The Euro: Is It Short-Term Gain For Long-Term Pain?
30/06/11 -- There's an interesting and thought provoking piece on the euro and European debt on a Wall Street Journal blog here today: The Euro Has Bigger Fish to Fry Than Greece.
The PIIGS story is clearly far from over, which would suggest that today's sterling exchange rate of 1.1050 against the euro is somewhat miserly. However with the ECB looking likely to raise interest rates imminently, things may get worse for the pound before they get better.
Merv the Swerve seems smugly rather content to see the pound slide further in an attempt to boost our exports. Out of interest in 2010 our primary export homes were the US (14.71 percent), Germany (11.06 percent), France (8 percent), Netherlands (7.79 percent), Ireland (6.89 percent), Belgium (4.65 percent) and Spain (4 percent).
With the pound at, or close to, it's lowest levels against the dollar since January, as well as a fifteen month low against the euro then exports (including grains) to all of of those countries should in theory take a boost.
But that's only if they can afford to buy what we have got to sell.
As EU interest rates rise, the rate at which the PIIGS accelerate into their own shit will also increase. And I for one don't want to be standing too close to the fan when that happens.
Euro Résumé
25/11/10 -- The single currency remains under pressure as traders seem spoilt for choice as to which country to whip next. Just in case you are getting confused here's an update on where we are now:
The PIIGS have lost an I as Ireland have now grasped the nettle, as of course also have Greece so the G has gone as well now. Incidentally reports circulating yesterday that Steve Jobs and Apple Corp were to step in and buy Ireland, slim it right down, give it a touchscreen and re-brand it as iLand appear to have been untrue.
So right, we're left with PIS at the moment, although Slovakia or Slovenia could easily join the party any time soon.
Reports this morning suggest that little old Belgium might be about to join this illustrious club after the premium to insure against it's debt rose by 5% yesterday. I don't know whether that gives us SPIB, BIPS or PIBS, but it probably doesn't matter as the smart money is now piling on the Portuguese to be the next country to fall. The cost of insuring against their debt is apparently 3.3 times greater than that of Belgium and two thirds higher than Spain's.
That leaves us with BIS, if Italy pull out and Austria, Latvia and Lithuania do the decent thing then we're left with BALLS.
Flat For Sale
How long has the euro got? Less than five years according to a dozen of the 25 leading City economists that took part in a survey published in the Sunday Bellylaugh yesterday. Eight said it would limp through and five abstained.
One wag went as far as to say it "may not even survive the next week".
It seems fairly well touted that if the single currency can survive, then it won't be within the boundaries of the existing 16 member state set up, with talk of two-tier membership and/or various countries dropping out.
Hungary are the latest country to pop their heads up in urgent need of a slice of the rapidly disappearing rescue cake.
As a preamble to introducing unpopular austerity measures, the new Hungarian government are accusing the old one of lying to the population and markets about the financial state of the country. No surprises there then.
Germany meanwhile seem to be getting more and more hacked off with the irresponsible behaviour of its fellow eurozone members.
Think large block of multi-story flats. Germany have paid up to have the palatial penthouse apartment at the top, the one with the roof terrace jacuzzi and swimming pool. It was a lovely building, until that lot moved in.
Greece and Hungary have completely trashed their smaller ground floor apartments in the style of an ageing rock star, vomiting in the communal areas, throwing televisions out of windows, that sort of thing. And who did THAT in the lift? Germany doesn't know for sure but it has a pretty good idea. They paid for the cleaners to come in and sort it out last time, but it's happening every weekend now.
They're not sure what sort of an operation Spain and Italy are running on the second floor either, but they sure have a lot of gentleman callers.
How Frau Merkel must hanker after a quiet life, relaxing in her lederhosen and gimp mask gently combing her underarm hair in a nice quiet little dungeon in Dusseldorf?
Euro Slump
The euro has slumped to a four year low of 1.2051 against the dollar and its worst against the pound since December 2008 when sterling came within spitting distance of reaching 1.21 against the beleaguered single currency.
It's the same old story for the euro, concerns over the magnitude of sovereign-debt. China said last week that it was reviewing the euro portion in its mountain of foreign exchange reserves as the currency continues to fall.
It's ironic that it was only a year ago that China was expressing it's dissatisfaction with it's exposure to the then declining US dollar. Now it's ditching the euro in favour of the US currency.
