Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

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.


© 2005-2019 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

6 Critical Money Making Rules