The Governments Don't Rule The World, Goldman Sach Rules The World!!

... the governments don't rule the world, Goldman Sachs rules the world! Goldman Sachs doesn't care about this rescue package, neither does the big hedge funds!

The Flying PIIGS!

Truly ffunny but sadly that's how pathetic things are...

China And The Trade Imblances Issue Caused By The Euro Crisis

Posted the other day How Euro Crisis Is Hurting China

I have been waiting for Professor Pettis to write on this issue and he has not failed me.

It's an extremely interesting view point. Long as usual.

Don’t misread the trade implications of the euro crisis for China

• .... To summarize, and to make the sequence clearer using nothing more than explicit assumptions and accounting identities, let me suggest schematically the list of factors that require either much greater flexibility on the part of surplus nations or much greater deficits on the part of the US:
  
  1. I assume that for the foreseeable future the major trade deficit countries in Europe are going to find it very difficult to attract net new financing. At best they will be able, through official help, to refinance part of their existing liabilities.
  
  2. If these countries cannot attract net new capital inflows, their currency account deficits, currently equal to two-thirds that of the US, must automatically contract.
  
  3. If European trade deficits contact, there must be one or both of two automatic consequences. Either the trade surpluses of Germany and other European surplus countries – larger than that of China and just a little larger in sum than the European deficits – must contract by the same amount, or Europe’s overall surplus must expand by the same amount.
  
  4. We will probably get a combination of the two, but a much weaker euro – combined with credit contraction, rising unemployment, and German reluctance to reverse policies that constrain domestic consumption – will mean that a very large share of the adjustment will be forced abroad via an expanding European current account surplus.
  
  5. If Europe’s current account surplus grows, there must be one or both of two automatic consequences. Either the current account surplus of surplus countries like China and Japan must contract by the same amount, or the current account deficits of deficit countries like the US must grow by that amount, or some combination of the two.
  
  6. If the Chinas and Japans of the world lower interest rates, slow credit contraction, and otherwise try to maintain their exports – let alone try to grow them – most of the adjustment burden will be shifted onto countries that do not intervene in trade directly. The most obvious are current account deficit countries like the US.
  
  7. The only way for this not to happen is for the deficit countries to intervene in trade themselves. Since the US cannot use interest rates, wage policies or currency intervention to interfere in trade, it must use tariffs.
  
  
  Tariffs in the US, Asia and probably in Latin America and Europe will rise. These are big numbers and the risk is that the adjustments are likely to occur rapidly. This means the rest of the world will also have to adjust just as rapidly.
  
  I don’t really see how the numbers are going to work. Europe, China and Japan are all implicitly demanding that the US trade deficit rise to help them through their domestic employment problems. The US has its own domestic employment problems and is determined to bring the trade deficit down. Both sides cannot win and there doesn’t seem to be much serious attempt at global coordination. In fact the easiest part of any global coordination – that between surplus Europe and deficit Europe – has already degenerated into a nasty round of accusations, counter-accusations and insults.
  
  So the hard part of the global coordination is almost certain to fail. It will take a few months for the impact of the euro weakness and the withdrawal of net financing to deficit Europe to be felt, but it will be felt. Expect trade tensions to get nastier than ever by the end of this year or the beginning of the next.
  
  By the way is there anything that China can do to head off conflict? Yes. It can buy euros, the more the better –just lift every offer out there. By strengthening the euro, or at least limiting its weakness, this strategy will force the brunt of the adjustment back onto European surplus countries rather than onto the US and, via the US, back onto China. Sarkozy and other European leaders might not be very happy, of course, but they will be at least partially mollified by the net capital inflows and the reduced humiliation of a collapsing euro.
  
  But make no mistake – if southern European trade deficits decline, someone somewhere must bear the brunt of the corresponding adjustment. The only question is who?
  

Market Chaos Warning! Shock & Awe Phase II

Getting more serious:

On UK Telegraph: Market chaos warning after German ban on shorting

• The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market.
  
  Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."
  
  One immediate effect was that the cost of insuring European government debt fell as markets were hit by a so-called "short squeeze" where investors with short positions are forced to offload their holdings and buy the bonds, causing the price to increase.
  
  This is certain to please the German authorities, who have waged an increasingly hostile war of words with supposed speculators.
  
  BaFin said the ban was being introduced due to "extraordinary volatility in debt securities issued by eurozone countries".
  
