You are browsing the archive for Euro Zone.

Markets in Europe Plunge (Again) Over Greek Default Fears

4:45 am in Uncategorized by Bill Egnor

Stock Market Fortune Cookie

Stock Market Fortune Cookie by bransorem

It looks to be a rocky start to the new week in the world financial markets. Major stock indexes in Europe plunged between 2.42% and 4.57% in trading there. What is the big driver of this new sell off? The renewed fear of a Greek debt default and all that would mean for European banks that have large amounts of Greek bonds on their balance sheets.

The slowly dawning realization that no amount of austerity is going to allow the Greek government to cover its financial commitments and a growing reluctance by the German government to even try is putting a fairly panicked patina on the world markets.

It is not like this is really that unexpected. The problem is that as the Greek government has slashed spending and wages and hours, their economy has slowed down. The unemployment rate in Greece has is nearly 16% and that only counts those who are looking for work, not so-called discouraged workers.

With that level of unemployment any cuts in demand just wind up as more unemployed workers who can’t afford to spend very much. This means there is less tax collected, less production needed and more people are likely to be laid off.

The next logical step for Greece is to default on its debt. This could be good for Greece in the long run, but in the short run it is likely to make the Euro Zone a really unhappy place. The index that lost the most value today was the French CAC. This is because Frances three largest banks are major holders of Greek debt. All three are expected to be down graded by credit rating agencies some time this week for this very reason.

If this seems familiar it is because it is very similar to the way that our own housing bubble collapse played out. Risky debt began to become a liability and the amount of it in the hands of US and other nations banks threatened to rob them of the liquidity they needed and make it nearly impossible for them to borrow money short term.

That it is happening to the second strongest economy in the Euro Zone is making a lot of investors nervous, and with good reason. The Washington Post quoted the German Finance Minister as saying:

“To stabilize the euro, we must not take anything off the table in the short run,” Roesler told Germany’s Die Welt newspaper. “That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.”

Read the rest of this entry →

Modestly Good Job Numbers, Are They Enough To Stop The Slide?

5:19 am in Uncategorized by Bill Egnor

Support Unemployed Nomads

Support Unemployed Nomads by jon|k

Hey what do you know? We actually had a modest gain in jobs this last month. The economy gained 117,000 jobs according the statistics released this morning. That is actually better than the number that analysts were predicting, which was around 85,000.

Unfortunately that is all the good news there is on this. The economy needs 150,000 new jobs a month just to keep up with the rate of population growth, so if you are a glass half empty person, we came up 33,000 jobs short of what we needed to break even.

The unemployment rate fell one tenth of a percent to 9.1% but this was almost certainly due to more people leaving the jobs market, instead of robust jobs growth. The question is, will this be enough to blunt the sell-off that we are seeing on world markets?

The answer is likely to be no. The reasons for the sell-off have more to do with the future jobs and growth outlook than they do with any single month’s report. The picture has not improved.

As long as the Euro Zone is imploding (for reasons that have a lot to do with countries not having their own currency and having Euro Zone constitutional requirements for debt limits), and the Japanese economy is still rebuilding from the tsunami and the resultant nuclear disaster of this spring, and the U.S. looking at austerity instead of jobs programs there are more than enough structural issues which can make investors nervous enough to cash in on the market highs that we enjoyed until just last month.
Read the rest of this entry →

Greek Debt Crisis, No Simple Answers, For Anyone

5:36 am in Uncategorized by Bill Egnor

Greek flag

Greek flag by gingerbeardman

There are a few truisms that pop up again and again in my life; Everything takes longer and costs more; Nothing is simple and There are no simple answers to complex problems. All of these seem to be true of the Greek debt crisis. There are a couple of articles in the New York Times today that lay out the scope and complexity of the problem, you can find them here and here.

Unlike the United States the Greek government is actually in a debt crisis. They have probably entered a debt trap, where they don’t have enough money to pay all their normal bills plus the interest on their debt. This means that they have to borrow to cover the interest. Of course when they borrow they have more interest and more debt.

Unlike the United States or other nations who have a sovereign currency they can’t just devalue their currency or lower interest rates. Being part of the EU and the Euro zone these things are controlled by the European Central Bank.

This puts them in a really bad place with few options. Right now the three groups that are loaning them money, the IMF, the European Union and the European Central Bank are demanding cuts or savings totaling $40 billion by 2015. That is a huge amount of the Greek GDP, nearly 12% of GDP. To give you an idea of what that would be in the United States economy it would be like cutting out $1.75 trillion (yeah, 175,000 billion) in the same time period.

To do this the Papandreou government is basically going to have raise taxes, slash wages and employment and sell off a bunch of the state owned assets of the nominally Socialist state. The question that is starting to emerge is, will this actually fix the problem?
Read the rest of this entry →