Now that the Greek bail-out is being hailed as the tremendous success it is (sarcasm intentional), Spain is reportedly seeking a similar, but far bigger, rescue package of its own.
Sentiment towards Spain was hit by press reports, later denied by the European Commission, that the European Union (EU), International Monetary Fund (IMF) and U.S. Department of Treasury were drawing up a liquidity plan for Spain, including a credit line of up to €250 billion, about twice the amount made available to Greece.
Yields on Spain's sovereign debt are rising, but are still far below levels which would indicate immediate and irreversible distress. Spanish 10-year bond yields rose 12 basis points to 4.85% yesterday, the highest since July 2008, taking the spread over German Bunds to 2.21% – the highest since the introduction of the Euro in January 1999.
Spain faces a significant refinancing hurdle next month when €16 billion of bonds will need to be re-financed. While memories of the Greek crisis are at the forefront of investor minds, Madrid is nowhere near the crisis situation experienced by Athens. Spain's 10-year bond yield is still below 5%, which is less than Greece is paying on its IMF facility. Greece didn't seek emergency funding until its two-year bond yield reached 10%. By comparison, Spanish two-year bonds currently yield a very comfortable 3.3%.
Madrid's banking system, however, is a completely different story. Spanish banks borrowed €85.6 billion from the European Central Bank (ECB) last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and one sixth of net Euro-Zone loans offered by the central bank.
This is the highest amount since the launch of the Euro-Zone in 1999 and a disproportionately large share of the emergency funds provided by the Euro’s monetary authority, according to an analysis by Royal Bank of Scotland (RBS). Spanish banks account for 11% of the Euro-Zone banking system.
The rise in borrowing from €74.6 billion in April, which makes up nearly 15% of the net liquidity pumped by the ECB into the Euro-Zone financial system, provides further evidence of the acute distress in the Spanish financial sector.
RBS estimates the total amount of Spanish liabilities held by overseas investors is €1.5 trillion, or 142% of the country’s Gross Domestic Product (GDP). By comparison, Madrid's budget deficit is fairly tame, at approximately 60% of GDP - a far cry from Greece, which is well in excess of 100%. Of the total debt held by external investors, more than half, or €770 billion, has been issued by Spanish banks.
While investors have not yet required high yields on Spain's sovereign debt, the concern is that the situation in Madrid will continue to deteriorate. With austerity measures in place which will undoubtedly weigh on the Spanish economy, 4th largest in the Euro-Zone, investors have every reason to doubt that the situation will turn around anytime shortly.
Every European country that gets in financial trouble causes every other country to suffer. So goes Greece, so goes Spain, so goes Portugal, so goes Ireland and on and on. Even France and Germany can only absorb so much. With such low yields on its sovereign debt, it's no wonder that investors are beginning to refrain from Spain.
Marko's Take
Showing posts with label IMF. Show all posts
Showing posts with label IMF. Show all posts
Thursday, June 17, 2010
Tuesday, June 15, 2010
Euro-Zone Sovereign Debt Continues To Stumble
Moody's, that venerable credit rating agency, just acknowledged what the entire financial universe has known for months: Greece is not an investment grade credit! Really? Even Standard & Poors figured that out nearly two months ago.
In making the 4-step downgrade to Ba1 from A3, Moody’s cited risks to economic growth from the austerity measures tied to a €110 billion ($134.5 billion) aid package from the European Union (EU) and the International Monetary Fund (IMF). Obviously, the Moody's analysts must be regular readers of Marko's Take.
Greece has cut spending, raised taxes and trimmed public-sector wages and benefits to reduce the deficit, which ballooned to 13.6% of Gross Domestic Product (GDP) last year, more than four times the EU maximum. The government pledged to trim the shortfall to 8.1% of GDP this year and bring it back under the 3% EU limit by 2014.
Spain's problems, which are far less severe than those of Greece, is struggling to raise financing for debt maturities of €16.2 billion by July.
Spain disclosed yesterday that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some, while Germany said the EU stands ready to help if Madrid needs a Greek-style rescue.
