Germany Sets Conditions

German opposition to any assistance to Greece has been widespread and has caused a political rift in the euro zone. On Tuesday Germany signaled for the first time that it may accept EU aid for Greece but only if the International Monetary Fund is involved and EU nations accept tighter budget rules and regulations.  A German official listed the conditions for EU aid to Greece;

The IMF would need to provide a “substantial contribution” to any aid package.

Greece would not be able to access credit markets.

European Union nations would have to negotiate and approve “additional instruments” to impose budget discipline over existing rules that enabled Greece to run up huge debts and deficits.

ECB and Eurogroup Oppose IMF Solution

An unnamed source in Chancellor Angela Merkel’s government said that Germany would only agree to EU aid for Greece if aid packages combined bilateral EU and IMF assistance. The senior official stated, “The condition for action, as a last resort, is that Greece’s financing on the capital markets is exhausted. There are first signs from various capitals that people could envisage financial co-assistance by the IMF.” EU sources said that France and Germany, which were co founders of the euro are attempting to reach a joint position to be presented at the upcoming EU summit. Talks have been described as “very sensitive”. European Central Bank President Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker said that involving the IMF could send the message that the EU is incapable of resolving its own problems. Julian Callow of Barclays Capital stated, “The message from Berlin is crystal clear really, which is that Greece still needs to continue not just with consolidation but to test the markets out and if necessary use the IMF. The implication is that Germany will support Greece only if the IMF channel does not deliver.”

Greece’s Debt Hits 12.9% of GDP in 2009

Greece’s debt is expected to reach 120% of national output and hit 12.9% of the nation’s GDP in 2009 and Greece’s problems have shaken investor confidence in the multi nation currency. Credit rating agency Fitch said it does not expect a solution to Greece’s debt problems at the upcoming EU summit and also said that failure to reach an agreement would not prompt a downgrade. Chris Pryce, of Fitch said, “As long as the market is prepared to make the money available to the Greek government at any reasonable price — current rates are reasonable given circumstances although not desirable — we would have no immediate reason to change the rating.”

Greece May Seek Aid From IMF

The euro continued its fall Friday as investors and traders speculated whether Greece will obtain financial aid from other EU nations. Greece’s debt problems have pressured the euro since 2009 and disagreements about how to aid the ailing nation have caused political rifts in the euro zone.  The Athens government has indicated it may seek aid from the IMF and no concrete decision about how to aid Greece has been forthcoming from recent EU meetings. Most expect Greece to be high on the agenda of the upcoming EU summit next week. Michael Woolfolk of BNY Mellon in New York stated, “The tensions surrounding Greece are escalating. This whole IMF situation has become a game of brinkmanship and the whole uncertainty is undermining the euro.” European Central Bank President Jean-Claude Trichet and other EU officials have nixed IMF participation but the administration of Germany’s Chancellor Angela Merkel believes that the IMF should have a role in helping Greece. Greek Prime Minister George Papandreou said his country may turn to the IMF for aid if EU leaders fail to set up a lending mechanism at next week’s EU summit. Greece has to raise 10 billion Euros ($13.6 billion USD)  to refinance government bonds by April 20th and May 19th.Nobel Prize winning economist Robert Mundell said that the IMF should be a “lender of last resort” for Euro Zone nations.

European Commission President Calls For EU Aid For Greece

European Commission President Jose Manuel Barroso urged EU nations to agree to a standby aid mechanism to aid Greece as soon as possible. Barroso said Euro Zone nations should make coordinated bilateral loans to Greece and also said such loans would not violate the EU’s rules against bailouts. Barroso stated, “The European Commission is ready to make a proposal for an instrument for coordinated assistance for Greece. Such an instrument will be constituted by a system of coordinated bilateral loans and will be compatible with the no bailout clause and with strict conditionality. I urge all member states to agree as soon as possible on this instrument.”

BOE Says UK May Return to Recession

The US dollar and the yen gained on most major counterparts as the Dow Jones Industrial Average fell paring demand for risky assets. The pound was hammered in currency markets after the Bank of England said the UK may return to recession. Singapore-based Rogers Holdings Jim Rogers had this to say about the pound, “Things are pretty bad for sterling for the long, long, long term.  I cannot imagine buying sterling back unless it gets really cheap.”

