Summer and its doldrums are becoming very present in EU. Germany, Italy and Spain under fire…

let´s see if the  ” Political Elite ” can bring another Bail out as soon as possible !!! Last one lasted 5 days.

Courtesy of Ron Paul

Default Now, Or Suffer A More Expensive Crisis Later

” Debate over the debt ceiling has reached a fever pitch in recent weeks, with each side trying to outdo the other in a game of political chicken. If you believe some of the things that are being written, the world will come to an end if the U.S. defaults on even the tiniest portion of its debt.

In strict terms, the default being discussed will occur if the U.S. fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder. Proponents of raising the debt ceiling claim that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). My expectations of such a scenario are more sanguine.

The U.S. government defaulted at least three times on its obligations during the 20th century.

– In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40 percent.

– From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.

– From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.

Unlimited Spending

No longer constrained by any sort of commodity backing, the federal government was now free to engage in almost unlimited fiscal profligacy, the only check on its spending being the market’s appetite for Treasury debt. Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable.

Boom and Bust

The Austrian School’s theory of the business cycle describes how loose central bank monetary policy causes booms and busts: It drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences. Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.

For far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.

Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary.

Hard Decisions

It isn’t too late to return to fiscal sanity. We could start by canceling out the debt held by the Federal Reserve, which would clear $1.6 trillion under the debt ceiling. Or we could cut trillions of dollars in spending by bringing our troops home from overseas, making gradual reforms to Social Security and Medicare, and bringing the federal government back within the limits envisioned by the Constitution. Yet no one is willing to step up to the plate and make the hard decisions that are necessary. Everyone wants to kick the can down the road and believe that deficit spending can continue unabated.

Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later.

If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing.

Raising the Ceiling

The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default won’t take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.

Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.

We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.”

Long time no write… After a few days seeing the unfolding of the European tragedy and EU political elite behind the curve,  yesterday we had a reality check from the Markets. €´s mess ¿?¿?

Courtesy of Daily Capitalist.

Italy is the world’s eighth largest economy and it has one of the highest levels of public debt-to-GDP in Europe:

Greece is ranked the 28^th largest economy in the world. By comparison Ireland is ranked 36^th.

Needless to say, Italy represents a flash point in the euro zone as bond vigilantes have gone after it for the past two days. Fear is contagious as they say. Greece is the ostensible problem and the stated reason for today’s EU emergency meeting, but they will discuss Italy. Italy’s debt costs are still relatively low, but the Bund spread is growing and their cost of debt relative to the amount of debt (primary balance) is a problem.

Is this something we here in Fortress America should worry about? Yes.

As Goes Greece, So Goes …

Contagion is the big fear in the euro zone. If Greece defaults on its sovereign obligations that lends credibility to an unwinding of the euro because German and French taxpayers will ultimately and reluctantly foot that bill. That is because the biggest lenders to Greece are German and French banks, and like us, they would sacrifice a stance against moral hazard before they will see their banks fail (bailouts).

There is no way Greece can pay back its debt to the European Financial Stability [Bailout] Fund or its other creditors in our lifetimes. And it is unlikely that they will be able to muster the courage to significantly cut back the large public trough and liberalize their economy in order to make repayment happen. Today the EU ministers agreed to “enhance the €440 billion [bailout fund's] flexibility and scope,” which really means they will allow the €440 billion fund to buy Greek bonds on the secondary markets, thereby bailing out the banks. It will take the vote of each country to allow them to do this, so it’s not a fait accompli … yet. But it is easy to visualize creditor banks lining up at the fund window, Greek bonds in hand. Also, it is likely they will restructure Greek bailout debt with longer maturities. This will amount to a default as far as the rating agencies are concerned. The markets will react negatively, and money will flow into Treasurys.

Bund spreads are high and sovereign rates on PIIGS have been climbing.

Yesterday (Tuesday)10-year yields on Greek, Portuguese, Irish, Spanish and Italian debt fell sharply which means the ECB intervened in the market to allay fears. But, they can’t do that long enough to keep the vigilantes away.