With the 4th largest economy in the EU, Spain is coping with 20% unemployment and an 11.2% budget deficit. Spain has among the lowest sovereign debt ratios in the Euro-Zone, at less than 60% of GDP.
Despite growing investor concerns amid a tougher credit environment, Madrid was able to place €5.2 billion at its 12- and 18-month bill auctions, but investors demanded a big yield premium.
Spanish 10-year bond yields rose nearly a quarter of a point yesterday, to 4.67%, while financial sector shares also came under pressure, down nearly 1% as they underperformed the broader market.
The demands on Germany and France, the EU's most healthy countries, continued to exert political problems.
German chancellor Angela Merkel's center-right coalition government may be close to collapse, stung by a string of disagreements and intense infighting over austerity cuts, policy reform and the departure of senior conservatives. With elections coming up in the next few weeks, German voters appear inclined to make wholesale changes.
The bail-out package has also raised the ire of Merkel's French counterpart, Nicolas Sarkozy, who has accused the Germans of creating an atmosphere that will thwart growth in Europe at a time when it should be stimulated. Relations between the two politicians are at an all-time low.
Ireland was also able to sell €1.5 billion of new debt, but at much higher yields than in previous auctions. The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April. The 2018 bond had a yield of 5.088%, up from 4.55% last August.
The credit window is still open for European sovereign debtors but could slam shut at any time. If, and when it does, the toll on the world financial system will be particulary acute as governments will be forced to make substantially greater cuts to bolster investor confidence. Marko's Take? Avoid these issuers and focus on the only winner in this entire financial crisis: Gold.
Marko's Take
Some sites we really like and hope that you visit: http://www.lemetropolecafe.com/, http://aegeancapital.com/,
http://marketviews.tv/, and, of course, our ever-so-informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
In making the 4-step downgrade to Ba1 from A3, Moody’s cited risks to economic growth from the austerity measures tied to a €110 billion ($134.5 billion) aid package from the European Union (EU) and the International Monetary Fund (IMF). Obviously, the Moody's analysts must be regular readers of Marko's Take.
Greece has cut spending, raised taxes and trimmed public-sector wages and benefits to reduce the deficit, which ballooned to 13.6% of Gross Domestic Product (GDP) last year, more than four times the EU maximum. The government pledged to trim the shortfall to 8.1% of GDP this year and bring it back under the 3% EU limit by 2014.
Spain's problems, which are far less severe than those of Greece, is struggling to raise financing for debt maturities of €16.2 billion by July.
Spain disclosed yesterday that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some, while Germany said the EU stands ready to help if Madrid needs a Greek-style rescue.
With the 4th largest economy in the EU, Spain is coping with 20% unemployment and an 11.2% budget deficit. Spain has among the lowest sovereign debt ratios in the Euro-Zone, at less than 60% of GDP.
Despite growing investor concerns amid a tougher credit environment, Madrid was able to place €5.2 billion at its 12- and 18-month bill auctions, but investors demanded a big yield premium.
Spanish 10-year bond yields rose nearly a quarter of a point yesterday, to 4.67%, while financial sector shares also came under pressure, down nearly 1% as they underperformed the broader market.
The demands on Germany and France, the EU's most healthy countries, continued to exert political problems.
German chancellor Angela Merkel's center-right coalition government may be close to collapse, stung by a string of disagreements and intense infighting over austerity cuts, policy reform and the departure of senior conservatives. With elections coming up in the next few weeks, German voters appear inclined to make wholesale changes.
The bail-out package has also raised the ire of Merkel's French counterpart, Nicolas Sarkozy, who has accused the Germans of creating an atmosphere that will thwart growth in Europe at a time when it should be stimulated. Relations between the two politicians are at an all-time low.
Ireland was also able to sell €1.5 billion of new debt, but at much higher yields than in previous auctions. The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April. The 2018 bond had a yield of 5.088%, up from 4.55% last August.
The credit window is still open for European sovereign debtors but could slam shut at any time. If, and when it does, the toll on the world financial system will be particulary acute as governments will be forced to make substantially greater cuts to bolster investor confidence. Marko's Take? Avoid these issuers and focus on the only winner in this entire financial crisis: Gold.