Euro Zone Industrial Output Rises

Strong euro zone economic data prompted euro gains in global currency markets. Euro zone industrial production figures showed the biggest monthly industrial output on record in January. Some currency experts expected the move and Nick Bennenbroek of Wells Fargo in New York stated, “What we’re seeing here is probably corrective strength in the euro and sterling. We had very large positions in these currencies so they are due to bounce anyway. And we got some positive news on these currencies, which was a convenient excuse for these to gain.” The pound gained for the second straight day vs. the US dollar after a report showed that UK house prices gained at the fastest rate in seven years. Home prices in Wales and England rose 1.9% in February the largest increase since 2002. Election concerns are still putting the pound under pressure as investors fear government gridlock in the UK.

Pound Gains on UK Housing Data

Many experts believe that the UK could have its first minority government since 1974 which could hamper the nation’s ability to address economic concerns. The pound gained 0.8% vs. the US dollar trading at $1.5184. Prime Minister Gordon Brown said that this years UK budget will be delivered on March 24th and called recovery in the UK ‘fragile.’ Bank of England Chief Economist Spencer Dale said that the Bank of England’s 200 billion pound ($303 billion USD) bond purchase program is starting to yield results. In a speech at Cambridge Dale said, “There are perhaps some tentative signs that nominal spending in our economy is starting to accelerate. Much of the impact of our asset purchases to date is still to come through and so it is too early to judge their final impact.”

EU Nations Will Aid Greece

The euro gained after a report by the French newspaper Le Monde that said that EU nations will offer Greece and aid package of 20 billion to 25 billion euros, ($27.56-$34.45 billion USD) Le Monde reported that meetings took place in Brussels with the goal of reaching a compromise regarding aid to Greece. The report said finance ministers had to choose between a loan facility financed by euro zone nations or a facility financed by EU member states and guaranteed by EU member states. The facilities can only be used if needed and Le Monde noted that Greece faces more debt refinancing in April and May. A meeting between the European Central Bank and the European Commission will take place Friday. Economic and Monetary Affairs Commissioner Olli Rehn pointed out that the EU could lose credibility if Greece defaults.

Loonie at Five Month High

The Canadian hit a five month high as investors bet that Canada’s recovery will experience strong recovery from the global recession. Oil, one of Canada’s chief exports traded above $81 dollars a barrel for the sixth straight day and a Canadian government report is expected to show that Canada added 15,500 jobs in February. Eric Lascelles of Toronto-Dominion Bank stated, “The Canadian dollar has seen a monumental run in the last several weeks. For once the motion is because of fundamental factors in the economy that has prompted the Canada-U.S. rates spread to look more attractive, with people piling on that trade.” The Canadian dollar traded at 97.54 U.S. cents and some currency analysts say that the ‘loonie’ could achieve parity with the US dollar if the Bank of Canada raises interest rates. The Canadian dollar tends to rise and fall with stocks and commodities. Speaking about possible parity with the greenback Avery Shenfeld of CIBC in Toronto said, “We expect the Canadian dollar to hold firm even in this period of U.S. dollar strength, thanks to strong domestic performance in the first half. Enhanced expectations of a Bank of Canada interest rate increase, coupled with a lower probability of a Fed hike come the second half of the year, could lift the loonie past parity.”

Better Than Expected Canadian Data

The Canadian dollar gained a full 2.5% vs. the US dollar since the beginning of March and the Bank of Canada said on March 2nd that inflation and economic output are much better than expected. A Canadian jobs report due Friday may push the loonie even higher but some analysts are skeptical. Stewart Hall of HSBC Holdings Plc stated, “The push to parity is going to be harder than many may suspect in the absence of a significant pick up, well beyond the market median, for Friday’s Canadian jobs report. In the back of the market’s mind is the idea if the currency runs amok, it plays havoc with the overnight rates story and market sentiment that is looking for the Bank of Canada to come off the sidelines in the second half of this year.”

Commodity Linked Currencies Higher on Chinese Data

Chinese export data pushed commodity linked currencies higher. The Aussie dollar gained 0.6% vs. the US dollar and traded at0.9186. Australia is one of China’s chief suppliers of raw materials. The Kiwi dollar gained rose to a five week high against the greenback gaining 0.9% trading at 0.7087. In a note to investors Commerzbank analysts stated, “They (Australian and New Zealand dollars) are benefiting from good Chinese data which suggest that the economy there is expanding strongly.”

