Tag Archives: EU

A Fistful of Euros

ron paul

This week, my congressional committee will hold a hearing to examine how the Federal Reserve bails out European banks, propping up spendthrift European governments in the process. Unfortunately this bailout comes at the expense of American citizens, in the form of higher prices and diminished savings down the road.

A good analysis of the Fed’s “swap” scheme first appeared in the Wall Street Journal back in December, in an article by Gerald O’Driscoll entitled, “The Federal Reserve’s Covert Bailout of Europe.” Essentially, beginning late last year the Fed provided U.S. dollars to the European Central Bank in exchange for Euros– sometimes as much as $100 billion at a time. The ECB then funneled those dollars to European banks to provide liquidity and prevent crises from bank insolvencies. Since the currency swap was not technically a loan, the Fed did not have to embarrass itself by openly showing foreign bank debt on its balance sheet. The ECB meanwhile did not have to print new Euros and expose the true fragility of big European banks.

The entire purpose of this unholy arrangement was to obscure the truth: namely that the Fed was bailing out Europe with U.S. dollars.

But why is it the business of the Federal Reserve to bail out European banks that find themselves short of dollars to pay their dollar-denominated contracts? After all, those

contracts often were hedges taken to protect banks against weakness of the Euro. Hedges are supposed to reduce risk, but banks that miscalculate should suffer their own losses accordingly. It’s not our business if the ECB chooses to create moral hazards by providing liquidity to European banks, but why should the Fed prop up Europe’s bad decisions!

The Fed has promised to provide unlimited amounts of dollars to the ECB, should circumstances require it. It boggles the mind. Of course when Fed officials first entered into these swap agreements with the ECB last September, they did so quietly. The American public only found out via websites of the ECB, the Bank of England, or the Swiss Central Bank.

The Fed already has pumped trillions of dollars into the economy since 2008, and US banks currently hold $1.5 trillion of excess reserves. So why don’t American banks lend those excess trillions to European banks if they really need dollars? If US banks could earn 1 or 2 percent on those loans, they might just be interested. But they can’t compete with the ½ percent interest rate charged by the Fed to the ECB. That’s one glaring example of the harm caused by the Fed’s ability to create money and loan it at below-market interest rates.

The Fed argues that these loans will be temporary, merely providing a little boost to get Europe over the hump. But that’s what they thought a few years ago when such lines of credit to the ECB were set to expire, only to see the Fed reauthorize them. What happens if the European financial system collapses? Will the Fed be left holding a bunch of worthless Euros? Will the ECB simply shrug and turn over the collateral it received from European banks, maybe in the form of bonds from Ireland, Italy, or Greece? Have the 17 individual central banks backing the ECB pledged their gold holdings as collateral?

The Fed has placed a hundred-billion dollar bet on the future of the Euro, with the strength of the dollar on the line. This is absolutely irresponsible, and directly contrary to market discipline. Let private banks, European or otherwise, take their own risks. Let foreign central banks inflate their own currencies and suffer the consequences. In other words, it’s time to apply market principles to banks and money.

Does the ECB Have a Plan to Rescue the Euro? None That I See!

by Jack Crooks
Saturday, January 21, 2012 at 7:30am

Jack Crooks

We’re constantly talking about how much help the euro zone needs to escape the economic mess they’ve created. So will the European Central Bank (ECB) monetize debt? Will the European Financial Stability Facility (EFSF) be sufficiently funded as a bailout mechanism? Will Germany agree to back-stopping periphery nations?

Earlier this week the International Monetary Fund (IMF) put forth a new, albeit unoriginal, proposal to garner funds from its non-European members that will serve as a backstop should there be a major shock to the European financial system. The IMF wants to raise another $500 billion. But, laughably, they’re hoping the G-20 can come to an agreement and make this happen.

With all that said …

Why Didn’t the ECB Cut
Interest Rates Last Week?

Perhaps they’ve evaluated the impact on investor/consumer sentiment after recent rate cuts. And perhaps they thought it would be more beneficial to portray a modicum of confidence in an economy that’s pretty much doomed, regardless of who you ask.