Marko's Take
Some sites we really like and hope that you visit: http://www.lemetropolecafe.com/, http://aegeancapital.com/,
http://marketviews.tv/, and, of course, our ever-so-informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
Monday, June 14, 2010
Euro-Zone Trapped In Vicious Cycle
What should a country do that has WAY too much debt and WAY too little economic growth? If it spends money it doesn't have to generate economic stimulus, it worsens its deficit and adds to the risk of default. If it embarks on austerity, thereby reducing spending, it imperils economic growth, which worsens its deficit and adds to the risk of default. Talk about being between "Ba-Rock and a hard place"!
The increasingly struggling Euro-Zone nations and the U.S. have taken diametrically different paths to addressing their economic and financial problems. After the passage of the huge International Monetary Fund (IMF) led rescue, European Union (EU) nations are each passing significant budget cuts to bring their gaping budget deficits under control.
The United States is taking the opposite approach. With policy makers fearing a re-newed slip into the second dip of this "Double-Dip Hyper-inflationary Depression", the Obama Administration is putting the final touches on a new $200 billion stimulus package. In addition, because of the desperate situation of so many municipalities, another $50 billion is being considered to save the jobs of teachers, police and firemen, whose jobs are being cut to balance city and state budgets.
In Europe, austerity is being reluctantly accepted by Greece, Italy, Portugal, Spain, Ireland, Germany, Great Britain, Hungary, Romania, the Netherlands and Iceland, as well as others. The only major exception has been France. In each case, austerity comes at the cost of future economic growth. The reduced presence of government will trim about 0.5-1.0% off from future economic growth, but satisfies the conditions laid out by the IMF. This identical approach, imposed on Argentina in 2001, failed miserably.
The United States is desperate to jump-start the employment situation, which has yet to show much signs of reversing, unless of course, we as a nation, decide that having an army of census workers is a good use of limited government funds. After having spent some $2 trillion on various bailouts and stimulus, all we have to show for it are roughly 400,000 new civil servants, a budget deficit of $1.5 trillion and rising, more than 8 million jobs lost in the last two years and rising personal backruptcies.
How long will it be before some nation tries that tried and true approach of starting a military war? It worked to bring the world out of the "Great Depression", perhaps it can work again. Sadly, the world is running out of peaceful options.
A better solution is the combination of both approaches. The austerity programs in Europe target the overblown government sectors and trade unions, who have enjoyed an un-deserved free ride for decades. No nation can have a large part of its citizenry living off a diminishing pool of productive workers. Ultimately, the productive ones will balk at the higher taxes imposed on them combined with the use of funds to support those that are living on the dole. A recipe for class war?
Government spending needs to be targeted at areas that produce Gross Domestic Product (GDP) and employment NOT on transfer payments to people who are not motivated to add to society. The biggest reason for problems with budgets is runaway entitlement spending on those who receive from others yet produce nothing. In exchange for any govenment handouts, the recipients need to do something to earn their keep such as repairing our nation's crumbling infrastucture or performing community service. Subsidizing sloth. or dependenc, merely generates much more of it.
Countries can simultaneously reduce spending and get more out of less if they prioritize it correctly. We need to be cognizant of how much GDP each dollar of spending creates, and emphasize those activities. If spending merely transfesr money from the productive to the un-productive, it should be phased out over time, and ultimately, entirely eliminated.
The choice of policies does NOT have to be either/or. Unfortunately, it is highly doubtful that government will ever get smart about spending OUR money.
Marko's Take
Some links we like and hope that you visit: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.goldpennystocks.com/, and, of course, our incredibly informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
The increasingly struggling Euro-Zone nations and the U.S. have taken diametrically different paths to addressing their economic and financial problems. After the passage of the huge International Monetary Fund (IMF) led rescue, European Union (EU) nations are each passing significant budget cuts to bring their gaping budget deficits under control.