IMF Leader Dominique Strauss-Kahn Proposes New Reserve Currency

In recent years there has been much talk of replacing the US dollar as the world’s primary reserve currency. Last year China and Russia proposed replacing the greenback with a basket of currencies that would serve as a reserve currency. The proposals were not well received and the dollar remains, for better or worse, as a global reserve currency. A recent report in the venerable New York Times suggests that the idea of replacing the dollar is still with us. International Monetary Fund leader Dominique Strauss-Kahn floated the idea of an alternative reserve currency in a recent speech at IMF headquarters in Washington D.C. Strauss Kahn pointed out that an alternative reserve currency would limit dependence on the decisions of a dominant country. (The US) Very few economists believe that a change in reserve currencies will take place anytime soon and the US dollar’s status as a global reserve currency is secure for now.

Dollar to Remain as Reserve Currency

Mr. Strauss-Kahn said that in the future the IMF may be called upon to provide financial markets with a globally issued reserve currency but “that day has not yet come.” Harvard professor and former chief economist for the IMF said that the idea of an alternative reserve currency has been a “perennial big-think question” and “perennial big-think question.” Rogoff predicted the collapse of large banks at the beginning of the global recession with uncanny accuracy. Rogoff has also predicted that several EU nations will default on their sovereign debt as early as this year. The US Treasury responded to Strauss Kahn’s remarks by referring to its most recent semiannual foreign exchange report which says that “as long as the United States maintains sound macroeconomic policies and deep, liquid, and open financial markets, the dollar will continue to be the major reserve currency.”

IMF Willing to Help Greece

After the speech Mr. Strauss Kahn told reporters asking about the Greek debt crisis that the IMF would be “happy to help if asked” and said he believed that the European Union is capable of resolving the crisis. Strauss-Kahn who is a former French Strauss-Kahn stated, “The Europeans, especially the members of the euro zone, want to try to deal with the problems themselves. I perfectly respect this.” Recently the IMF has joined the European Union and the European Central Bank in sending experts to Greece. The ECB and the EU have demanded that the Athens government impose austerity measures before granting financial aid to Greece.

Bernanke in Front of Congress

The long awaited testimony of Fed Chairman Ben Bernanke began today in front of the House Financial Services Committee in Washington. Bernanke had plenty to say to congress regarding the state of the US economy. Bernanke said the US economy is in a “nascent” recovery which requires keeping benchmark rates low for an ‘extended period. This is Bernanke’s first appearance before congress since his contentious confirmation hearings in January. Bernanke painted a relatively sobering picture of the US economy which is still mired in recession despite recent signs of recovery. During the past two years the US has lost approximately 8.4 million jobs during the most severe financial crisis since the great depression of the 1930’s. Bernanke told congress that job losses are slowing but noted the recession’s effects on American workers.

Rates to Remain Low

Bernanke said that the current state of the US economy requires rates be kept low to stimulate demand by consumers and businesses. Bernanke stated, “A sustained recovery will depend on continued growth in private-sector final demand for goods and services. Private final demand does seem to be growing at a moderate pace.” Bernanke said that dismal US labor markets and low inflation will allow the Federal Open Market Committee to keep rates low but said the Fed will have to tighten monetary policy “at some point.” Bernanke told the committee, “The FOMC continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Bernanke also said that the FOMC id prepared to support the economy with stimulus measures for as long as necessary.

Bernanke Cites Weak US Economic Data

Last week the Fed surprised financial and currency markets by raising the discount rate it charges banks for emergency loans. Many investors feared that the Fed was about to raise borrowing costs despite the fact that the Fed did not raise the federal funds rate. The Fed portrayed last week’s move as “normalization” and said last week’s rate hike will not change the Fed’s outlook on the economy or change monetary policy. Bernanke cited the weak US labor market as one of the factors motivating the Fed to keep rates low. Bernanke stated, “Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce.” Bernanke said the Fed possesses a wide range of tools to withdraw emergency measures when the ‘time is right.’