By not cutting rates, the ECB suggests the economy doesn’t precisely need rate cuts to achieve stability. And it implies the current dealings between governments and international policymakers are headed in the right direction.

I’m inclined to say the latter is impossible. But that attitude wouldn’t get us anywhere.

Instead, I’ll ask: Why is it that other central banks seem more concerned than the ECB, which sits at ground zero of the number one crisis facing the global economy?

For example …

  • Brazil’s central bank is still cutting interest rates to avoid the financial fallout from the euro zone. They just cut their benchmark rate to 10.5 percent from 11 percent and hinted of more cuts ahead.
  • South Africa’s central bank is holding tight with interest rates at 30-year lows because they fear a global economic revival may not pan out to a sufficient degree.
  • China is on the verge of easing up on last year’s stretch of tightening since it is realizing significant slowdown in key areas of its economy. Lending is expected to exceed last year’s total even though there is a case to be made against the effectiveness of additional lending in an economy that shows major signs of overinvestment.
  • Even Australia, the yardstick economy to which most developed nations can’t measure up, saw its central bank cut interest rates at the last monetary policy meeting. If you wonder why, maybe the news this week that employment unexpectedly fell offers a clue.

What Could Those Folks at
the ECB Be Thinking?

Have Mario Draghi and the ECB done enough to get the euro-zone's finances  under control?
Have Mario Draghi and the ECB done enough to get the euro-zone’s finances under control?

If the answer to that question eludes you, and not knowing bugs you, you’re not alone …

The ECB confounds most investors by not cutting interest rates while the Federal Reserve and other central banks around the world prepare to go easy with interest rates should the euro-zone problems encroach on their economies.

So let me give you my take on it that might help you set expectations for ECB policy going forward:

Rate cuts and monetization aside, the ECB’s ability to help support banks is determined by collateral. If a bank can put up collateral of sufficient quality, then it can receive needed funds from the ECB. If banks can’t put forth quality collateral, and the ECB wants to do something about it, they can lower the standards of what they accept … assuming they have that flexibility.

And this from Leto Market Insight:

In order to keep euro-zone banks liquid in the months ahead, the ECB may need to lower its standards for qualified collateral. But this brings us to the next problem: The ECB is not sufficiently capitalized to accept the additional risk of poorer quality collateral. The ECB’s paid-in capital was €6.36 billion against €2,733 billion assets at the end of 2011, representing a leverage ratio of assets/capital of 430! For comparison, the Federal Reserve has a paid-in capital of $26.9 billion against $2,928 billion assets, a leverage ratio of 109.

It’s impossible to determine if further ECB interest rate cuts or reduced lending standards would rescue the euro-zone’s economy and its currency. But it sure seems like what they’re doing isn’t working.

Best wishes,


Source: http://www.moneyandmarkets.com

Tobin Tax Threatens To Derail Upcoming EU Summit

european union stars

Peter Lavelle at foreign currency exchange broker Pure FX


Is the upcoming EU summit on Jan 30th set to revive the fortunes of the ailing euro?

Nicholas Sarkozy and Angela Merkel certainly hope so: speaking in the last 24 hours, they envisioned a strategy that involves encouraging growth among EU countries while imposing tight public spending rules, thereby restoring market confidence. The pair hope to have this plan in place soon.

The problem though, is that continuing disagreements regarding the so-called Tobin Tax could quite possibly derail the summit.

After all, things haven’t changed since last December. David Cameron remains opposed to a Europe-only financial transactions tax, arguing that it would encourage financial firms to relocate elsewhere. (Ernst & Young support this statement, claiming in a recent estimate that imposing the Tobin Tax could cost Europe up to €116bn, as companies exit.)

Angela Merkel meanwhile faces opposition from inside her own coalition regarding the issue, which argues that pushing for an EU-wide tax without British support is futile.

However, on the other hand, the French remain adamant that such a tax must be legalised, even going so far as to declare they’ll impose it unilaterally if they cannot gain support. (This though could be a bluff on the part of Nicholas Sarkozy, who faces re-election in April.)

