1/22/2013 2:30 AM ET|
Will Europe kill the rally?
So back to square one?
So what happens now? How quickly do we approach a rerun of the eurozone debt crisis?
The answer is not very quickly. Spain and Italy, the two economies with problems too big for the eurozone's bailout funds to handle, have used the calm after Draghi's "whatever it takes" promise to pre-fund a good portion of their debt needs for 2013.
For example, on Jan. 15, the Italian government sold 6 billion euros in 15-year bonds, roughly $8 billion. That was the first time Italy has been able to sell 15-year bonds in more than two years, itself a sign of how far confidence has climbed. And this brought total bond sales by the Italian government in 2013 to nearly 10% of its total funding need for the year. Ten percent in two weeks -- that's a very good start for a year that will be challenging -- though less so than 2012. In 2013, it's now estimated that Italy will need to sell 186 billion euros in debt, a hefty sum but substantially less than the 235 billion euros sold in 2012. The Italian Treasury has been so encouraged by bond sales this year that it plans to offer 30-year bonds -- when the time is right, according to Treasury sources. Italy hasn't been able to sell 30-year bonds in the market since September 2009.
The story in Spain is also positive, although less so than in Italy. Spain has to sell about 8% more debt in 2013 than it did in 2012 -- about 122 billion euros this year. So far, as with Italy, the Draghi promise has brought interest rates down and given Spain renewed access to the bond markets. Foreign investors who had shunned Spanish debt before Draghi's pledge have returned to buy Spanish debt. I wouldn't call foreign holdings of Spanish debt robust, but the level has rebounded from a summer low of 33.86% of total debt to 35.44% in November.
I think the good news on bond yields and bond sales from Italy and Spain -- and from Portugal and Ireland, where those countries have said they hope to return to the bond markets as early as 2013 -- pushes a return to crisis further down the road. I think optimism about European sovereign debt has enough momentum to hold until summer.
3 signals to watch for
After that, the date on which the financial markets might see a return of the crisis depends on three things:
- First, it hinges on the strength of a new Italian government after the February elections. The goodwill that sustained even the minimal economic reforms that Mario Monti pushed through is largely gone. A weak coalition government will have a hard time convincing the European Central Bank or the International Monetary Fund that Italy's debt is under control. I don't think a weak Italian government will create an immediate negative reaction in the bond market, but it would be the start of a creeping unease.
- Second, it depends partly on how quickly the finances of Spain's regional governments deteriorate in 2013. Already, one-third of the planned 71 billion euros ($94.6 billion) in new debt that Spain plans to issue in 2013 (the rest of next year's total consists of refinancing debt that matures) is headed to Madrid's bailout fund for regional governments. Yes, Spain's weaker banks are likely to need further bailout funding, but I think the market already understands that and that previous bailouts have put a structure in place.
Regional government debt raises much more troubling issues for the bond markets. We've already seen the beginnings of a battle over the subordination of this debt to Spanish national debt with holders of existing regional debt protesting Madrid's efforts to make this debt junior to the national debt. Regional debt has exposed the unsettled political questions about the relation of the central government to the regional governments. With Catalonia pushing for more autonomy, regional debt could be a flash point for a genuine constitutional crisis that would unnerve bond markets. I think Spain is the likely catalyst for any revival of the eurozone debt crisis.
- Third, it will be partly determined by whether Merkel can postpone any action likely to rile German voters until after fall elections. She certainly will try. The idea of more money for Greece is extremely unpopular in Germany. So is anything that implies joint responsibility for debt. German -- and, to a lesser degree, Finnish and Dutch -- politics will severely limit what the eurozone countries can do to head off a crisis. I don't think this moves the return of the crisis closer to us in time, but it does suggest that any effect from a return to the crisis would be addressed slowly. (This is even more likely if, as now seems to be the case, the International Monetary Fund is having second thoughts about the effectiveness of austerity economics.) Negative trends could well gain momentum. In a political vacuum, even more will depend on the European Central Bank. Draghi's promise to do whatever it takes to defend the euro might get tested.
Defending the euro
This last factor is the one that most worries me, because it, unlike an actual deterioration in the budget deficits of Spain or Greece, has the potential to significantly weaken the market's faith in Draghi's promise.
I can see a political situation arising in Germany where the opposition of the German central bank, the Bundesbank, to further support for the troubled economies and banking systems of Italy and Spain and the rest of the eurozone-crisis countries threatens Draghi's ability to deliver on his promise. And I can see a political situation arising in Germany where Merkel's position is so weakened that she can't push back against the Bundesbank. She would have to behave like the "Germany first" leader that so many in Europe fear -- wrongly, I think -- she already is.
And that would change the game. If investors start to think that the European Central Bank doesn't guarantee the markets and that the solution to the crisis depends instead on European politicians, then I think we're looking at not only a replay of 2012 but also an escalation of the crisis to something that could significantly damage global financial assets.
