Financial Market Report for July 21, 2011
1) … World currencies, DBV, Emerging Market Currencies, CEW, and Commodity Currencies, CCX, rose … lifting world stocks, ACWI, Industrials, XLI, the DOW, DIA, Utilities, XLU, World Government Bonds, BWX, and Emerging Market Bonds, EMB, as the US Dollar, $USD, fell on a news of a Greek debt bailout and fears of a US Treasury downgrade as Bloomberg reports Obama Aide, Boehner Say No Debt-Limit Deal President Barack Obama’s spokesman and House Speaker John Boehner said there is “no deal” on raising the U.S. debt limit as all sides said they still lack a consensus on spending cuts and tax revenue.
Indonesia, IDX, Thailand, THD, Russian, RSX, Australia, EWA, and KROO, New Zealand, ENZL, Switzerland, EWL, Japan, EWJ, JSC, Canada, EWC, CNDA, The UK, EWU, and South Africa, EZA, all rose strongly on rising world currencies.
2) … European Financials, EUFN, European Shares VGK, such as Spain, EWP, and EWI, rose as news leaked that European Council President Herman Van Rompuy orchestrated a new seigniorage aid package for Greece and moves toward a European Fiscal Union … with IMFcontributing and banks rolling over some debt and writing off other debt as the European Leaders met in summit and effected a default of Greek debt as Mr. Van Rompuy assures “Private sector involvement will be limited to Greece, and Greece only.”.
Ambrose Evans Pritchard relates: “Europe’s leaders have grasped the nettle. Faced with a spiralling bond crisis in Italy and Spain and the greatest threat to the EU project for 50 years, they have ripped up their bail-out strategy and and taken a large stride towards a “liability union”.
I ask since Greece has lost its debt sovereignty and relies upon seigniorage, that is moneyness, from European Leaders, will it not have to eventually sacrifice its fiscal authority, that is its fiscal sovereignty?
Today Herman Van Rompuy lead the Eurozone in taking The Big Step to Fiscal Union and laid the foundation for the rise of The Sovereign and The Seignior whose word, will and way will establish European economic governance as well as seigniorage in the Age of Deleveraging and Neofeudalism.
Mr Pritchard continues “Germany has dropped its vehement opposition to debt sharing and crossed the line in the sand towards fiscal federalism. It has agreed to turn the eurozone’s €440bn bail-out fund (EFSF) into what amounts to a European Monetary Fund, and arguably into an EU Treasury in embryo.”
The EFSF will be allowed to “intervene in the secondary markets”. It may fund “recapitalisation of financial institutions through loans to governments including in non programme countries”, code for Italy and Spain. The full weight of the German-led creditor bloc will stand behind south Europe’s banking system.
The wording lets the EFSF intervene pre-emptively to cap Spanish and Italian bond yields, whatever the cost of moral hazard. These countries can therefore piggy-back on the AAA credit rating of the EMU core. This was the crucial measure needed to calm nerves after 10-year Italian and Spanish yields punched through the systemic danger line of 6pc last week. Global markets surged as the details of the EU statement leaked.
Chancellor Angela Merkel said the goal was to “go to the root of the problems”, but she may not find it easy to secure political assent for such sweeping concessions from her own parliament. The accord is a spectacular volte-face. Her mantra until now has always been that “collectivisation of risks” would be a grave error.
The terms overstep a resolution passed by the Bundestag limiting how far she could go in committing Germany to any form of transfer union or pooling of debts. The use of the EFSF as a fiscal fund without treaty authority further complicates a ruling by the German constitutional court on the legality of the bail-outs expected in September. Such changes to the EFSF will require ratification by each of the EU’s 27 parliaments. It may require an amendment to the Treaties, greatly raising the bar in Germany.
EU officials hope that a debt rollover plan for Greece can be limited to a short technical default.
The ECB has backed down on its threat to reject Greek bonds as collateral. The formula will not be extended to Portugal and Ireland. It is understood that rating agencies will hold fire for the sake of global stability. However, there is no disguising that a major taboo has been broken, even if French leader Nicolas Sarkozy continued to insist that Greece would pay “all its debts”. Florian Toncar, deputy chief of the Free Democrats (FDP) in Mrs Merkel’s coalition said it was “unthinkable that a state in default could remain in monetary union”.
Questions abound. The EFSF is not yet big enough to handle the threat facing southern Europe. “To be credible, the EFSF needs to be proportional to the scale of contagion: we think €2 trillion is needed,” said Silvio Preuzzi at RBS. “We are not yet ready to say this is the full stop that ends the crisis.”
Europe’s economic recovery is sputtering out. Markit’s PMI surveys for the eurozone in July showed a preciptious fall to a 23-month low, with “deeper contraction” in the southern bloc. Howard Archer from IHS Global Insight said eurozone growth is “in serious danger of grinding to a halt”.
The risk is that Spain and even Italy tip back into recession, with knock-on effects for their debt trajectories. The root of Europe’s debt crisis is the gap that has built up over 15 years between North and South, which itself reflects the disparate characters of these countries. This economic chasm cannot be bridged by bail-out funds or loans guarantees.”
Gabriele Steinhauser of The Associated Press reports:”The eurozone countries and the International Monetary Fund will give Greece a second bailout worth euro109 billion ($155 billion), on top of the euro110 billion already granted a year ago. Banks and other private investors will contribute some euro37 billion ($53 billion) to the rescue package by either rolling over Greek debt, swapping it for new bonds with lower interest rates or selling the bonds back to Greece at a low price. The eurozone will provide some form of guarantees to the new Greek bonds rated at “selective default,” so that Greek banks will be able to continue accessing liquidity support from the ECB”
3) … US Treasuries, TLT, EDV, ZROZ, traded lower.
4) … Commentary.
An inquiring mind asks: “Will President Obama declare Martial Law in the event of an impasse on the debt ceiling?