So how to overcome these disagreements? It seems obvious that – without some kind of consensus – the forthcoming summit will simply be a repetition of that last month.

Business as usual in other words for the ailing euro.

The Euro Could Fall all the Way to 90 Cents

european union stars

By Evaldo Albuquerque, Editor, Exotic FX Alert and Currency Capitalist

Europe’s woes will not be banished – and this week, just when you thought it was safe, things got even worse.

Spain announced its 2011 deficit will be much deeper than anyone thought – and that means it will almost certainly need a bailout, sooner or later.

Borrowing costs for countries like Italy and Spain are still skyrocketing, which makes it harder for them to roll over their debt.

Meanwhile, trading in UniCredit, Italy’s largest bank, was suspended after shares tumbled in response to a heavily-discounted share offering. This indicates the bank is having trouble raising capital, making it a strong candidate for another European bank failure.

How Low Can it Go?

There’s no question that all this is bad for the euro.

But how low can it go?

We don’t have a crystal ball, but we have the next best thing – chart patterns.

One of the most reliable chart patterns, known as Head & Shoulders, is now saying the euro could drop all the way to $0.90.

If you’re not familiar with this pattern, you can read this article I wrote last year explaining how it works.

In that article, I also showed how this pattern could have saved your portfolio from the 2008 stock market crash.

It’s basically a pattern that indicates that an asset will move lower, much lower.

Let’s take a look at the big picture for the euro. Below is a monthly chart that goes back to 2001, when the euro started a major bull market. Notice there’s a massive potential Head & Shoulders forming right now.

I say “potential” because this pattern is only complete if the price closes below the black line, known as neckline.

Right now, that line is at 1.24, so the euro is still trading above it – but not by much. It’s trading around 1.27 today.

One of the great things about this pattern is that once it’s complete the price usually falls by the same distance that separates the top of the head and the neckline. So you can use that distance to project a minimum target.

The target in this case would be around $0.90, which is much lower than anyone expects the euro to go.

But can the euro really close below 1.24?

Well, another Head & Shoulders pattern, this time on the weekly chart going back to 2010, shows it will certainly happen.

Notice that the price has already closed below the neckline. Using the distance between the top of the head and the neckline, you get a minimum price target of 1.22.

The Fed Will Keep the Dollar Weak

My observation about the Head & Shoulders is not a prediction. It’s just, well, an observation.

I rarely disagree with the pattern because it’s very reliable. But I find it hard to believe the euro will move all the way to $0.90. Why? Because of the Fed.

If the euro drops that much, it will mean the dollar will be much stronger – and the Fed won’t allow that to happen.

It wants a weak dollar to boost the U.S. economy through exports.

Besides, if the euro drops much lower, Europe will very likely be in a very deep recession.

The euro zone accounts for about 16% of the world economy. If we get a deep recession over there, it’s unlikely the U.S. will be immune.

If a recession spreads from Europe to the U.S., the Fed will have a good excuse to start printing money again, driving the dollar lower.

Nonetheless, the Head & Shoulders pattern indicates the major trend of the euro remains down, and it could move all the way to 1.22 in the weeks ahead.

Profiting from the Smaller Currencies

And if it closes below 1.24 on the monthly chart, we will have strong evidence the euro zone is falling apart, and the euro will move much lower.

It also shows that, if the euro fails to close below 1.24 on a monthly chart, it could have a big rally, much like it did in 2009 and 2010.

There will be a lot of demand for the euro around 1.22-1.24. So my instinct is that will be a great level to buy the euro for a short-term trade.

But for now, any euro rally is a shorting opportunity. I will be betting against the euro by shorting smaller European currencies, such as the Czech koruna and the Polish Zloty.

Very few people believe the euro will move all the way to parity. I don’t know anyone who believes the euro will move below it.

But the Head & Shoulders says the euro’s downside risk is much larger than anyone thinks, and it could still move all the way to $0.90.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist

Eurozone collapse ‘starts this year’ says CEBR

european union stars

Europe’s single currency is almost certain to disintegrate within the next decade, the CEBR has predicted, with Greece and Italy potentially abandoning the euro this year…or so this article says (The Telegraph).

