(9 am. – promoted by ek hornbeck)
One thing we can all agree upon is that the debt-ceiling stand-off in Washington is a totally manufactured “crisis”. It is a financial crisis of choice. If I was a little more cynical and Machiavellian, I would think they were trying to distract us away from a real financial crisis.
In fact, there is a real financial crisis happening in Europe. Until a week ago it was all over the front pages – Greece’s default.
Perhaps you heard something about a bailout of Greece. That news came out right about the time that Greece dropped from the headlines.
Problem solved, right?
The bailout plan almost immediately ran into problems.
For starters, the rating agencies downgraded Greek debt to default levels BECAUSE of the bail-out plan.
Rating agency Moody’s has downgraded Greece’s credit rating from Caa1 to Ca after the deal brokered July 21 by European leaders that included voluntary losses taken by creditors…
“Taking losses” means a default in any language. But the interesting part of the article comes a little later. In fact, the cost of insuring against default by the European nations barely budged from the bailout announcement.
Eurozone leaders deliberated late into the evening July 21, smoothing out the creases on a second bailout package for the troubled country. Part two of what some analysts say may continue as a trilogy of aid measures contained a framework for voluntary contributions from private-sector creditors, an additional bailout from the eurozone fund and firm pledges from Greek leaders to restructure their economy to bring down the debt.
The bailout measure is so ineffective that some financial markets are already expecting another round of bailouts in the future. However, those financial markets may be getting ahead of themselves, because this bailout is anything but a slam dunk.
In fact, this second bailout of Greece may not happen at all.
Greece is due to receive the next installment of its original, €110 billion ($158 billion) bailout in September. But Italy and Spain, both of which committed to extend bilateral loans to Greece with other euro-zone countries, have seen their own borrowing costs rise recently.
Living up to that commitment could put further pressure on Italian and Spanish bonds, just as officials in Madrid and Rome have been scrambling to reassure markets. Euro-zone finance officials are now considering allowing Italy and Spain to opt out of the payment, according to people familiar with the matter.
If the rescue fund isn’t ready to lend to Greece, Italy and Spain might be called on to make loans directly, potentially exacerbating tensions in the Spanish and Italian sovereign-debt markets.
It is insanity to put the MUCH larger economies of Italy and Spain at risk in order to bail out Greece. Already the borrowing costs of Spain and Italy are nearly unaffordable. Any further increase would price them out of the private debt markets, thus making it necessary to bail out Spain and Italy too.
The problem is that Italy and Spain are simply too large for any bailout. It would effectively end the Euro as we know it.
Spain’s 10-year bonds are yielding 6.12%, and Italy’s 10-year yields 5.92%-both well above rates Greece pays on loans under the first bailout program.
So if Italy and Spain can’t do their part in bailing out Greece, who can? That would be Germany.
The problem with Germany picking up the tab is that they are already shouldering a large part of Greece’s default risk, and it is VERY unpopular with the German public. This resentment is spilling over to the German politicians, who are feeling the heat.
German Finance Minister Wolfgang Schauble said in an open letter to politicians belonging to his Christian Democratic Party that the euro-zone debt crisis isn’t over and that more discipline is needed.
Mr Schauble said in his letter that Germany wouldn’t write “blank cheques” for the European Financial Stability Facility, the EU’s bailout fund for distressed governments — again registering German opposition to calls to increase the fund’s lending volumes to reassure markets that default risk was being minimised.
The really interesting part of this article concerns the fact that the financial contagion in Europe has continued despite the Greek bailout plans. In this case, we are referring to the island nation of Cyprus.
Moody’s Investors Service downgraded Cyprus and warned it may cut the country’s rating further, citing its weak fiscal position, fractious political climate and exposure of its banks to Greece.
The island’s economic troubles have been compounded by rolling blackouts after an explosion destroyed the country’s largest power station this month.
The back story of the Cyprus explosion is an interesting story in itself. About three weeks ago a cache of confiscated Iranian weapons, which happened to be stored right next to the largest power plant in Cyprus, exploded for unknown reasons and killed 13 people. The power plant provided 60% of the electricity in Cyprus and will cost over 1 billion Euros to replace.
The interesting part of this story is that Cyprus confiscated those weapons in 2009 because of pressure from the United States. Documents released by Wikileaks reveal that the State Department prompted Cyprus to seize the contents of the ship, but then no effort was ever made to do anything with the weapons.
Now the island nation is faced with economic ruin, and adds more contagion pressure to the Euro zone.