Continue reading »]]> If the US falls off the so-called “fiscal cliff,” then the investors are anticipating stock market plunge in the state. The situation may further complicate if the White House is unable to knock a deal to increase the nation’s debt ceiling. However, the threat of default increases if the debt ceiling is not raised, and it may create a panic in the financial market.

US Debt

According to the report of the market strategists, falling off the cliff may lead to automatic tax increase and spending cuts. However, they may adversely affect the consumers as well as the business sector.

Automatic tax hikes and stiff cuts in government spending are affecting the stock market. However, the stock market did not show any sign of collapse still now. The market has plunged lower and has become more volatile in this current scenario. If this situation continues for long, then it may lead to a US debt downgrade. U.S. Treasury Secretary Tim Geithner informed that the United States may precisely reach its debt limit by the end of the year.

The White House announced that unlike 2011, it may not negotiate the debt ceiling this year. In 2011, it led to the first-ever downgrade of the U.S. credit rating after the increase of the debt ceiling. Well, this time again, the government is compelled to increase the debt ceiling. However, the repercussion on the market is really intimidating.

In 2011, the market was exposed to huge losses during the period surrounding the debt ceiling fight. The stock market dropped as the bills were passed to increase the debt ceiling.

A huge tussle is expected between the Democrats and Republicans about the debt ceiling. Therefore, Jon Najarian, a co-founder of online brokerage TradeMonster.com, speculates it to be the greatest risk to the downside in January for the US economy.

However, Mr. President offered a proposal to avoid the fiscal cliff after a discussion with the congressional leaders. Obama told the reporters that its time for immediate action and he assured that an agreement can be achieved. The U.S. House of Representatives is planning to work through the holidays. In this economic scenario, Obama has proposed to maintain current tax rates for all.

Until now, the consumers are not paranoid by the fiscal cliff talks. On the other hand, recovery in the housing market and growth in the labor market helps to encourage consumers once again. But the lawmakers are required to knock the agreement deal to avoid fiscal cliff; otherwise the consumers may see the effect on the paycheck with the rise of the tax rates.

The option strategists marked an increase in the position of defense stocks to safeguard against the volatile economic situation. Spending cuts adversely affect the defense stocks like General Dynamics.

The government may come to an agreement in order to avoid the effects of fiscal cliff. However, the result may not help to satisfy the investors. There is no sign of improvement in the equity market. The equity futures dropped by 3.6%, and we did not see this kind of volatile market in 2008 or 2011. Due to lack of Republican support, the House Speaker John Boehner called off a scheduled vote on a tax-hike bill.

Well, the market may dwindle if the consumer confidence continues to take a hit due to fiscal cliff talks. Due to fiscal cliff issue, the consumer confidence fell incessantly in December.
Samantha Spuckler is a professional financial writer. Mostly She is a freelancer, working for various finance community including http://www.debtconsolidationcare.com/payoff-credit.html who are interested about good writing. She is quite knowledgeable of various financial matters like credit card issues,saving planing and frugal living.

Continue reading »]]> If Greece returns to the drachma there is a real risk that trade will break down.  How will companies be treated?  What happens to contracts that Greek companies made?  Will they be honored in original form or also be subject to being redenominated?  Can Greek companies afford the contracts after introduction of the drachma?  This is just basic stuff, but in a world that depends on global trade, it is hard to tell what the consequences of a trade breakdown with Greece would be.   We saw from the Japanese earthquake how sensitive and widespread problems from seemingly isolated supply line problems can develop.

That is all based on the hope that the world doesn’t become fixated on a chaotic breakdown of Greek society.  The worst case is shortages of fuel and food where prices skyrocket in the immediate aftermath of the redenomination.  Industry grinds to a halt from a lack of raw materials.  This should be the easiest element of a devaluation to deal with, but it will require planning.

I’m assuming that depositors will be forced to accept drachmas in their bank accounts rather than keeping Euros.  If they are allowed to keep Euros, then the situation would be better, except for the fact that the already insolvent banks would become more insolvent if forced to pay out depositors in Euros while have most of their assets turned into drachma.

These problems are unlikely to get out of control, and should be “merely” disruptive but would benefit from planning and preparation, none of which has really occurred yet.

Bank runs in Italy, Spain, and Portugal

This is the most likely result, no matter what happens to the ECB, IMF, and EFSF’s positions.

If you have a deposit in a bank in a country at risk of redenomination, then you would have to seriously consider taking money out to avoid that risk.  This isn’t default risk.  This is different.  You aren’t concerned that your bank is going to default you are concerned that €1,000 will turn into 1,000 lire or pesetas of unknown value.  Pan-European deposit insurance will NOT stop that flight of depositor money, unless it also ensures against forced conversion.  That is a big risk to insure against, and may not be even remotely in the ECB’s mandate.  So this is another difference from any other situation.  If Argentina devalues, there is always risk that Brazil would devalue as well.  That contagion risk played out in Asia in the late 1990’s.  That risk is amplified here, because Greece will be a template for the others.  In the back of every depositors mind, will be the fear that their country does it too.

