Wednesday, November 24, 2010

Ireland Beats Spain to the Bailout Line

Ireland is the latest to lose its financial bearings in the European Union. This comes with distinction, as the government adamantly denied that they had any difficulty this past Summer. With their tail between their legs, the Irish Government is forced to accept the largest international bailout to date. Last Thursday was the first time the finance minister acknowledged needing help. It is widely believed that the sour loans lead to the huge financial losses that nearly toppled the Island.
Much needed help is on the way, amid fierce concerns for the impact it will have on the EU, and Spain in particular. The IMF is prepared to package over €110 billion Euros as bailout for Ireland. Where does that leave Spain? Spain has a greater need for the financial bailout than Ireland or Greece. Here is the dilemma, once the IMF bails out Ireland, the €350 billion Euros needed to salvage Spain’s debt and deficits will exceed what is available. There must be some way to avoid this train wreck. Perhaps the IMF could come up with an alternative; for instance; The bailout could be done on a drawdown schedule. The IMF could provide Ireland with bailout installments over time. This might give them a chance to help Spain, and work toward soliciting additional funds to meet Ireland's bailout installments that are due later in the payment schedule. Just a thought.

In the meantime, in anticipation of the Ireland bailout, Portugal and Spain’s bond yields have increased nearly 12 basis points. That is only the beginning. The list below serves as a reminder as to just how steep these bailouts are for the EU.

-Greece bailout: 110 billion Euro Greece bailout
-Ireland’s bailout: 113 billion Euros
-Spain Needs: 350-billion Euros

Portugal is reportedly the next in line for a bailout, while the IMF is looking at Belgium as another EU member in financial distress. Although, an official from one of the leading EU countries pointed out that Belgium’s debt is largely internal, so it's not at all in the same boat as Ireland or Spain. Belgium’s financial problems will not have as much of an impact on international investors.

The Euro has declined to a two-month low against the dollar, as crisis continues to unfold. I will be closely watching to see what solutions are put forth from the authorities at IMF, and how the EU will wiggles out of this one. America's economic stability is still at large, while economies around globe also struggle to climb out of the valley of a deep recession.

K. Reilly
Cohn-Reilly Report

Monday, November 15, 2010

Greece Recovery: 6-Months After Bailout

Greece’s recovery is likely going to be a long time coming. Last August the jobless rate jumped to 12.2% up 2% from July. With all the Prime Minister’s efforts to reduce the deficit, the government data illustrates slow progress. Reuters reportedly anticipates a contraction of Greece’s GDP by at least 5% over last year. As Greece is expected to report their 3rd quarter GDP on Friday, the Greek Finance Ministry warns that the Country's unemployment could reach 14.5% by next year.

Though a cloud still looms over Greece’s deficit, the Finance Ministry stated that their deficit has declined 30% since last year, which represents $23.8 billion in U.S. dollars, or €17 billion in Euros. This was achieved through drastic spending cuts. Admittedly, 30% off their debt is a substantial chunk off Greece’s deficit, but unfortunately it still came in below the 36.9% target. To compound the disappointment, the Finance Ministry's revenue projections were also thwarted as a result of rebellious tax evaders and weakening demand. As part of this Spring’s €110 billion bailout, agreement the government of Greece pledged to reduce the deficit by 5.5 of the GDP, which would bring the deficit down to 9.5% of the GDP, as opposed to the estimated 15% in 2009. Nevertheless the Prime Minister, George Papandreou confidently expressed that the deficit will be 5.5% lower by year’s end

At the moment the Greece’s quarterly economic hiccups have minimal impact on the European Union in the short-term, since their borrowing needs have been met by the bailout. The European Union will now have to shift it attention to financial problems mounting in Spain.

K. Reilly
The Cohn-Reilly Report


Erin Thak said...
From what I'm reading, there are so many more members of the European Union that are in need of Financial help that Spain may not be the next country to get the attention of the IMF. like the article

Wednesday, November 3, 2010

The Elections Are Over – What’s Next For The Economy?

The American people have spoken and have clearly shown how unhappy they are with the Administration and the Democrats, formerly in control of both houses - result - the House is now in Republican hands. It is the nature of our political landscape to seek new blood when results are unsatisfactory. No surprise, considering unemployment is still high, with the actual rate somewhere in the teens, not the published 9.5% - 10% range. Many are not being counted because they are no longer eligible for unemployment benefits or they never had any to begin with. The housing sector is still weak and the commercial construction industry is a disaster. The Democrats are lucky to have held onto the Senate.

More Reasons for Political Unrest:

Mr. Obama claims that he cut small business taxes 16 times to fend off public perception that he is not a friend to small business. However, half of the “tax cuts” are actually incentives that reward businesses for taking actions they might not otherwise take - in other words, you have to spend money to get the tax benefit. For example, only businesses that already provide health insurance to their employees now would consider the health-care credit a tax cut. The main beneficiaries are businesses making big investments (and perhaps those caught investing in tax-shelter scams). Encouraging such investments may be a worthwhile public policy goal, but in this economic climate, the number of companies that will participate is likely to be very limited. Those inclined to be suspicious of Mr.Obama probably won’t take much comfort in this offering.

Today the Fed announced another round of asset purchases to the tune of $600 billion, adding to the $2 trillion already spent from 2008 to present. This second round of quantitative easing comes with many risks. The idea behind asset purchases is to flood the economy with money (the Fed printing press), which would lower interest rates and spur more lending and spending. But new asset bubbles could form if the Fed doesn't start backing away from its policy of easy money, often thought to be the source of the housing bubble which caused the recession in the first place.

Kansas City Fed President Thomas Hoenig has been warning of asset bubbles since early this year, and consistently voted against additional asset purchases and low interest rates. There are already troubling signs of possible new bubbles, like increases in the values of various assets from Treasuries to gold to other commodities.

The dollar is at risk: at the last Fed meeting policymakers said prices were too low, and signaled they were ready to take action if necessary. That caused a drop in the value of the dollar, as investors fear the currency will lose value in the future. That day, the dollar fell about 1% against the euro, and almost 4% more since then. If more confidence is lost, a downward spiral for the greenback could raise prices by making the cost of various commodities and imports, such as food and oil, more expensive for Americans. That could also drive up interest rates, as overseas investors financing U.S. government debt would demand higher rates to compensate for expected declines in the dollar. Higher rates could lead to a host of problems, like making business and consumer loans more expensive. It would also hurt the value of the Fed's huge asset holdings.

Click to continue

C. Cohn
Cohn-Reilly Report