Chinese exporters are said to becoming increasingly reluctant to accept the euro in settlement of foreign trade.
Figures from the ECB say that Eurozone banks are depositing record amounts of cash in the ECB's overnight facility. That is being taken as a sign that they are happier having it sitting on deposit than lending it out to business.
One euro was worth 1.4287 at the close of 2009, it has subsequently fallen more than 15% from that level and we are less than halfway through the year.
Early Chortle Of The Day
"More bluntly, if Papandreou's dog drops a deuce in a box and he presents it to the ECB claiming that it's worth $10 billion, the ECB will in fact issue $10 billion in real, honest-to-God Euros against that box - no matter how badly it smells."
Pithy insight into the the Greek debt problems and the associated implications for the euro: here
Big Week Ahead In The Currency Markets
Having dipped below the 1.50 mark against the dollar again this morning, the pound looks like it's in for another volatile week.
Monthly inflation figures are due to be published tomorrow, with analysts expecting the consumer prices index (CPI) to have eased back to 3.1% for February after hitting 3.5% in January.
The increase, up from 2.9% in December and a low of 1.1% last autumn, was driven in part because of the end of lower VAT.
The Bank of England's government-set target for inflation is 2%. The Bank say that they expect things to dip back to this kind of level later in the year.
If they don't the the BoE may ultimately have to consider raising rates in order to meet its target.
We have the budget to look forward to on Wednesday, where the caterpillar eyebrowed one will outline exactly how he's going to cut borrowing, and pay back some of what we already owe. Of course in the run up to an election he's got a bit of a tightrope walk to do.
Greece is finally likely to be told politely but firmly to "do one" by EU minsters meeting at their summit on Thursday/Friday, before getting straight onto their mobile phone to the IMF.
We can probably therefore expect both the pound and euro to come under pressure as the week progresses.
Euro Drops As Greece Wants More Than Eggs This Easter
The euro is down across the board today as Greece indicates that it might have to approach the IMF for aid as soon as the Easter weekend.
Piling the pressure on the EU to agree to launch some sort of fiscal rescue package at an EU summit a week today, March 25th, rumours are abounding that a failure to do so will force Greek Prime Minister George Papandreou to approach the IMF for help.
A Dow Jones News article, quoting a senior Greek official, suggests that the rift between the administration in Athens and that of Germany is widening. A report in the Wall Street Journal says that Greece's minister of economy, competitiveness and shipping, Louka Katseli, says that the chance of going to the IMF is now some 70%.
It's an interesting situation developing and a difficult one to call. Whilst German Chancellor Angela Merkel plays hardball, ECB President Jean-Claude Trichet and French President Nicolas Sarkozy appear more in favour of an aid package.
Sarkozy's keenness to help Greece out might have something to do with the fact that the IMF head, Dominique Strauss-Kahn, is an old political adversary of his.
Looks like more euro volatility lies ahead over the coming weeks.
What Do you Call A PIG With Three Eyes
It's a PIIIG of course. A three-eyed pig would come in handy today, as it could keep one eye on Greece, one on Brussels where EU leaders are meeting and the other on the euro.
Currently of course we only have two-eyed pigs: Portugal, Italy, Ireland, Greece and Spain.
The Greek porker is the most unwell, will today's meeting offer any help, that is the sixty billion euro question.
Although Germany and France seem to be coming round to the notion of proffering a strings-attached bailout, Germany's Free Democratic Party are wittily quoted in the press as saying that doing so was like offering an alcoholic another bottle of schnapps.
The euro has been buoyed this past few days by talk of a rescue package, indeed the pound is currently little more than one euro cent higher against the single currency since the turn of the year.
Personally, I think that this owes more to funds banking profits with all the current uncertainty in the air. If a rescue bailout is launched we might see the euro temporarily push a bit higher. Although I can't see any upswing lasting too long before the reality of what is it all really going to cost kicks in.
If Greece is left to fall on it's own sword then the implications for the single currency are pretty obvious.
Either way, the euro is going lower. The next questions is is the pound going down the toilet with it?
Euro Latest
All of a sudden the word on the streets is that EU finance minsters might have had a bit of a rethink and a bailout for Greece might be on the cards after all. And it seems to be a German-led attempt to put some sort of a hastily arranged package together, ahead of tomorrow's meeting of EU leaders.