I'd say the odds are against that very negative outcome. But I can't, unfortunately, rule it out.
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Since right after the time of Jimmy Carter (Dow 700) the government has regularly and increasingly drugged the economy with stimulus money. After some thirty years of this, our addict economy is nothing more than a zombie in a stupor that can no longer even feel the ever larger doses of stimulus.
If, and that's a big IF, the US can fix it's debt and deficit spiral then the US market could be immune to a small but pesky EU NO to Greece this time around. Basically somebody has to tell the Greeks that the free lunch is over and they should go back to their own currency. That will serve Italy, Portugal and Spain with a notice that they're next if they don't fly narrow and straight.
Italy , with the election coming ( that' s a big can of worms ) I live in Italy at the moment , I see the nightly news i see the debates I see the daily struggles of this beautiful country and people , I see the lack of trash pick up here in the south . I always say if we could just Export the political corruption we would be in good economic shape . Silvio Berlusconi , what a Joke , Please
PS on top of this , do you know you have to pay two euro to vote in Italy ?
Financial markets rallied in 2012 and have continued that rally so far in 2013, despite worries over slow growth in the United States and the realities of no growth in Europe and Japan.
let me re-state that
it's all f-in KOOLADE always has been
If we... Closed the Banks, ended the Federal Reserve and got RID of Wall Street... the correct 47% would be disabled from scuttling us further and the 53% with abilities and skill sets could get back to work and recover us. Europe's issues haven't changed since Day One... Germany couldn't revive the Third Reich with military weapons so they went for financial ones instead.
There is massive unemployment and every Euro goes into Complex Financial Instrument obligations. Without separate currencies, no nation can restore economic balance. With separate currencies, the moves made by Germany make it's exports too expensive for the rest of the world to buy. They have ONCE AGAIN screwed themselves into a corner.
The markets keep moving up, based on the belief that the world's central banks will keep pumping money in to boost the economy. A replay of Europe's debt crisis could test that faith.
'moving up based on the "belief" that the worlds' central banks will keep pumping money in to boost the economy, now where have I heard that one before???? so pumping money, not based on a surging economy is supposed to boost the markets??? so more smoke and mirrors, smoke and mirrors, so let me get this straight, the markets are basically going up, not on ECONOMIC growth with huge influxes of jobs in the private sector, but on "hopes" on "beliefs" and a partridge in a pear tree, ok, got it!!!
meanwhile how ugly is michell obama in those outfits, sheeesh!!! man her azz looks like a cross town bus!! lengthwise, but oh how the media gush over her, the woman looks like a pre-op tranny!! and everybody knows it!!! the leftwing loony media is as off the rails, and phony like the market is, we're soooooo fcked!!! soooooooooooooooooooooooooooooooooooooooo fcked!!! ultra fcked!!!
The negative scenarios described here can easily happen, good article.
The optimistic flip side is that Europe manages to kick the can down the road until after the elections in Germany. And then whoever wins there has the courage to push forward a long term plan that involves eventual joint debt and/or greater federalization of Europe (i.e. a transfer union like we have here in the US). That would permanently end the European crisis, and thrust the US and Japan into the starring roles as most dangerous to world financial stability.
this kill's the rally.........
phil mickelson apologized to the HAPPY HAPPY SMILEY SMILEY PEOPLE for raging against the communist gov. in california.........he apologized as they threatened him by stating he not allowed on golf course..........
phil pay's 63 cents on the dollar for all you commies to have a nice life and do nothing.......PHIL HAS LOST FREE SPEECH BY JOINING THE COMMUNIST'S OF AMERICA IN CALIFORNIA!
SRT, thats what is propping up our market as well. We have borrowed and printed MORE than our growth. Our money supply in 2009 was about 800 billion. We have increased that to over 3 Trillion in just a few years. At some point inflation will come on ....BIG TIME. A guess ...starting this fall and within 1 - 3 years we get smoked.
When inflation kicks up, interest rates plow higher, the dollar falls dramatically. By then the debt will be over 20 trillion and the interest alone will be over a Trillion a year. That is just assuming rates we had under Clinton in the 4% range. The same thing that is propping us up now, massive borrowing and spending, will make the fallout much, much worse.
Marxism; Stalinism; Maoism; Fascism.........OH'bomaism!
Goldberg: The media love affair with Obama continues
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[BRIEFING.COM] Equities ended on their lows with the S&P 500 down 1.4%.
The S&P entered today's session with a week-to-date gain of 1.5% as investors expected reassuring words from today's Federal Open Market Committee Statement.
Stocks traded with slim losses until this afternoon's FOMC Statement and subsequent comments from Chairman Bernanke sent equities and Treasuries to their lows while also providing a significant boost to the dollar.
Today's Statement was ... More
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