Main Markets Summary – Another Greek Bailout

The greek bailout staged a strong recovery day among most equity markets, the main beneficiary being the eurozone, a couple of emerging markets tagging along.

Details

Equities : A weak rebound in the US, however the fears of a short-term correction seems to be going away. A very impressive day in green energies (both Solar and wind)

There was a very strong day in the eurozone lead by the Greek Bailout with gains north of 3% for many countries. Most significant performers are Spain, France, Germany, Italy, UK & Poland.

The arab world is still having a hard time overall (below all MA), except Egypt that is showing strong short-term momentum since the revolt’s end. Turkey had a very good day too, perhaps staging an exit from a long streak of underperformance

Vietnam is closing the pack, showing the worst performance of all countries.

Bond Market : Not much to report, except maybe that junk bonds are overall still doing good (short and medium term momentum still positive).

Commodities : Mixed. Oil is still heading higher, starting to pull Nat Gas along. Cotton is edging up, trying to recover its former strength. It’s still the commodity with the strongest momentum (+134% TTM)

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Debt to GDP ratios are irrelevant (or : why Japan is not in such a difficult fiscal position)

Over the past few years the “Japan is going to default” theme has proven quite popular both in blogs and regular financial media. It’s true that the headline number (over 200% debt to gdp !) is eye-catching – as it’s 3 time more than most developed nations.

But this number is also very misleading, and this post will (hopefully) explain why Debt to GDP ratios are irrelevant when assessing a nation’s likelihood to default. I’ll use two groups of countries to illustrate the points made : Japan and Greece (very high debt to gdp), and Germany, Canada & USA (similar and average debt to gdp), to show that they all have very different risk profiles.

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A framework to assess European policy decisions

According to the market, the short-term default of Greece is a near certainty, with 3 years yield around 24%. Indeed, debt service is estimated to reach 25% of the budget revenues by 2013, which is extremely hard to bear.

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Greece is unlikely to leave the eurozone

Since the Der Spiegel article “revealing” that Greece was considering to leave the EMU, there has been a lot of speculation on whether this should be taken seriously. Markets clearly got scared, as the EUR/USD lost around 3 % after the rumour spread. Read more of this post

Is the Euro-zone headed for a break up ? (3/3) – Solutions

 

Solutions that are unlikely to work

The bailouts did not solve any of the issues of the euro-zone. The divergences in productivity, growth, current account deficits and inflation trends are still there and without tackling with them there can be no long term survival of the euro. Some solutions often touted are unlikely to solve those structural issues, either because they are politically unacceptable, or because they attempt to prevent the next crisis rather than to tackle with the problem at hand.

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Is the Euro-zone headed for a break up ? (2/3) – Fundamentals

The EMU has brought enough positives to be defended

The Euro has by no means been a disaster. It has met its main goal of price stability, did help to get lower interest rates and probably helped growth by helping capital flows. Had it not existed, the European Union would in the past two years have been convulsed by a more extreme version of the currency instability that rocked it in the early 1990s. The single market would have been under serious threat.

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Is the Euro-zone headed for a break up ? (1/3)

Since late 2009, it has become fashionable for pundits and financial commentators to argue that the euro is headed for a breakup – partial or total. It started to be taken seriously when one of founding fathers of the euro (Otmar Issing) said in Feb. 2010 that “starting monetary union without having established a political union was putting the cart before the horse.  Now the question is whether monetary union can survive without such a political union.”

How likely is the eurozone to really break-up ? How to analyze european policies’ impact on a potential break-up ?

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