Now call me an old cynic, but might it just be that the nice German finance minister has suddenly realised that it's German banks who are sitting on the largest proportion of Greek debt in Europe?
Talk of a rescue being mounted was enough to prompt some euro short-covering yesterday, but the single currency could easily be back under pressure by the end of the week unless EU leaders come up with something credible.
Even if a deal gets done, the wider implications for the euro are that this would potentially pave the way for Portugal to be next (but not last) to come knocking on the door.
This saga is far from over yet, about the only thing that looks certain is that more volatility lies ahead. Ultimately though, I'd say that the euro is going lower in the medium term, although a collective sigh of relief and further short covering should a bailout be launched could see it correct a little higher in the short-term.
Kissing A Greek
Is the euro set for the knacker's yard? Certainly everybody seems to think so, according to the FT, traders and hedge fund managers have built up more than GBP5 billion in short bets that the single currency will continue to go down the pan.
Of course, that leaves a heavily oversold euro possibly overdue for a sharp rebound at some point. If only we could figure out when that will be.
It is unlikely to come whilst all the current uncertainty is around, that's for sure.
Personally I don't think that ultimately Euro Zone finance ministers resisting a bailout and allowing a Greek default will happen, because the financial and political repercussions for the rest of Europe are simply too great.
A Greek default immediately devalues an estimated 250-300 billion euros of Greek debt held by banks, and bond and pension funds. Mostly already under capitalised European and international banks. It would be another subprime domino effect all around the world (and particularly in Europe) all over again.
So whilst the rest of Europe, and the world, paces the floor hoping that the Greek patient will take it's bitter medicine and slowly get better, surely Trichet and the rest of his crew are secretly prepared to administer a mouth to mouth bailout if absolutely necessary?
If a bailout does happen, then there will need to be some very serious "riders" indeed, as mounting one would be futile without clear and tangible deficit reductions by the Greek government. Whilst that might make them unpopular at home, they're hardly flavour of the month right now anyway.
If they defaulted instead, that would ultimately bring about the same Greek recession as the one brought about by what the media are calling the current "austerity measures" - PLUS they'd never be able to borrow money at anything other than crippling rates ever again.
Media reports today are saying that Trichet is to leave a meeting in Sydney unexpectedly early and fly back to Europe for an EU leaders' summit on Thursday. I wonder if he's bringing some heavy duty mouthwash with him?
Friday Morning Currency Ramblings
The pound has dipped just below 1.57 against the dollar this morning, that's the first time it's been that low since May last year, when it was still on the road to recovery from the dark days of early 2009 when it fell to 1.35.
It seems to be all about a flight to safety at the moment, and the dollar is still seen as the safest haven around. It seems strange that the dollar moves higher despite disappointing jobs data from the US, but there we have it.
The US Labor Dept said yesterday that initial claims for unemployment benefit in the US increased by 8,000 to 480,000 last week, that's the highest figure for seven weeks. A fall of 10,000 had been expected.
Crude oil stocks data also appeared to indicate that the global malaise is far from over. US refineries are now running at their lowest capacity since 1990, barring hurricanes, and crude stocks are still rising.
Then we have the poor old euro and the spectre of the PIGS, the potential fallout from which is also weighing on the pound. The ECB left interest rates unchanged yesterday, as did the BoE, just as everybody expected. Trichet trotted out the same old rhetoric in his accompanying speech, droning on and on about how each country in the Euro Zone must sort it's own problems out. Blah, blah, blah.
Greek customs officials began a 48 hour strike yesterday, doctors and civil servants plan to walk out next week and there is talk of a general strike later this month.
As far as a Greek bailout is concerned the official ECB line is that there won't be one, as mounting one sets a dangerous precedent with the rest of the PIGS holding out their trotters. Why should other EU countries pay for their financial mismanagement? The domino effect could spell the downfall of the entire single currency.
That puts Trichet in a be damned if you do, or be damned if you don't kind of a situation.
The euro has consequently fallen from 1.5140 to 1.3640 against the dollar in just two months, a decline of 10%, further declines look on the cards.
No Bail-Out For Greece - German Economist
The former European Central Bank chief economist Otmar Issing, writing in Germany's Frankfurter Allgemeine Zeitung, says that there should be no bail-out for Greece.