US Consumer Confidence Drops

The dollar posted gains vs. the euro and losses against the yen as markets gear up for Fed chairman Bernanke’s testimony to congress scheduled to take place on Wednesday and Thursday. UD data which showed a decline in consumer confidence pared demand for risky assets and currencies. In February US consumer confidence fell to the lowest in ten months and labor outlook worsened. Matthew Strauss of RBC Capital Markets stated, “I’m not surprised to see the forex markets reacting to (consumer confidence) by shifting positions into safer assets. The headline may be overstating the softness in consumer behavior but it highlights risks to the economic recovery going forward.. The shift from government-induced growth to consumer-led growth will not be without disappointment. We can’t see fed funds going up before the fourth-quarter of this year. In the short-term, safer assets, such as the yen, will get a bit of a boost.”

Apprehension Ahead of Bernanke’s Congressional Testimony

In addition the Standard & Poor’s/Case-Shiller index of home prices in 20 cities showed a 0.2% decline in December from November 2009 and an annual 3.1% decline. Apprehension about Bernanke’s testimony contributed to the rise in risk aversion and demand for safe haven currencies like the yen. The Standard & Poor’s 500 Index fell 1.2% and the MSCI World Index also fell 1.2%. Brian Dolan of FOREX.com stated, “It’s an abysmal consumer confidence number and the risk trade is under pressure as a result. Treasuries are rallying, yields are falling and that pushes the yen higher.”

German Business Sentiment Unexpectedly Declines

The euro accelerated its decline against the greenback after Germany’s Ifo business sentiment index showed an unexpected decline. In addition French consumer spending numbers and Italian confidence data were below forecasts pressuring the already troubled euro further. As if that wasn’t enough bad news for the euro Ifo economist Klaus Abberger said that the German economy may have contracted during the first quarter. Germany is the euro zone’s largest economy. Markets remain troubled by Greece’s debt problems and investors are concerned that Greece’s austerity measures may not be enough to prevent a bailout by the EU or the IMF. Referring to the euro negative tone in currency markets Alan Ruskin of  Royal Bank of Scotland stated, “The euro tone is so negative that strong data is helpful for the dollar (via rates), and weaker data is seen as mild negative for the euro (because of risk appetite consideration). This ‘heads you lose, tails you lose’ logic can be dangerous, but is symptomatic of the negative euro tone.” Until the euro zone solves Greece’s problems the euro is likely to remain under pressure for some time to come.

Dollar Gains on Euro For Sixth Straight Week

The long awaited Fed rate hike happened and markets were quick to react. The greenback posted gains for the sixth straight week against the euro and the multi nation currency hit a nine month low after a February 15th meeting of European Finance ministers told Greece to prepare additional austerity measures in case the troubled nation cannot demonstrate sufficient progress in reducing the deficit by the next meeting on March 16th. The Fed rate hike prompted speculation among investors that the Fed will withdraw emergency stimulus measures. Vassili Serebriakov, of Wells Fargo stated, “The dollar should continue to do well against weaker G10 currencies like the euro, the yen and the pound. Serebriakov also said that the hike “was an important first step on the way to policy normalization.” The dollar gained 0.14% against the euro this week trading at $1.3613. The dollar gained 1.7% vs. the yen and traded at 91.62 yen.

Fed Says No Change in Monetary Policy

The Fed raised the rate it charges banks for direct loans from 0.50% to 0.75% and also said that the “the typical maximum maturity for primary credit loans will be shortened to overnight” on March 18th. Additional Fed statements said that “These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” and that the Fed’s actions “do not signal any change in the outlook for the economy or for monetary policy.”

Expert Says That Greek Crisis Could Lead to EU Breakup

The euro remains under intense pressure by the ongoing Greek debt crisis. Currently Greece’s budget gap is more than four times what EU rules allow and many fear that Greece’s problems will spread to other EU nations, most notably Spain and Portugal. Societe Generale SA strategist Albert Edwards said the euro zone was poised to break up. Edwards said that the problems facing Greece, Portugal and Spain “is that years of inappropriately low interest rates resulted in overheating and rapid inflation.” In a pessimistic assessment of the future of the euro zone Edwards warned that even if “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable breakup of the euro zone.” Opposition to any aid to Greece is fierce in Germany and the Netherlands. Polls show that a majority of citizens in both countries oppose aid to Greece and many polled favor ejecting Greece from the EU. Clearly the euro zone is in real trouble.

