

"Europe is a major component to the U.S. economic engine and it is a concern," Howard Silverblatt, an analyst with S&P Indices, told MarketWatch. Silverblatt noted that while a European recession may not necessarily take down the U.S. economy, "it has an impact that will move stocks."

Here are five U.S. stocks that have significant exposure to Europe and leveraged balance sheets high - making them risky investments until Europe gets back on its feet:

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Too-Big-To-Save: Italy Totters on Debt Crisis Cliff

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler - November 9, 2011

With its 10-year bond yields nearing 7%, Italy's debt is becoming a burden it will no longer be able to handle as it follows the same path as Portugal, Ireland and Greece.

However, Italy's economy - seven times larger than Greece's, nine times larger than Portugal's and 10 times larger than Ireland's - is too big for the Eurozone to rescue.

And because Italy's economy is so large - the third-largest in the Eurozone and the eighth-largest in the world - a default on its sovereign debt would be that much more calamitous.

Yesterday (Tuesday), yields on Italy's 10-year bonds hit 6.77%, a record for Italy in the era of the European Union (EU).

"Now we are really reaching very dangerous levels...We are above yield levels in the 10-year where Portugal and Greece andIrelandissued their last bonds," Alessandro Giansanti, a rate strategist at ING Groep N.V. (NYSE ADR: ING), told Reuters.

The spike in yields reflects rising investor concern that besieged Prime Minister Silvio Berlusconi doesn't have the political muscle to push through the tough budget measures Italy needs, such as pension cuts, to get its debt issues under control.

Those fears were further stoked yesterday when Berlusconi was unable to win a majority on a routine vote on a budget report, but eased when Berlusconi agreed to resign. Yields dipped slightly on Monday in response to rumors that Berlusconi might step down.

"The market's bias is fairly clear. The question is; what comes afterward, assuming he falls?"Peter Schaffrik, head of European rates strategy atRBC Capital Marketsin London, told Bloomberg News.

Unsustainable

If Italy's bond yields don't fall significantly, it won't matter who's running the country. The high yields are making Italy's ability to cope with its debt increasingly infeasible.

At 120% of gross domestic product (GDP), Italy's debt load is second only to Greece's among Eurozone nations. Its total debt of $2.7 trillion is the eighth-highest in the world.

As bond yields go up, the cost of rolling over this massive amount of debt increases as well, and is nearing unsustainable levels.

Italy needs to auction $41.5 billion (30 billion euros) of debt less than a week from now, Nov. 14, and another $31.13 billion (22.5 billion euros) in December. Next year Italy will need to borrow $415 billion (300 billion euros).

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