Italy Isn’t Greece

As the world’s eighth largest economy, Italy’s problems are Europe’s problems, and Europe’s problems are our problems. About 16% of our exports go to Europe. The more the euro zone is roiled with default problems, the more hot money will flow here and ultimately increase the dollar versus the euro. While your European vacation will be cheaper, exporters to Europe will take a hit.

What are Italy’s problems? The aforementioned sovereign debt as 120% of GDP is a problem in a socialist country whose economic growth has been flat for the past 10 years–less than 0.25% vs. 1.1% for the EU.  Q1 growth was 0.1% versus the euro zone’s 0.8%. The government has been doing what all governments do: buying votes with social welfare benefits. If they don’t have the money, the don’t stop spending, they borrow and spend. Nothing new there. In fact, the Romans invented the practice going way back to the days of the Republic. The debt is mostly (75%) owned by Italian banks, and the short-term roll-over is relatively modest:

But the “modest” amount is more problematic that it would look. They will probably get through 2011, with a little help from euro zone friends, but with a declining economy and a poor economic future, rising borrowing costs could leave them little room to maneuver.

Like Greece, the rest of the EU is demanding Italy cut spending and bring their budget in line with reality. Berlusconi has proposed a €43 billion austerity package, and the opposition was quick to agree to do it with “‘very few’” amendments to the budget plan in order to speed the bill’s passage.” I wonder what “very few” really means. His administration’s hold on power is tenuous.

Reforms include  increased retirement age, public-sector wage freezes, simplified tax structure, and fewer transfers of funds from the central state to local administrations. In fairness, their budget deficit “shrank to 4.6% of GDP in 2010 from 5.4% the previous year, the lowest level among euro zone countries after Germany and well below the euro zone average of 6%.”

And what after that ¿?¿?¿?

From Reuters: “The cost of insuring Greek government debt against default rose to a record high of 1,600 basis points on Monday, hit by concerns that any second rescue of Greece will trigger a credit event or at least multi-notch rating downgrade of its debt. Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit.  The Markit iTraxx index of western European sovereign CDS was up 9 bps on the day at 220 bps, near a record high of 221 bps hit on January 10. Portuguese CDS were up 40 bps at 773 bps, while Irish CDS were 33 bps higher at 745 bps, both at record highs. Spanish CDS were up 13 bps at 289 bps.”

Congratulations Political “Elite” for helping so much in finding answers !!!

Let´s see what happens with the Support for IBEX and the resistance for the 10 Y Bono.

With € under pressure and Greece looking very week, we are not sure that Spain can handle the storm.

By FT:

Source : Barrons

Greece´s  debts are EUROPE´S problems for sure …

Greece is arriving to a dead end. The country is facing a Scylla and Charybdis moment.

European political “Elite” continues on Denial. What´s next ¿?¿?¿?

Courtesy of Greg Weldon

Today’s Money Monitor theme can be pitched two ways …

… D.O.A. = Dead on Arrival …

… or … D.O.A. = Debt Offenders Anonymous

Either way, the title applies to our examination of the still-intensifying EU debt-deficit debacle. We are tempted to say that the Eurocurrency is currently being rushed to the hospital, and that it is likely to be pronounced ‘D.O.A.’, or dead-on-arrival …

… but we think the more ‘appropriate’ analogy is to look at the EU as if it were a prime candidate to join a twelve-step self-help program called D.O.A., or ‘debt-offenders-anonymous’.

The first step would be ‘acceptance’.

However, the EU is not yet capable of this, as it remains ‘in denial’.

As EU debt markets come under renewed pressure amid a broadening in the scope of downgrades to sovereign credit ratings, and ratings outlooks, we note commentary from the Union’s Economic and Monetary Affairs Commissioner Olli Rehn …

… “We have contained the crisis to the three countries now in the EU-IMF programs. It is not correct to speak of a crisis of the euro or monetary union.”

DENIAL, case closed.

EU officialdom, via their denial, continues to be an ‘enabler’.

Of course, a symptom almost always attached to an ‘addict’, is lying … by the addict, AND by the co-dependent enabler.