Support For Greece’s Austerity Measures

The Greek fiscal crisis has caused investors to lose confidence in euro zone assets and has pummeled the euro in currency markets since January. The EU is now trying to impose discipline on Greece and other weak EU nations. Greek austerity moves have been opposed by public sector employees and unions as generous pension plans are threatened. Greek fiscal troubles have caused social unrest in the country. A series of one day strikes failed to have any affect on the Athens government which is under immense pressure by the EU to cut deficits. Greek opinion polls show support for austerity measures as long as the budget cutting measures are applied equitably. Last year Greece suffered two credit downgrades and rating agencies are not convinced that Greece can fix its debt problem alone. Worse than expected Greek GDP data showed a deepening recession and little prospect for growth in the beleaguered nation.

German Opposition to Any Aid For Greece

The German government of Angela Merkel has expressed fierce opposition to any financial aid to Greece but most experts believe this could change if the financial integrity of the euro zone is threatened. On February 11th EU President Herman Van Rompuy stated, “Euro-area member states will take determined and coordinated action, if needed, to safeguard financial stability in the Euro area as a whole.” German Chancellor Merkel stated, “Greece won’t be left alone, but there are rules that must be adhered to. On this basis we will agree on a statement.” Many experts fear that Greece’s problems could spread to other euro zone nations and affect global markets. A Greek default would hammer the euro in currency markets. Greek President George Papandreou has called for a wage freeze for public sector employees, pension reforms and higher fuel prices all of which are unpopular. In Germany former Bundesbank official Otmar Issing warned, “The viability of the whole framework — nothing less — is at stake. Financial assistance for countries that violated the terms of their participation in EMU would be a major blow for the credibility of the whole framework. Such principles do not allow for compromise. Once Greece is helped, the dam would be broken. The question is whether monetary union can survive.”

Pound Falls on Recovery Concerns

Lately it seems that there has been nothing but bad news for Europe. The pound fell after data showed that the UK’s recovery may lag behind US recovery. The Bank of England said it may be necessary to “provide further monetary stimulus.” Clearly Europe is in serious trouble.

EU Ministers Tell Greece More Action Needed

The euro has been pressured by Greece’s fiscal woes for the since late last year and other EU nations are not pleased. A poll taken by a German newspaper showed that a majority of Germans oppose aid to Greece and are in favor of removing Greece from the European Union if necessary. On Tuesday EU ministers told Greece that its will have to take additional measures to address the nation’s debt problems and calm ‘irrational’ financial markets. At the EU meeting ministers from Germany, Austria and Sweden stated that Greece should follow the lead of Ireland and Latvia who are cutting spending and wages aggressively. At the meeting Joerg Asmussen stated, “We made it clear the ball is in Greece’s court. Additional measures by Greece are needed.”  After the meeting the ministers said that the 30 days they have given Greece to implement measures before reporting back to the group will only end with more demands for tax hikes, budget cuts or both.

No Specifics About Support For Greece at EU Ministers Meeting

Greece is the first EU country in eleven years to require a political pledge of support after Greek debt concerns prompted an attack by financial markets which has pressured the multi nation currency, lifted bond yields making debt servicing much more difficult. The ministers did not say anything specific about aid or support for Greece and put pressure on Greece to implement severe measures in exchange for a promise of support if things get out of hand. Austrian Finance Minister Josef Proell stated, “The pressure on Greece to consider further measures by March 16 has clearly increased. Germany, France and others — there (would) be a group of countries who can give this money to Greece to stabilize the country and also the euro zone. But this debate is not yet on.”

US Confident EU Can Handle Greek Situation says White House Spokesman

European Monetary Affairs Commissioner Olli Rehn said that economic experts from the IMF, the European Commission, and the ECB “will be on the ground in Athens in the coming days” to make sure steps to address the fiscal crisis are being implemented. In the US White House spokesman Robert Gibbs said that the United States is confident the European Union is capable of resolving the Greek situation but dodges a question about whether US president Obama was happy with the steps taken by the EU so far. Gibbs told reporters, “We have confidence, as they told the president, that the EU is capable of dealing with the situation.”