Once again the Euro finance ministers assembled for another meeting in Brussels to discuss the Greek bailout. German Finance Minister Wolfang Schaueble, asked if there would be a new programme for Greece: “I said we have a gap within the existing programme. You can see from that that we have a gap. If we didn’t have one, we wouldn’t have to consult.”
In short, Euro zone finance ministers meeting in Brussels ended their discussions on the next tranche of loans to Greece without agreement, but with plans to meet - consult - again next Monday.
Although you’d think by now it should be obvious that austerity - with higher taxes, and reduced government expenditures - is an economic prescription that has killed the patient. As the economy shrivels, so do tax receipts, and further austerity is then demanded by the troika.
The Greek unemployment statistics illustrate what a miserable failure the plan has been. Total unemployment was up to 25.4% and youth unemployment had soared to 58%. Greek public debt in 2013 is now estimated to be 180% of GDP.
The Greeks have been pleading for easier terms. Most of the private bond-holders have had their claims written off, so the remaining debt is held by the European Central Bank and other EU institutions. The ECB has agreed to extend the debt-to-GDP target until 2022; however, the IMF, a supplier of bailout funds, disagrees.
The issue is no longer the welfare of the Greeks - perhaps it never was, but rather the welfare and payback to the public lending institutions. Will the ECB get more than the IMF? And how will the profits from the distressed bonds purchased by the ECB be divided?
Typically the euro market rallies going into EU Summit or Finance Minister’s Meetings. The rally continues when the politicians emerge and inform the press what wonderful progress has been made. This puts pressure on shorts and the rally can continue, but the allure gradually fades.
The Eurozone finance ministers’ Tuesdsay meeting followed Fed Chairman Bernanke’s speech Monday where he cited the threat of austerity as the main concern and expressed some optimism about the outlook …"…cooperation and creativity to deliver fiscal clarity - in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery - could help make the new year a very good one for the American economy.
There had been some speculation that ‘Operation Twist’ (a program conducted by the U.S. Federal Reserve to help stimulate the economy) would be discontinued. This program was designed to bring long-term rates down, and give the housing market a boost. Monday, the New Residential Construction Report, known as ‘housing starts’ on Wall Street, showed the highest rate in more than four years, so Bernanke can claim success.
There are rumors that the current program to purchase $40B of mortgage-backed securities will continue, and another program - to purchase Treasuries and add them to the Fed’s loan portfolio - will commence. If that should happen, combined with some post summit happy talk, a further rally in the Euro could easily develop.
The denouement for this potential trade comes on a major holiday in the US. If a market is depleted of some traders, and actively traded equity and bond markets, a little news can go a long way.
Currently, the euro has rallied to the top side of 1.28 and is resting around the 200 day SMA. In a thin market, a run to the 1.30 area might be possible. Longer-term, we think the Eurozone has some major problems. The last thing they need is a stronger currency when entering another recession.
Try the short side on a strong rally toward the 1.30 handle. As always watch your stops.
[I]Any opinions, news, research, analyses, prices, or other information contained in this post are provided as general market commentary, and do not constitute investment advice from CashBackForex and/or CashBackForexUSA[/I]