ECB must buy ‘hundred of billions’ of bonds to tame Europe’s debt crisis
This situation in the EU is starting to get pretty dire with interest rates on more Euro Zone country bonds rising much higher than the flagship German economy. In the article the European Central Bank said that this purchase operations would be a sterilized program. This means that these operations should not impact the money supply by increasing it.
If you look at how they are going to implement the program, this is flat out not true. They plan on purchasing the bonds outright from investors and governments alike. When you purchase these bonds, they are giving cash or equivalent in exchange. This money can be spent at that point on any number of endeavors. That does not meet the criteria of sterilized. Even if they just create the credits now to purchase those bonds, in the future you are creating inflation when those bonds come due and you either need to pay them off or create even more bonds (debt obligations) and roll over the debt. There is only 3 options with any debt, pay off, default or refinance. All these programs created always fall under one of three of these.
I am very eager to see the EU’s plan to prevent a double-dip recession in July.
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Spanish savings banks could need up to 24 billion euros
This news along with debt problems in Hungary is helping to push the Euro to new lows. Sunday night when the foreign exchange markets opened, the Euro under $1.20. According to the article, the banks tier 1 capital is below their required 8% equity based on the Citibank analyst Ignacio Moreno. The reason for the losses is no surprise, real estate. Spain’s real estate market really heated up during the bubble years and Spain’s banks had a large exposure to those assets.
Market Watch - Spanish Cajas, or savings banks, could need between 24 billion euros ($28.7 billion) and 34 billion euros to restore an 8% equity Tier 1 ratio for each of them, Citi analyst Ignacio Moreno said in a note to clients published Monday, after conducting a stress test of capital and real estate asset quality. As a result, he said that the cajas should undergo “significant changes” in the next few months including mergers, downsizing and, further ahead, potential listings.
Of the 46 cajas existing today, half will disappear, based on the transactions already announced, he noted. More consolidation is likely in the foreseeable future, according to him, partly because the Bank of Spain’s new provisioning policies will lead to faster recognition of real estate-related losses.
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Libor Show Doubts on EU Trillion Dollar Bailout Package
It has been really surprising with the size of the Euro support package that is reported at being $1 trillion dollars is not calming the markets and sovereign debt investors. All the experts do not think this will be enough to cure the debt issue.
Most experts still think that countries like Greece, Portugal and Spain will need to restructure their debt and that means that a haircut will be taken on some of these bond issues. If a trillion dollars does not help, then we are at a point that we might actually be on the last legs on a bear market rally and we are in for some serious declines to create a real support. The only other option is that we are in for some serious inflation.
The LIBOR (London Inter-bank Lending Rate) is edging up with all this uncertainty. It will be important to watch over the next 2-4 weeks if the rate rises and gets closer to the rates we saw last March.
Bloomberg - Money markets and the cost of protecting bank bonds from losses show investors are concerned Europe’s almost $1 trillion rescue plan may not be enough to contain the region’s sovereign debt crisis.
The Markit iTraxx Financial Index of credit-default swaps on European banks and insurers rose to 38 basis points more than the Markit iTraxx Europe Index tied to investment-grade companies from 31 yesterday. While the gap narrowed from 58 basis points before European leaders agreed to the rescue plan, the bank index on average has traded 10 basis points less the past three years. A measure of banks’ reluctance to lend also rose to more than three times the level from March.
The loan package for debt-laden nations including Greece is part of an attempt to stop a decline in the euro and stave off a sovereign default that would threaten recovery from the worst global recession since the 1930s. European financial companies, which hold more than 134 billion euros ($170 billion) in Greek, Portuguese and Spanish sovereign debt, are under scrutiny by investors concerned that they’re owed too much by Europe’s most- indebted countries.
“Sovereign risk hasn’t gone away in the slightest,” said Jim Reid, head of fundamental strategy in London for Deutsche Bank AG, Germany’s biggest bank. “What this package has done is massively reduce the tail risk in European markets without necessarily changing the medium- to long-term dynamics of financial markets.”