The United States is taking the opposite approach. With policy makers fearing a re-newed slip into the second dip of this "Double-Dip Hyper-inflationary Depression", the Obama Administration is putting the final touches on a new $200 billion stimulus package. In addition, because of the desperate situation of so many municipalities, another $50 billion is being considered to save the jobs of teachers, police and firemen, whose jobs are being cut to balance city and state budgets.
In Europe, austerity is being reluctantly accepted by Greece, Italy, Portugal, Spain, Ireland, Germany, Great Britain, Hungary, Romania, the Netherlands and Iceland, as well as others. The only major exception has been France. In each case, austerity comes at the cost of future economic growth. The reduced presence of government will trim about 0.5-1.0% off from future economic growth, but satisfies the conditions laid out by the IMF. This identical approach, imposed on Argentina in 2001, failed miserably.
The United States is desperate to jump-start the employment situation, which has yet to show much signs of reversing, unless of course, we as a nation, decide that having an army of census workers is a good use of limited government funds. After having spent some $2 trillion on various bailouts and stimulus, all we have to show for it are roughly 400,000 new civil servants, a budget deficit of $1.5 trillion and rising, more than 8 million jobs lost in the last two years and rising personal backruptcies.
How long will it be before some nation tries that tried and true approach of starting a military war? It worked to bring the world out of the "Great Depression", perhaps it can work again. Sadly, the world is running out of peaceful options.
A better solution is the combination of both approaches. The austerity programs in Europe target the overblown government sectors and trade unions, who have enjoyed an un-deserved free ride for decades. No nation can have a large part of its citizenry living off a diminishing pool of productive workers. Ultimately, the productive ones will balk at the higher taxes imposed on them combined with the use of funds to support those that are living on the dole. A recipe for class war?
Government spending needs to be targeted at areas that produce Gross Domestic Product (GDP) and employment NOT on transfer payments to people who are not motivated to add to society. The biggest reason for problems with budgets is runaway entitlement spending on those who receive from others yet produce nothing. In exchange for any govenment handouts, the recipients need to do something to earn their keep such as repairing our nation's crumbling infrastucture or performing community service. Subsidizing sloth. or dependenc, merely generates much more of it.
Countries can simultaneously reduce spending and get more out of less if they prioritize it correctly. We need to be cognizant of how much GDP each dollar of spending creates, and emphasize those activities. If spending merely transfesr money from the productive to the un-productive, it should be phased out over time, and ultimately, entirely eliminated.
The choice of policies does NOT have to be either/or. Unfortunately, it is highly doubtful that government will ever get smart about spending OUR money.
Marko's Take
Some links we like and hope that you visit: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.goldpennystocks.com/, and, of course, our incredibly informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
Tuesday, June 8, 2010
The Next Euro-Zone Domino: Hungary
First, we had the "PIGS" (Portugual, Ireland, Greece and Spain). Then, with the addition of Italy, the acronym for troubled European countries becames PIIGS. Hold on a second. Hungary has applied for membership to this very elite group. Get ready for PHIIGS. PHIIGS?
Fears escalated yesterday that Europe's debt problems were spreading beyond the core Euro-Zone after Hungarian officials warned for a second day that the country was at risk of a Greek-style fiscal meltdown.
A government spokesman for new prime minister, Viktor Orban, said on Friday that even default was possible given the economy’s problems. This sent Hungary's currency, the Forint, tumbling and credit default swaps surging by more than 100 basis points to 425.
The latest comments are likely to increase skepticism of the new administration among investors. Markets initially welcomed the center-right party's election victory in April. However, they have been unsettled by repeated government clashes with the central bank and calls for foreign-currency loans to be converted into Forints.
Hungary's debt last year was 78% of Gross Domestic Product (GDP), the highest among the European Union's newest members. But it remains very close to the 74% European Union (EU) average, and well below Greece's 115%.
Budapest has yet to draw down all of a €20 billion support package with the International Monetary Fund (IMF) and the EU in October, 2008. The previous Socialist-backed government last year cut the deficit to 4% of GDP and stopped drawing on the credit line when market conditions improved.