I sincerely hope this does not happen, but we as currency traders must be prepared for this event. Are you ready for a massive euro shorting storm?

Out of curiosity, who is long on the Euro at this point?


Why Everyone is Wrong About the Euro

european union stars

By Jeff D. Opdyke, Investment Director, The Sovereign Individual

“People are looking at the hood of their car while they’re driving.
Some are even looking at their feet. No one seems to be
looking at the road.” Daniel Z., Swiss asset manager.

Traveling at more than 100 miles per hour on the autobahn between Munich and Zurich, you quickly develop a keen awareness of the roads that take you through Germany, Austria and Switzerland.

You notice how smooth they are, not a pothole, bump or ripple to be felt.

You notice the decorum as slower motorists reflexively make way for faster cars approaching at speeds topping 120mph.

You notice how well traffic flows almost gracefully as cars enter and exit the roadway.

But most of all, you notice the roadway itself.

By necessity, you pay attention to what’s happening well ahead of you. Not what’s just in front of your hood … and certainly not what your feet are up to. To do so would be certain death at this speed.

It is a perfect analogy for the euro-debt crisis at play. Those who are looking at the hood of the car – those focused on the immediate events – are doomed. They don’t see what’s coming.

Those looking down the road … they see the turn up ahead. They’re the ones who’ll profit because the wreck that’s coming isn’t the demise of the euro.

It will be those who are betting on the euro’s demise. Though it looks troubled now, the euro is destined to survive … and ultimately emerge stronger than ever.

What the Swiss Are Saying About the Euro

I can’t take credit for the autobahn analogy. I’ve borrowed from a Swiss money manager I know in Zurich.

He and I were having a lunch last week of butternut squash soup and Wiener schnitzel, and talking about Europe, the debt crisis, the euro and European stocks and bonds.

I had arrived in his hometown with a preconceived notion: that, despite all the naysayers, the euro has no option but to pull through this crisis as a stronger currency undergirding a more-unified Europe.

That’s clearly not an opinion very popular in the media. Countries supposedly are preparing to revive defunct currencies. Greeks are rioting to exit the euro. Germans are talking of leaving the euro themselves. I was listening to a former British minister on the BBC late one night in Zurich and he announced the euro essentially had no future.

My lunch companion grabbed the chance to voice his frustration to an American who might actually listen.

“This end-of-the-world mentality,” he told me, “drives me nuts.” That’s when he launched into his roadway analogy to explain the short-sighted ways of those who only latch onto the headlines. Even American politicians don’t get it, he said. “We listened to Obama on TV say that Europe needs to deal with its debt quickly, and that America stands ready to help. And you send Geithner over here to talk. We look at that and shake our heads in disgust.”

The irony is laughable. The country with history’s largest accumulation of debt is urging the Europeans to act quickly on the necessary repairs, or else sink the world economy.

Every conversation I had during my week in Europe came back to the same message … those announcing news of the euro’s pending death are simply wrong.

You won’t hear this in many places in America, but the reality is that Europe is in better condition fiscally than we are. When the euro problem is solved, the people who are today fixated on the euro’s demise – the problem right in front of the hood – will shift their focus back to America and all the messes that still exist.

Why Survival is the Only Option

It’s easy – and popular – to predict the euro’s death. It’s the simple answer to a very hard question about how to integrate peoples and cultures that have been beating each other senseless for centuries. But it’s even easier to predict the euro’s survival … though much less popular.

If you spend any amount of time thinking about the ramifications of the euro going away you know that there’s one reason the currency’s survival is preordained: Germany.

The German economic miracle over the last decade is the direct result of the euro. The euro did away with the cost of currency conversions when importing and exporting products around the E.U. It also equalized pricing from one country to the next, and added huge efficiencies to the manufacturing and sales processes.

In essence, the euro allowed the German exports to excel.

Indeed, German exports in the early-90s rose by about 3% a year. Between 1999 and 2003, when the euro existed largely as an accounting currency only, German export growth rose by more than 6% annually. And between 2003 and 2007, when physical euro coins and notes were in circulation, German exports grew by 9% a year.