"Nothing would weaken the euro more and bury the reputation of the monetary union as a community of stable money more than a blatant breach of the precept of financial policy discipline," he writes.
"If the no bail-out clause is breached, all the dams will break. The Greek disease will spread," he adds.
"Each state is itself responsible for its own public finances, member states do not guarantee the debts of others. This principle allows no compromises. If an exception is made, there will be no holding back. The fear that Greece could set off a chain reaction would become a certainty," he says.
"If the community helps Greece, which blatantly breached the community's rules and went into the crisis with heavy debt, how can you then refuse others?" he concludes.
The euro might garner a bit of strength from that, we shall have to wait and see. The pound currently stands at 1.1520 against the single currency, posting a 2.8% gain for the month of January.
Pigs, Geese And Chickens
One of the potentially most interesting problems of 2010 is how is Europe going to solve the problem with the PIGS? Particularly Greece, the most ailing porker of the lot.
Unemployment there is set to top 20% this year, according to the country's Labour minister Andreas Loverdos, and Greece’s national debt will hit 120% of GDP this year, possibly getting close to 140% by 2012.
Wasn't it Groucho Marx who said that he wouldn't want to join any club that would have him as a member? How the financially stronger nations in Euroland must be wishing that they hadn't been quite so keen to welcome all-comers now.
It seems to me that the Greek government are playing a game of chicken with ECB chief Jean-Claude Trichet. How sick do you want us to let the nation get before you send the paramedics in? You can't just let us die.
For all his hard words, Trichet will mount a Greek rescue if it becomes the only way to save the break-up of EMU, that is what most pundits seem to believe. But of course Greece isn't the only patient on the critical list, and if you save one then what's good for the goose & all that means you have to save them all, surely?
That comes bundled with enormous financial and political cost implications, and would certainly be a gigantic millstone around the euro's neck.
Maybe I will book that Spanish villa this summer after all...
Would You Bailout The PIGS?
It seems like you can pretty much largely forget the fundamentals for the time being. We are unfortunately back in the grip of an ever-worsening credit crisis, and that seems to be all the market can focus on for the time being.
The euro nations are in serious trouble and in danger of not being able to ride this one out. It was always going to be a potentially explosive mix, putting countries with economies so diverse together.
For the record the sixteen members of the Eurozone are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
It's one thing bailing out your own country, it's another entirely bailing out somebody elses.
For the euro it may be a case of the first crisis is one crisis too many.
At one end you have, the highly disciplined, but also slow growing, economies of Germany. And at the other end you find the faster growing but poorly disciplined countries such as Spain and Greece. As icing on the cake, you also have, countries that lack in both departments, such as Italy.
As Al Murray would say, you'd never sell that flat with that lot living next door would you?
It seems that the relative good times enjoyed by all since the euro's inception ten years ago, have simply papered over the cracks. During this time the PIGS appear to have made little effort to discipline themselves over debt.
Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged.
German Finance Minister Peer Steinbrueck now says that euro-region countries may be forced to bail out other members of the 16-nation bloc that face problems refinancing their debt.
Imagine the uproar here in the UK if we were in that situation. Things are bad enough for Gordon McBroon already.
What are the alternatives? Let euro members default on their debt? Break the party up and tell the PIGS to sort their own mess out? Or carry on printing more money like Zimbabwe?
Whichever way, "make your mind up time" is rapidly approaching.
Euro And Sterling Decline
The pound and the euro both fell against the dollar in early trade Tuesday, with the euro plumbing to a ten week low of 1.2603 against the greenback.
Moody’s Investors Services said that they might downgrade banks with heavy involvement in Eastern Europe as the financial turmoil in the market worsens. They might want to take a look at Ireland as well, with talk in the papers over the weekend of bank defaults there not being out of the question.
The yen is also down the tubes after video footage of Japan’s Finance Minister Shoichi Nakagawa falling asleep in front of the TV cameras at the G7 meeting over the weekend. Nakagawa said he'd taken too much "medicine" but offered his resignation anyway.
The pound is down ahead of a report which is likely to show UK inflation continuing to slow, giving the BoE one more excuse to drop interest rates to a half percent at the next MPC meeting in March.
Euro Under Pressure On Rate Outlook
The euro is under renewed pressure today, just a day after the single currency's biggest ever one-day fall against sterling Monday.
