The Euro slipped 2.3% in the last week marking a weekly low of 1.1953. Continuing economic concerns in the Euro Zone led to the decline in currency. Sovereign debt worries in the Euro Zone haunt financial market sentiments. Despite some positive news on support to the ailing European countries in the form of a $1 trillion rescue package the Euro continues to trade southwards. The impact of the debt crisis on the global economy is being introspected and this has led to risk aversion across the globe. Demand for higher-yielding and riskier investment assets has generally declined as investors have become cautious.
In the month of May, the Euro did receive some support after China's foreign-exchange regulator affirmed its commitment to investing in Europe. This led to hopes of improvement in the current economic scenario of the Euro Zone. But soon the optimism faded as the long-term impact of the $1 trillion bailout package coupled with slowdown in economic growth in the European region also came under scanner.
The European Debt Crisis………
Concerns of a sovereign debt crisis started developing in early 2010 as countries like Greece, Ireland, Spain and Portugal faced huge budget deficits. This led to fears over rising government deficits and debt levels across the globe. The recent events in Greece have aggravated the situation in the financial markets and the Euro Zone countries and the International Monetary Fund (IMF) agreed to €110 billion loan for Greece.
But this loan has come along with a package of harsh austerity measures which Greece has had to adopt. On the back of these ongoing economic issues, the European policymakers and the IMF agreed upon a comprehensive rescue packageworth $1 trillion which is aimed at ensuring financial stability across Europe.
The month of May has been eventful as the financial markets kept a check on the happenings and developments on the Euro Zone front. Greece has witnessed major protest by citizens against the austerity measures. Protest by way of strike led to a global sell-off in equities as the general nationwide strike in Greece turned violent. Such poor has been the capability of the Euro Zone to handle its debt crisis that the global financial markets witnessed a downside pressure and markets shivered on expectations that this will lead to another round of recession.
EU Emergency Measures
In order to prevent the situation from getting bad to worse, the European Union (EU) and the IMF have carved out an emergency rescue package of up to €750 billion ($1 trillion) in order to control the Greece's crisis from spreading. The European package has been the biggest government rescue since the G-20 leaders moved to stabilize markets after the collapse of Lehman Brothers in September 2008. But despite the announcement of this rescue package, the Euro has slumped to a more than a four-year low of 1.2109.
Following are the three components of the EU-IMF rescue package:
The first part includes a €60 billion ($70 billion) stabilization fund. This fund will be provided to the Euro Zone members who are struggling to finance its debts because of high interest rates demand by the financial markets. The second part of the emergency fund includes government-backed loans worth €440 billion ($570 billion). These loans will be issued via a Special Purpose Vehicle (SPV). The final part of the emergency fund consists of €250 billion ($284 billion) with additional contribution from the IMF.
Systemic risk continue as $1 trillion package fails to support Euro
Debt crisis in the Euro Zone is expected to be as serious as the credit crunch in the US. Hence, even after a $1 trillion rescue package to the ailing European countries systemic risk is not corrected. Despite the announcement of this rescue package, the Euro continued to decline and slumped to a four-year low. Austerity measures in the Euro Zone have become rigorous as Spain has unveiled the biggest cuts in the last 30 years and Portugal has also announced to reduce wages and raise taxes.
Spain's unemployment rate rose above 20% for the first time in more than a decade. The jobless rate rose to 20.1% in the first quarter from 18.8% in the previous three months. A 5% cut in public salaries was also announced by the Spanish Prime Minister this month. Retail sales volumes in the 16-nation euro zone were flat in March. German manufacturing purchasing managers index fell to 58.3 in May from 61.5 in April, a three-month low, and the services PMI also dropped to a three-month low of 53.7 vs. 55.2 in April.
Despite this huge rescue package of $1 trillion, what triggered a downside in European equities was the short-selling ban imposed by Germany in May. Germany's market regulator banned investors from naked short sales for 10 banks and insurers, as well as naked credit- default swaps on euro-area government bonds starting May 19. The decisions to ban short selling on these instruments led to concerns amongst investors that the crisis may get severe in the future.
Spain fights to survive
Spain is the fourth-largest economy in the Euro Zone and poor economic prospects in the country could lead to a major financial disaster. High level of household and corporate debt has left the country in an uncompetitive state. Size of Spain's economy is four times bigger than Greece and more debt worries in Spain could derail economic recovery in the Euro Zone.
Poor economic scenario in the European countries has created havoc as the political abilities of the countries have also come under scanner. Spain is especially finding it difficult to keep a grip on power as the country is caught between citizens opposing austerity measures on one hand and on the other hand investors demand budget cuts and more flexible labor markets.
The Spanish government does not have a parliamentary majority and this leads to delay in the timing for every measure in this testing time. The Popular Party in Spain has voted against spending cuts last week. But the situation in Portugal is different as the main rival parties have recently agreed on an austerity package. The Spanish government's move is being judged at every level as it promises to slash the public deficit from 11.2% of gross domestic product in 2009 to the EU guideline of 3% by 2013.
Fundamental Outlook
Public finances pose the biggest threat to the Euro Zone and the ECB said in its latest Financial Stability Report that predictions of further potential write-downs remain. Banks in the Euro Zone suffer considerable loan losses in 2010 and 2011 and this could amount to a further €195bn (£165bn) in write-downs. May has turned out to be the worst month for the European currency and equity markets in the year 2010. These concerns are expected to remain and lead to downside in the Euro. We expect the Euro to weaken in the coming week and trade in the range of 1.1690 and 1.2490.
Major economic data releases in June which will help to set the trend in the markets are Federal Reserve Chairman Ben Bernanke's speech, ECB Press Conference, US, Retail Sales, Consumer Confidence and FOMC Statement which will help to set the tone in the global financial markets.
No comments:
Post a Comment