Thus we find it MOST interesting to observe last week’s startling admission from the head of the EU Finance Ministers, Luxembourg’s Jean-Claude Juncker, who stated that he “LIED’ to the press and the public, regarding a secret meeting of top EU officialdom, held to discuss the Greek situation …

… “It was done in the interest of the people who use the euro as their common currency. The denial immediately prevented further speculation in the markets. Speculation about an exit by Greece from the euro-zone had to be avoided at all costs, in the interest of the euro-zone.”

Denials and lies — this has become the EU’s arsenal.

The reality is … the EU is unwilling to accept the fact that it has become addicted to debt and deficits, and that their fiscal life has become ‘unmanageable’. The EU must first admit to themselves, and to the markets, the exact nature of their wrong-doing.

Without acceptance, the EU cannot reach the point where they can make a conscious decision to turn over their ‘will’ to a ‘higher power’, which in this case would be ‘fiscal austerity’, and a restructuring of debt that will allow the situation to become ‘manageable’.

Without acceptance, the EU cannot even think about ‘making amends’.

The EU (along with the US) is in desperate NEED of a ‘spiritual awakening’.

The problem is one linked to our instinctive nature as human beings …

… a thing called … the desire to avoid pain, at any cost.

The EU, like the US, suffers from what we might call the ‘Cyrenaic Syndrome’, a dynamic linked to the ancient Greek philosophers Aristippus and Hegesias of Cyrene, who, in 3rd and 4th Centuries BC, hypothesized that the goal of life was the avoidance of pain and suffering. Addicts accomplish this thru substance abuse. The EU is trying to accomplish this thru pure denial, and an outright refusal to accept that austerity, like sobriety, is the ONLY way to actually deal with the problems it faces.

The EU is still … FAR … from ‘hitting bottom’.

For SURE … the debt-deficit crisis is NOT “contained”, as Olli Rehn would have us believe. We have been pounding the table for years, screaming that the problems facing Greece, Ireland, and Portugal, will look like CHILD’S PLAY, when the situation in Belgium, Spain, and Italy, begins to take center stage. This is NOW HAPPENING, on the back of today’s outlook downgrade placed on Belgium and Italy, in synch with intensified anxiety linked to Spain following weekend elections in which the ruling Socialist party got mauled.

At the heart of the issue in Spain, and Greece, is rising unemployment. Indeed data released last week in Greece revealed a jump to yet another new high in the Unemployment Rate, as seen in the chart. The Unemployment Rate jumped to 15.9% in February (data lagged by one-month), up from 15.1% in January, and up from 12.1% in Feb-2010. Worse yet, the Number of Unemployed has now spiked higher by +30.1% versus last February, and is up by a mind-numbing +99.9% versus February of 2008.

We also shine the spotlight on data released by the Greek National Statistics Service two weeks ago revealing that Industrial Production contracted by (-) 8.0% year-over-year during the month of March, plummeting deeper into negative territory versus the decline of (-) 4.8% yr-yr posted in February …

… LED by a double-digit decline in the year-year rate of Manufacturing Output, which plunged by (-) 10.3% during March, sliding from a (-) 6.8% yr-yr contraction in February, and the (-) 4.5% yr-yr decline seen in January. Evidence the chart on display below, which speaks for itself.

Further, we note today’s report on the Greek Budget, revealing that DESPITE austerity measures undertaken as part of the EU-IMF directed program, the Deficit WORSENED during the month of April. Indeed, the government reported a deficit of (-) EUR 7.246 billion in the four-month YTD 2011, an ‘increase’ of +13.7% versus the same period 2010.

Worse yet … Revenue FELL, while Spending ROSE … with Revenue falling by (-) 9.1% in the YTD-yr-yr, and Spending rising by +3.6%.

Problematic for SURE … as a rise of +14.4% in Outlays linked directly to Interest Payments on the debt, which accounted for a MIND-BLOWING 52.7% of the TOTAL DEFICIT in the year-to-date, pegged at (-) 3.819 billion EUR.

Unfortunately, Greek bond yields continue to SOAR, reaching a new ALL-TIME HIGH TODAY, as evidenced in the chart below, wherein the 2-Year Bond yield now exceeds 25%.