Hungary’s cabinet met for a third day on Monday to discuss a range of fiscal measures designed to trim an estimated 1-1.5% of GDP. The government promised to announce its action plan today at the latest.
European problems don't stop there. Let's not forget Romania. Analysts have talked down the relevance of Hungary’s problems to others in the region, but neighboring Romania, a fellow recipient of a €20 billion credit line from the IMF and the EU, is suffering from its own set of fiscal problems.
Prime Minister Emil Boc has presented a bill in parliament that would cut public sector wages by 25% and pensions and unemployment benefits by 15%.
The austerity measures are among the most severe in the EU and have unleashed a maelstrom of protest in one of the bloc’s poorest members. The package will face a vote of confidence next week that could bring down the government, which holds a razor-thin majority.
The government insists that the wage cuts are necessary if Romania is to meet its revised 6.8% deficit target agreed with the IMF and the EU.
Another day, another country in crisis. Where will it end? Not with more debt, not with bail-outs. Only a return to a market-based system with incentives for people to work, rather than retire, will prove to be a permanent answer. Sadly, all the civil servants, who have enjoyed a cushy ride, are loathe to make the changes necessary.
Marko's Take
Want more background on the Euro-Zone's problems? Use our search engine at the top-right of this site to obtain the latest information on everything financial and political. And, if you have a more political bent, we will be expanding the You Tube videos. You can access them by clicking here http://www.youtube.com/markostaketv. Bone up on topics such as The Federal Reserve, Peak Oil, Personal Income Taxes and Social Security.
Fears escalated yesterday that Europe's debt problems were spreading beyond the core Euro-Zone after Hungarian officials warned for a second day that the country was at risk of a Greek-style fiscal meltdown.
A government spokesman for new prime minister, Viktor Orban, said on Friday that even default was possible given the economy’s problems. This sent Hungary's currency, the Forint, tumbling and credit default swaps surging by more than 100 basis points to 425.
The latest comments are likely to increase skepticism of the new administration among investors. Markets initially welcomed the center-right party's election victory in April. However, they have been unsettled by repeated government clashes with the central bank and calls for foreign-currency loans to be converted into Forints.
Hungary's debt last year was 78% of Gross Domestic Product (GDP), the highest among the European Union's newest members. But it remains very close to the 74% European Union (EU) average, and well below Greece's 115%.
Budapest has yet to draw down all of a €20 billion support package with the International Monetary Fund (IMF) and the EU in October, 2008. The previous Socialist-backed government last year cut the deficit to 4% of GDP and stopped drawing on the credit line when market conditions improved.
Hungary’s cabinet met for a third day on Monday to discuss a range of fiscal measures designed to trim an estimated 1-1.5% of GDP. The government promised to announce its action plan today at the latest.
European problems don't stop there. Let's not forget Romania. Analysts have talked down the relevance of Hungary’s problems to others in the region, but neighboring Romania, a fellow recipient of a €20 billion credit line from the IMF and the EU, is suffering from its own set of fiscal problems.
Prime Minister Emil Boc has presented a bill in parliament that would cut public sector wages by 25% and pensions and unemployment benefits by 15%.
The austerity measures are among the most severe in the EU and have unleashed a maelstrom of protest in one of the bloc’s poorest members. The package will face a vote of confidence next week that could bring down the government, which holds a razor-thin majority.
The government insists that the wage cuts are necessary if Romania is to meet its revised 6.8% deficit target agreed with the IMF and the EU.
Another day, another country in crisis. Where will it end? Not with more debt, not with bail-outs. Only a return to a market-based system with incentives for people to work, rather than retire, will prove to be a permanent answer. Sadly, all the civil servants, who have enjoyed a cushy ride, are loathe to make the changes necessary.
Marko's Take
Want more background on the Euro-Zone's problems? Use our search engine at the top-right of this site to obtain the latest information on everything financial and political. And, if you have a more political bent, we will be expanding the You Tube videos. You can access them by clicking here http://www.youtube.com/markostaketv. Bone up on topics such as The Federal Reserve, Peak Oil, Personal Income Taxes and Social Security.
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