The European Union's statistics office Eurostat said inflation in the 15 countries using the euro in December was up just 1.6 percent on a year earlier. That was down from 2.1 percent in November and well below the ECB's target of just under 2 percent.
Inflation could now possibly be close to zero in the spring, analysts are saying, piling the pressure on the ECB to slash rates in the coming months by a further 150 basis points to 1%.
The ECB meets to discuss rates next week. Markets have largely priced in a 50 basis point cut, with some investors betting on a 75 basis point move after the last such reduction in December.
The pound currently stands around 1.09 against the euro.
Forex: Sterling, Euro Crash On Rate Outlook
Just when you thought Tuesday was bad enough, sterling and the euro have started Wednesday having a very bad day at the office.
The euro fell below $1.28 for the first time since November 2006 and the pound tumbled to a five- year low on speculation European central banks will cut interest rates as the global economy heads for a recession.
The euro fell to $1.2743 before trading at $1.2874 as of 9:20 a.m. in London from $1.3063 late yesterday in New York.
The pound dropped as low as $1.6203, the lowest since September 2003, and traded at $1.6295 at 9:20am BST, from $1.6706 late yesterday. It also declined for a third day against the euro to 79.06 pence from 78.17.
Investors bet the European Central Bank will lower borrowing costs by another 0.75 percentage point by June after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8, part of coordinated reductions by major central banks.
The British pound fell for a fourth day against the greenback after a report yesterday showed U.K. manufacturing confidence dropped to its weakest level in almost three decades.
The minutes of the most recent BoE MPC meeting are due for release at 9.30am London time and could provide further downwards impetus for the pound. Last night BoE Governor Mervyn King said that "it now seems likely that the U.K. economy is entering a recession."
Pound slips on mortgage woes, credit crisis
U.K. mortgage approvals slipped to a fresh record low of 32K from 33K in July, signaling that the downturn in the housing market may get worse as U.K’s biggest mortgage lenders find themselves in troubled waters.
The dollar received a boost from relief that U.S. lawmakers were set to vote on a $700 billion bailout fund to alleviate the credit woes.
The euro fell against the dollar as Belgian-Dutch financial group Fortis was rescued in a state buyout after European Central Bank President Jean-Claude Trichet held emergency talks with Dutch, Belgian and Luxembourg officials.
Sterling was hit as authorities prepared to nationalise troubled mortgage lender Bradford & Bingley and were discussing the sale of its savings deposits and branches, people familiar with the matter said.
At 11am BST the pound was $1.8030, more than four cents lower than Friday's close. The euro was $1.4355 around 2 1/2 cents down from Friday's close of $1.4610.
Dollar Hits High Note Vs Euro/Pound
EURO
The dollar climbed to the highest in almost a year against the euro Friday morning on concern that a credit- market slump will lead the world into a recession, prompting investors to sell higher-yielding assets.
The euro declined after Luxembourg's Finance Minister Jean-Claude Juncker said the currency is "overvalued."
The euro fell to $1.4297 from $1.4325 yesterday. It earlier touched $1.4214, the weakest since Oct. 24. The euro may decline to $1.40 in the coming months analysts said.
POUND
The pound fell against the euro and the dollar, headed for a fourth weekly loss, after the Bank of England kept interest rates on hold, making an economic recovery less likely. The pound is set for a seventh weekly decline versus the dollar.
The pound was at 81.30 pence per euro by 8:10 a.m. in London, from 80.25 pence a week ago. It fell to 81.88 pence yesterday, the weakest level since the single European currency debuted in 1999. The pound was at $1.7610, after earlier slipping to $1.7538, the lowest level since April 2006. It has dropped 3.3 percent in the past week.
Dollar hits six month high vs euro
The dollar rose to its highest level since February against the euro on speculation oil prices near a four-month low will support economic growth in the US, the world's largest energy consumer.
The greenback also advanced to its strongest level in more than two years versus the pound as Hurricane Gustav weakened before making landfall in Louisiana.
The pound fell to $1.7851 early Tuesday, the strongest since April 2006. Against the euro it rose as high as $1.4516, its highest since February.
The US currency was bolstered by speculation the Federal Reserve's seven rate cuts in the past year will help the world's biggest economy recover from a slump.