Turning to Spain, we note that the ruling Socialist Party got crushed in regional elections, falling victim to promises made by the People’s Party that they will move to restructure the electoral process, and squash planned cuts to social spending programs.

Perhaps more troubling is the fact that the United Left Party, formerly the Spanish Communist Party, saw a significant rise in support from a disenchanted populous, in line with massive protests among the youth in the country last week, who reject thoughts of … austerity.

Subsequently, we continue to closely monitor the action in the Spanish Government Bond market, with focus on the line-drawn-in-the-sand at 5%, as evidenced in the chart on display below plotting the country’s 5-Year Sovereign Bond yield. Clearly, from a technical perspective, a rise in this bond’s yield thru the double-top marked at 4.93%-4.95% would constitute a major upside breakout, and would come in synch with the upside acceleration taking place in the long-term trend defining 200-Day EXP-MA.

Similarly, we observe the chart shown below in which we plot the 5-Year Sovereign Credit Default Swap Rate linked to Spain’s government’s credit worthiness. We focus on the upside push taking place today, and the violation of the highs reached last May, in line with the upside directional reversal by the long-term 200-Day EXP-MA.

We have repeatedly stated that Greece, Ireland, and Portugal represent the minnows in the debt-deficit pond, while Spain and Belgium might be considered big-fish.

But, when it comes to Italy, we have used the term WHALE to describe the country and the risk attached to their HUGE outstanding debt, pegged at more than $2 trillion (including interest payments). With that in mind, we shine the spotlight on today’s downgrade to Italy’s credit rating outlook, instituted by Standard and Poor’s, with specific focus on commentary from the agency …

… “In our view, Italy’s current growth prospects are weak, and the political commitment for productivity-enhancing reforms appear to be faltering, and potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished. If one or a combination of these risks materializes, Italy’s general government debt could stagnate at current high levels. In this case, we may lower the long- and short-term ratings on Italy.”

Subsequently, Italian Government Bond yields rose sharply today, with the 2-Year Bond moving above 3%, and the 5-Year yield spiking upwards to more than 4% … amid a widening in the spread over Germany’s comparable 2-Year Schatz yield, and the German 5-Year BOBL yield. We note the 5-Year spread in the chart on display below, with focus on the fact that Italy’s yields are threatening to breakout to the upside, while German yields actually fell today, amid a flight to safety among regional bond investors.

We are keen to watch the price action in the Italian 10-Year BTP futures contract, as noted in the chart below, with thoughts of being short amid the downside violation of the 100-Day EXP-MA, and the fresh sell signal being generated by the med-term Oscillator.

Against the negative backdrop of ratings news, macro-economic weakness, and overt denial by EU officialdom …

… we examine the chart on display below plotting the Italian MIB Stock Index, which PLUNGED by (-) 3.32% in today’s trading session, producing THE SINGLE LARGEST one-day LOSS of ANY industrialized nation, and trailing only Vietnam (down -3.48%) and Bangladesh (down -5.98%) as the day’s largest losers in the world, stock market wise.

More importantly, we note the technical damage inflicted on the Italian stock index during today’s trading session. We evidence the downside violation of the uptrend line that has defined the bull market run since the 1Q of 2009, in synch with the move below the March swing low, and the penetration of the long-term 200-Day EXP-MA (which has completed its downside directional reversal). A further decline below the May-25th 2010 low marked at 18,382 would constitute a full-blown breakdown.

The Spanish stock market got whacked as well, losing (-) 1.42% and taking out its March low. As noted in the chart below, the Spanish IBEX stock index is highly correlated to the German DAX, and tends to lead the German market. Indeed, both the Italian MIB and the Spanish IBEX are now threatening to lead the German market to the downside.

As such, we are becoming increasingly bearish on the DAX, in synch with the weakness exhibited by the Spanish and Italian equity markets. We shine the spotlight on the long-term weekly chart of the German DAX, shown below, with specific focus on the significant degree of bearish momentum divergence exhibited by the 52-Week Rate-of-Change indicator, and the long-term Oscillator, neither of which ‘confirmed’ the most recent newer new high in the underlying index itself.