For 2011, Germany expects exports will top €1 trillion for the first time, representing more than one-third of GDP … and about 40% of that goes to other Euro-zone countries.

Anyone who thinks German business and industry – which relies heavily on selling goods to the rest of the E.U. – will allow such an important trading advantage to slip away is delusional. It’s never going to happen. The single-currency’s existence has added hundreds of billions of euros to the German economy in the last few years alone.

Survival is the only option.

Because consider the fate otherwise … Europe returns to individual currencies and instantly BMWs and Mercedes Benz’s become too expensive across much of the rest of Europe. German exports would immediately slow and the German economy would crash. Massive layoffs would ensue and Germany’s political and financial might would shrivel.

The re-emergence of Germany’s former currency, the Deutsche Mark, would attract capital from all over Europe as Greeks, Italians, Irish, Spaniards, French and others dive out of their weak currencies and into a stronger currency. That would risk inflation in Germany – exactly the fear today of Germans who, as a culture, cling to images of Weimar hyperinflation.

So Germany would end up in a situation where the economy is crashing even as inflation rises.

German business and industry absolutely does not want that.  And it will ensure that it doesn’t get it.

Buy Euros Now

The road from here will not be smooth. The euro still has some painful months ahead as Germany and the rest of Europe hash out a plan that Germans can live with. The currency, now at $1.30 to €1, could reach parity before exploding past its previous record near $1.60.

You want to use this period of euro stress to build long-term exposure to the currency. Trade some dollars for cash in a euro-denominated deposit account.

When the road ahead turns and today’s pessimists realize their assessment of the euro was wrong all along, the euro will soar against the dollar. And those who’ve put their money into the euro will see profits roll in.

Until next time, keep a global view…

Jeff D. Opdyke
Investment Director, The Sovereign Individual

Beware the Coming Bailouts of Europe

european union stars

The economic establishment in this country has come to the conclusion that it is not a matter of “if” the United States must intervene in the bailout of the euro, but simply a question of “when” and “how”. Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.

The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.

The euro was built on an unstable foundation. Its creators attempted to establish a dollar-like currency for Europe, while forgetting that it took nearly two centuries for the dollar to devolve from a defined unit of silver to a completely unbacked fiat currency note. The euro had no such history and from the outset was a purely fiat system, thus it is not surprising to followers of Austrian economics that it barely survived a decade and is now completely collapsing. Europe’s economic depression is the result of the euro’s very structure, a fiat money system that allowed member governments to spend themselves into oblivion and expect that someone else would pick up the tab.

A bailout of European banks by the European Central Bank and the Federal Reserve will exacerbate the crisis rather than alleviate it. What is needed is for bad debts to be liquidated. Banks that invested in sovereign debt need to take their losses rather than socializing those losses and prolonging the process of adjusting their balance sheets to reflect reality. If this was done, the correction would be painful, but quick, like tearing off a large band-aid, but this is necessary to get back on solid economic footing.  Until the correction takes place there can be no recovery. Bailing out profligate European governments will only ensure that no correction will take place.

A multi-trillion dollar European aid package cannot be undertaken by Europe alone, and will require IMF and Federal Reserve involvement. The Federal Reserve already has pumped trillions of dollars into the US economy with nothing to show for it. Just considering Fed involvement in Europe is ludicrous. The US economy is in horrible shape precisely because of too much government debt and too much money creation and the European economy is destined to flounder for the same reasons. We have an unsustainable amount of debt here at home; it is hardly fair to US taxpayers to take on Europe’s debt as well. That will only ensure an accelerated erosion of the dollar and a lower standard of living for all Americans.

Ron Paul – US Congressman

The Light Bulb Moment for the Eurozone

EWI’s free EU debt report sheds some light on what’s in store

By Elliott Wave International

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone.

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”


European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.

Free Report
The European Debt Crisis and Your Investments
Continue reading more articles like this one by Brian Whitmer in our European Debt Crisis report. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years.

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This article was syndicated by Elliott Wave International and was originally published under the headline The Light Bulb Moment for the Eurozone. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.