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China trade imbalance blamed for 2.4 million jobs lost
I have to agree that foreign free trade is in part to blame for this loss of jobs from 2001-2008. It is not that free trade is bad but we incentivize the movement of jobs off-shore and we let the cheap finished goods back into the country unencumbered. This is not totally bad, but if we are not providing retraining and more after-highschool training like vocational and college. If we do not do this to create opportunity, then these under-skilled workers are going to have jobs available to them that will lower their standard of living and create less opportunity for their children.
This is the key point that we as a society do not seem to grasp. We keep vilifying foreigners like China because its easy and doesn’t place blame on the home front but that is not the real culprit. These countries are just taking advantage of the system we have opened up to them. As long as we keep producing less and consuming goods without any thought of the actual cost, this cycle will continue until it gets so unbearable that we revolt.
Reuters – Unfair Chinese trade and currency practices caused the loss of as many as 2.4 million U.S. jobs between 2001 and 2008, according to a study released on Tuesday.
The report by the left-leaning Economic Policy Institute said China’s “currency manipulation” was a major cause of the United States’ trade deficit with China, though it said other Chinese practices contributed to the deficit.
The report comes ahead of an April 15 semi-annual report by the Treasury Department in which it must decide again whether to label China a currency manipulator. U.S. lawmakers in recent weeks have been pressuring the Obama administration to label China as such, something that U.S. President Barack Obama, like his predecessor, George W. Bush, has so far resisted.
Source: Reuters
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Obama administration closely monitoring Dubai debt crisis
The White house and most of the world are looking intently at the looming situation in Dubai after the announcement from Dubai World that they will be postponing almost $60 billion dollars in scheduled bond payments. Reaction on Friday was severe compared to what is usually a light trading day. The dollar fell on this announcement and stocks sold off worldwide.
This does not bode well for the recovery that all central banks are trying to engineer and this could be the catalyst that starts the correction many investors have been waiting for after this major run-up in stock prices. If these types of announcements continue in other parts of the global economy, it is going to make banks even more reluctant to lend which is the lifeblood of any glowing economy. This week will be very important to watch in the markets.
The Obama administration said Friday that it was monitoring developments in a looming debt default by the Persian Gulf emirate of Dubai, whose efforts to fend off creditors sent stocks skidding in the United States and around the globe amid fears of new bank losses.
The Dow Jones Industrial Average opened down by more than 200 points during Friday’s abbreviated session, recovering slightly later in the day as analyst reports suggested that U.S. banks had little exposure to Dubai, one of seven sheikdoms that compose the United Arab Emirates.
Around the world, fears focused on the danger that a massive debt default by Dubai could trigger similar defaults elsewhere. Such defaults in Mexico, Russia and Argentina over the past two decades proved contagious.
“The Treasury Department is monitoring the situation,” said a White House official, who spoke only on the condition of anonymity because she wasn’t authorized to talk about the issue for publication.
Source: Miami Herald
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Offshore private banking model is dead in U.S. according to experts
It won’t be die but private offshore banking will continue to be under scrutiny as tax revenues are falling and our budget expense rise. The United States needs all the tax receipts it can get with all these massively expensive social programs coming online. We can not have the wealthiest portion of our population not pay their fair share of the taxes by making income in the U.S. but then sending the proceeds overseas so they are essentially not taxed.
Regardless if you agree with the tax structure, once you get everyone paying in the system, if they still strongly disagree with the level of taxation, the taxpayers have a strong incentive to lobby their representatives for tax reforms. Right now, our wealthy class doesn’t seem to care either way because they have found a loophole to avoid having their wealth taxed like the rest of us. Right incentives are key to having a functioning democracy.
News:
Reuters, Zurich - A U.S. tax probe against Swiss bank UBS has killed traditional offshore banking and wealth managers will have to improve their offers to survive, bankers and industry experts said on Tuesday.
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German finance minister pressuring banks to provide more lending
It is not a good sign to see pressure being put on to banks to provide lending in a economic environment that does not support such an expansion of credit. This is what will lead to more defaults if the income is not there to support the debt service on this additional lending activity. Another issue you will have to deal with and the German population is familiar with…inflation. Steinbrueck mention that banks have a responsibility for the overall economy, I would hope that includes price stability and growth, not just growth.
News (Reuters):
Finance Minister Peer Steinbrueck has written to German bankers pressing them to supply the economy with ample liquidity, raising pressure on lenders to increase the flow of funds to businesses.
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