I am scared that the ECB thinks they can address that risk with liquidity measures because they cannot.  I am scared that the ECB thinks they can address that with solvency measures because they cannot.  Real fear of forced currency conversion and devaluation is a new fear and new problem.  You may not be concerned that BBVA is going to default, but you may be afraid that your account will be turned into something worth a lot less.

The only way to stop this is to insure against it (difficult) or to force Greek banks to pay depositors in Euros.  But it is unclear how the Greek banks could afford to pay people out in Euros.  The banks are already insolvent and the amount of additional money they would need to pay depositors in Euros would just push the problem elsewhere into the system.

I don’t see an easy way to stop a run on the banks in any of the weak countries if Greek depositors are forced into Drachma, and I don’t see any way for the Greek banks to pay depositors in full in Euros.

Anticipating what forced currency devaluation would really do is a new aspect to the crisis.  It isn’t a liquidity or a solvency problem, it is its own problem.  Politicians and central banks have to focus on this issue.   I remain afraid, that like at so many other stages in this crisis, they will fail to understand the real problem, so their “preparations” will fail to stop this run and the crisis will escalate.

Continue reading »]]> Past 40 years has been a period of unprecedented economic growth. Humankind has probably never seen such a growth in entire history. Stock markets rising, banks lending at low interest rates, companies making big profits and general public having easy access to money to buy luxury cars, posh homes, holidays in exotic places around the world and what not. But all of a sudden it seems that the economic models which looked so correct few years ago are tearing apart now. We, it seems, are heading into an era of low economic growth, high unemployment, public unrest, bankruptcies. Was there something very wrong going behind the exponential economic rise of last 40 years?

Yes. Behind all these monumental growth stories there was something fundamentally very wrong. Last 40 years saw economic growth fuelled by credit boom. Governments around the world, especially developed world, took on lots of debt to keep their country’s economy booming. Interest rates were kept artificially low so that more and more money could be borrowed. Governments forgot the fact that these high debts had to be paid at some point of time. They neglected the fact that a time would come when it wouldn’t be possible to amass more debt. Worst thing is that they had a live example of Japan in 80s and 90s but failed to learn. Japanese high debt brought country to standstill for almost 2 decades now. Debt situation in Japan was less harmful for rest of the world because Japanese government debt was largely owned by the banks of Japan. So, there was less fear of contagion in that case. But story is entirely different with debt crisis we are seeing now where all the big banks have exposure to government debts of several countries. So if one fails then in just a matter of time others will follow. Well, that time is almost here.

There are only 2 things that are possible with these debts, either they should be paid back or someone takes all the losses. Now the problem is that the size of  these debts is so huge that taking losses means a total catastrophe of financial system where liquidity would freeze as banks would start going bankrupt. Secondly, if we think of paying back these debts, it would be possible only if governments’ income from taxes are good enough which is not possible because those who should pay high taxes get rid of them by help of government and common public that pays taxes can never fulfill insane debt repayment obligations of government.

So, we are finally at a juncture where banks and governments sitting on big piles of debts that can start bursting anytime. To start this process the catalyst is already ready, GREECE. Greece is the biggest economic horror of current times. Let us see why is Greece such a pain for financial system around the world.

According to a study by Barclays on Greek exposure to Euro banking system, Greece has total exposure of around EUR290 Billion in Euro area. Exposure via bilateral loans and EFSF are around EUR126 Billion. As part of the first Greek bailout package (May 2010), EUR53bn has been disbursed by member states out of the EUR80bn committed over a three-year period. These disbursements are in the form of bilateral loans between Greece and the other member states. In February 2012, a second bailout package was signed, but this time funds would be transferred to Greece by the EFSF and the guarantees passed on to member states according to (adjusted) ECB capital key allocation. This second package has taken over the unused funds from the first package and no further bilateral loans have been made since then. To date, the EFSF has issued EUR73bn out of the EUR145bn committed by member states. Altogether, the euro area states currently have a total exposure of EUR126bn, representing 1.3% of GDP. Exposure via refinancing and interventions are somewhere around EUR 130 Billion and Exposure via IMF is EUR4.4 Billion.

Look at Spain’s and Italy’s exposure. Where is Spain going to get EUR37 bln from? And Italy’s 59 Billion Euros are almost gone if Greece exists. No surprise why they are trying so hard to keep Greece in monetary union.

Greece’s derivatives contracts worth almost $90 Billion. So there is big counterparty risk mainly to banks like Goldman Sachs, JP Morgan.

Greek youth unemployment is reaching 50% which is a disastrous figure. No surprise that we see so many revolts, marches and unrest in people on the streets of Greece.

Around $72 Billion deposits have been withdrawn from Greek banks in past 2-3 years. Bank runs can arrive anytime.

GREECE is just a starting point. Signs are already ripe for countries who would follow. Yes, next obvious country in my list is SPAIN. Spanish banks were recently downgraded by major rating agencies. Bond yields nearing that level of 7% after which countries do default historically, at some point of time. Spain’s GDP dropped by 0.3% which means the country is in recession. Government debt is little less than 1 trillion dollars and youth unemployment around 50%. Isn’t this sound like complete mess?