Moreover, we note that both the long-term Stochastic indicator and the long-term Oscillator have generated renewed ‘sell signals’, via their dual downside rollovers. Subsequently, the door has been opened for a move to test the swing low set on March-16th at 6,412 (basis the nearby futures contract). A violation of this key technical support pivot would also cause a downside penetration of the long-term trend defining 52-Week EXP-MA, last marked at 6,792.

But there is a ‘bigger picture’ risk in play here, as ALL the addicts are at risk, the debt addicts, and the dollar-debasement/excess-liquidity addicts, as evidenced in the overlay chart on display below. We plot the path of the Spanish IBEX (blue), the German DAX (black), along with the US S+P 500 Index (purple), and the CRB Index of commodities prices (red).

In fact, Fed monetization driven ‘Dollar Debasement’ has been like ‘smack’ to the asset market … without it … withdrawal could be UGLY.

We note the high degree of correlation between dollar depreciation, as defined by the green bars plotted in the overlay chart shown below, representing the inverted price of the US Dollar Index (inverted to reflect a rise, when the value of the dollar declines) …

… and … the European stock markets, as represented by the German DAX (black line) and the Spanish IBEX (blue line).

With the Fed threatening to pull their debt monetization support for a continued debasement in the value of the USD … the time for DENIAL is running short. We will be keeping an EKG attached to the Eurocurrency, seen in the daily chart below, to determine if it might be, DOA, or dead-on-arrival. We focus on today’s technical breakdown, with a violation of the med-term trend defining 100-Day EXP-MA, completion of a head-and-shoulders topping pattern, and the bearish divergence in, and preliminary sell signal offered by, the med-term Oscillator.

Debt addicts are in denial, and monetary officialdom’s enablers have shown a willingness to LIE, in order to provide protection from reality.

Dollar debasement addicts are also in denial, if they believe that there is NO pain to be felt in ALL asset markets, if the USD’s multi-month trend towards depreciation is in the process of reversing, in line with a breakdown in the Eurocurrency.

If Europe is NOT willing to feel some pain, fiscally …

… the markets will INFLICT PAIN, in the form of lower equity quotes, and higher bond yields.

Within the context of our Macro-Global Discretionary Managed Accounts Trading Program, we are bearish on European stock markets, and are becoming increasingly interested in the bearish side of the US equity market.

We are bearish on bond markets linked to fiscally challenged countries, against a bullish stance on the US and German bond markets.

We are bullish on the US Dollar Index … and bearish on the EUR, along with the Canadian Dollar.

And, we are bearish on select commodity markets, with specific focus on the Industrial Metals sector (with focus on Copper, Nickel, Lead, Zinc, and Palladium) along with the Tropical-Soft sector (focusing on Sugar, Cocoa, Cotton, and Coffee).

Gregory T. Weldon

From Goldman Sacks

Spanish 10-year yields – Nearing very important triangle pivot at 5.53 and 5.58%

• Over the last few weeks market focus on the Eurozone periphery has returned and one chart in particular which it seems important to have on radar screens in this regard is Spanish 10-year yields
• They’ve been consolidating in a tight range since the November ’10 peak at 5.58%
• Given the underlying structure of the multi-month chart, the consolidation over this multi-month period appears most likely to complete as a yield bullish (price bearish) continuation pattern
• Resistance of the pattern comes in at 5.53%, a move above which would give an immediate triangle continuation target of 6.01%
• Structurally a move significantly beyond 6% does seem quite feasible when you take into account the setup on the multi-year chart
• Overall, this really looks like a chart which has to be on radar screens as a potential driver of EUR sentiment

Spain/Germany 10-year Spread – Breaking through material resistance

Spain/Germany 10-year Spread overlaid with inversed-“EUR Index” – Not a perfect correlation, but the broad trends are similar

• Blue is the Spain/Germany 10-year spread
• Green is the inverse of the “EUR Index” so higher is EUR-weakness and lower is EUR-strength. It’s approximately 30% USD, 30% GBP, 20% JPY, 10% CHF and 10% SEK.
• From a broad trend perspective the spread and the inversed index have been positively correlated

6% Yields for the Spanish 10 Y Bond would be very bad for our disfunctional  Economy…