Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Greece Debt Crisis Bailout, Europe Out of Time-Outs

Economics / Euro-Zone Apr 05, 2010 - 09:01 AM GMT

By: Bryan_Rich

Economics

Best Financial Markets Analysis ArticleIn sports, if the opposition is on a roll and the momentum is squarely against you … you need a “time-out.” This interruption in action can break the rhythm of the opposing team and give your team a moment to re-evaluate and re-group.

In the euro zone, European officials called a time-out back in February hoping to stem the heavy wave of selling against the euro and the speculative pressures on sovereign debt risk.


And when they re-grouped they brought out a carefully managed game-of-confusion.

Here’s how it worked …

  • They announced support for Greece; but they didn’t provide any details,
  • They leaked rumors of a financial aid package; then denied any notion of transferring taxpayer money from a fiscally responsible country to a fiscally irresponsible country, and
  • They talked about creating a European Monetary Fund to support ailing countries in the monetary union; then denied the viability of such an idea.

In short, they gave enough cross signals to confuse market speculators, to break their rhythm and confidence. As such, the euro stabilized, and the bets against Greek debt subsided a bit.

Euro-zone leaders created enough confusion to buy some time for their common currency.
Euro-zone leaders created enough confusion to buy some time for their common currency.

Yet, based on the structural flaws of the monetary union, the likelihood of actual intervention resolving the problems — in Greece, the other weak spots in Europe, and the resulting damage done to the euro — was nil.

Out of Time-Outs

It’s now apparent that Europe has exhausted its allotted “time-outs.” And we have some semblance of resolution on the “they will or they won’t bail-out” subject. European leaders have finally agreed to act with the IMF as a lender of last resort to Greece.

Although Europe now professes support for this plan, prior comments on record are to the contrary. Here’s what the three big hitters in Europe had to say prior to this agreement …

  • French President Nicolas Sarkozy has said an IMF option would make the E.U. look incapable of resolving its own crises,
  • European Central Bank President Jean-Claude Trichet previously said IMF involvement would “not be appropriate,” and
  • German Chancellor Angela Merkel said, “We want to solve our problems ourselves.”

So now it’s up to the markets to determine whether or not the IMF/EU safety net works. Is it enough to reduce the risk premium associated with investing in Greek debt?

The early indication: Apparently not. Take a look at this chart …

Greek Chart

The spread between German bond yields (the orange line) and Greek bond yields (the white line) has worsened since the announcement of Europe’s rescue plan. With the Greek bond sale this week, the cost of borrowing for Greece is a key barometer for gauging the confidence (or lack thereof) that the EU/IMF plan has attempted to manipulate. And it didn’t go well.

The EU/IMF Rescue Plan Smell Test

There are some very fundamental problems that don’t get this “rescue plan” past the smell test. Here are three of them:

    • How do mandates imposed by taking IMF funds marry with monetary union principles?
    • The dam has broken, and other weak countries will be lining up for a similar backstop. How can they be denied?
    • Direct or indirect bail-out of a euro member is a breach of the monetary union’s guiding principles. How can confidence be restored in a concept that has proven to be flawed?

    For some insight, see what Dominique Strauss-Kahn, head of the IMF, had to say about Europe’s future this week:

    “The risk for European economies is to be in the second league and not in the first, with the United States and Asia.”

    Europe’s Exit Strategy … on Hold?

    The risk of a double-dip recession is bound to put downward pressure on the euro.
    The risk of a double-dip recession is bound to put downward pressure on the euro.

    The markets are also starting to recognize the monetary policy impact that the struggling euro-zone constituents will have on the ECB’s ability to reverse ultra-easy money conditions. With aggressive austerity plans facing Greece, Spain, Portugal and Ireland, a risk of a double-dip recession for the euro zone rises dramatically.

    With these euro economies under the gun to rein in deficits now in order to bring deficits back toward treaty limits set forth by monetary union guidelines, the outlook is grim.

    Greece’s GDP contracted by 2 percent in 2009, while running a 12.7 percent deficit. Now under its austerity plan it’s attempting to cut the deficit (relative to GDP) by 4 percentage points this year … while growth is expected to contract again in the neighborhood of 1.7 percent.

    Indeed, the possibility of that plan succeeding seems highly unlikely.

    This creates a policy divergence between the U.S. and all three of its leading, developed market competitors … the UK, the euro zone and Japan. So with interest rate prospects widening in favor of the U.S., and the continued uncertain outcome in the euro zone, look for the euro to continue its decline.

    Regards,

    Bryan

    This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in