Italy is in no good shape either. 26 banks were recently downgraded. GDP drop by 0.8% in last 3 months. France’s debt is almost 1.3 Trillion dollar and youth unemployment around 25%.

Only country which is still going well in EU is Germany but I bet its bank would find it hard to survive the financial meltdown once euro breaks.

So, what about the rest of the world. Is it safe?

No, if Greece can bring down European economy then be certain that Europe will bring down world economy. An example of how is this possible is the fact that US banking system’s exposure to CDS in EU is 4 Trillion dollars. Entire banking industry is 12 trillion dollars.

There should always be a correction and consolidation in markets, a correction after 40 years will be a lot more painful and prolonged but it has to happen for better growth stories can be written in future.

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It seems Alan Greenspan, former chairman of Federal Reserve, is speaking ‘Bernankian’ language these days which precisely means ‘Fed is always right’. Here are few important things he said in an interview on Bloomberg:

• Fed rates didn’t cause housing bubble
• Stocks are CHEAP
• Equity stimulus is driving economy
• Equity stimulus is underestimated
• Housing markets are not moving for sometime now.
• Zero-bound rates can be technically increased
• Monetary policy be left for unelected people and Fiscal policy  should be taken care by elected ones.
• All the economic data are based on non-financial system and financial system is excluded.

Well, I tend to disagree with many points he said but there certainly few points which he was spot on.

If Fed rates didn’t cause housing bubble then what did? Wasn’t cheap money available to people made prices to rise. If rates were not low then only the demand from creditworthy people would have decided the prices but cheap money meant anyone could demand a house, doesn’t matter if he was anywhere near to creditworthiness to pay for it.

Stocks are cheap. This statement was heard even when markets were at same level as they are now in 2007 and rising. With stock markets nearing all time high, US debt increasing, Euro crisis persisting and fear of contingency still there among the market players, how can we say stocks are cheap? Current market rally is fuelled by excess money thrown in financial system and it will continue till Fed continues its ‘keep-markets-happy’ policy. If equity stimulus is so good for the economy then why didn’t the job markets performed as good as equity markets? We are reaching pre crisis levels of stock markets but why aren’t were reaching same unemployment levels as before crisis?

Interest rates are not increasing because policy makers are trapped within their obscure models which are mostly flawed. Policy makers are trying to avoid disaster at cost of a bigger eventual disaster. Until the mess (debt) is cleared from the financial system, we can’t see real growth. Look at Japan, they haven’t been growing for 2 decades because they never cleared the debt in their system. Worst part is that the fear of crisis will never go away from the households, institutions and corporations. Long run stagflation is what would result in the end.

I definitely agree with second last point of Chairman that fiscal and monetary policies should be independent and left to their respective in-charges but that would be an ideal world for me. The way world works today is not like that. Even if central bank wants to increase the rates they will face immense political pressure and criticism. Markets are too sensitive to such policy measures and politicians know that.

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Continue reading »]]> 2 weeks ago when crude oil was rocketing up, many analysts came up with different explanations why crude oil would reach $140 and some said it would go till $180. That doesn’t seem possible to me anymore. Firstly let us see why everyone was so upbeat on oil:

US WOULD ATTACK ON IRAN

SUPPLY SIDE SHORTAGE OF OIL

EXCESS LIQUIDITY IN MARKETS

First reason seems to be very important one and looks like most important reason of price rise of WTI Crude. Well, that still is a case but why are prices going down now?

Second reason again was a temporary one which never actually caused any major shortage anywhere and can not cause oil to spike like that.

This leaves us with the third reason which was indeed why prices went up.

But, what has changed now then? What has changed now?

CONCERN THAT EUROPE IS IN RECESSION AND IT WILL PULL REST OF THE WORLD INTO RECESSION AS GREEK PROBLEM INCREASES EVERY NEST DAY.

PETROLEUM USAGE IS ACTUALLY DECLINING SO SUPPLY SIDE SHORTAGE ISSUE NO MORE EXIST

NO INDICATION OF ANY QE BY FED ANY SOON WHICH MEANS LESS LIQUIDITY

I think in near future the factors for decline of oil prices would be far more strong than those causing its rise. So, oil might continue its downward journey in coming weeks.

Continue reading »]]> Let us see where these countries stand as per their ratings by rating agencies and find out who would go burst in which order.

It seems Germany is the only country for which all the three rating agencies unilaterally agree on stable outlook. UK, Netherland and Austria are in stable zone. But look at the outlooks of rest, all negative except Greece which can’t go more negative than that. So, for people who are guessing how would the EU states default look like, here is the order in which they would go burst. Greece which has already started to default. Then it would be Portugal who will very soon start asking for Greek type bailouts. They would be followed by Ireland,Italy and Spain would be fighting hard as to who will be the first to default but I guess it would be Spain. By the time all this happens the ratings of UK and France would have already gone down and what happens after that is called ‘depression’.