  In a statement, it said short-selling had led to excessive price movements "which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system". However, traders said that the measures, which will also prohibit the naked short-selling of shares in major German financial institutions, such as Allianz. Commerzbank, and Deutsche Bank, could lead to an immediate backlash from investors around the world.
  
  They added that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.
  
  "Without the two-way flow the German market is likely to become utterly dysfunctional," said one London-based bond trader. "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt."
  
  Germany, like other European governments, must raise hundreds of billions of euros by selling new bonds, but banning short-selling could jeopardise demand.
  
  Analysts at Bank of America Merrill Lynch summed up the mood with a note titled What's Germany going to ban next? Rainy days, harsh words, the Macarena?
  
  US shares fell as traders began to assess the consequences. After an early rally, the Dow Jones closed down more than 100 points, despite a day of gains for European markets.
  
  The German authority's actions echo those taken by many major Western governments in the wake of the financial crisis in late 2008 following the collapse of US investment bank Lehman Brothers. Britain and the US both temporarily banned shorting bank shares, fearing that speculators could cause the collapse of other major financial institutions.
  
  Speaking to Reuters, Lawrence Glazer, managing partner of Boston-based Mayflower Advisors, said: "The motive is probably more towards limiting volatility and trying to prevent some sort of raid on debt, or equities. We have seen this before, but whenever you see any type of regulatory changes it is worth paying attention."

Here are some comments from Mish: Shock & Awe Phase II: Germany to Ban Naked Short-Selling at Midnight; Politicians Battle Markets; Short Selling Restrictions and Market Crashes

• We have seen this play before. It's hopeless....
• Politicians cannot battle markets and expect to win. Wage price controls do not work. The Bazooka ploy failed a dozen times, and the ban on short selling financials in the US failed miserably....
  
  All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge.
  
  If history is any guide, there will be a brief rally in German banks, followed by a collapse of unknown duration. Politicians are not bigger than the markets, no one is.
  
  However, politicians can and do frequently exaggerate the existing trend. In this case, the trend is down. Short sellers are not the problem, if anything, short sellers are the cure, exposing problems and failed policies that politicians refuse to address.

Sadly but true.

One DO NOT GO SHORT without any justification. Why? That's suicidal.

Germany should seriously ask themselves if the shorties have a very strong reasoning to do what they are doing.

And naturally the Euro is getting whacked silly... (them Euro shorties are laughing yet again to the bank, eh? )

• TOKYO (Dow Jones)--The euro fell to a fresh four-year low against the dollar in Asia Wednesday, as investors in the region dumped the common currency on the view that new German financial regulations will complicate managing the risk of holding the currency.
  
  The new rules announced overnight may make both short-term and long-term investors increasingly eager to further trim their euro holdings. The regulations are also likely to weigh on European equities later in the global day, further hurting the risk-sensitive currency, dealers said.
  
  In morning trade in Tokyo Wednesday, the euro dropped to $1.2143, its lowest level since April ... source

On Bloomberg: Euro Falls to 4-Year Low, Yen Jumps on German Speculation Ban

• “If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The German ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.”
• “The regulatory step in Germany did little to soothe speculative selling on the euro and rather underscored the lack of solidarity in the euro zone,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “No one can dismiss entirely the worst-case scenario in which the single currency will fall apart.”

On Zero Hedge: The Definitive Incomplete Analysis Of Today's German Shock And Awe

• As BaFin has yet to provide details of the naked short ban, here is the best "incomplete" analysis of today's events, written by BofA's Jeffrey Rosenberg.
  
  Cleaning up the spill without stopping the leak
  
  Today’s actions by the German Financial Regulator BaFin prohibiting naked short selling continues a long simmering approach to the European sovereign debt crisis that we believe mistakes financial market uncertainty for the cause of the crisis rather than its effect. Drawing an analogy to the other major headlines of the day, attempts to curtail the sovereign debt crisis through curtailing trading activity is like trying to clean up the Gulf oil spill without stopping the leak. Budget deficits are the leak in this analogy and are similarly extremely difficult to fix. By confusing the cause for the effect the policy response exacerbated rather thanameliorated market uncertainty and with concern over the loss of ability to hedge long positions, investors sold what they could with the declines in the Euro leading risk markets lower and US Treasuries higher in a flight to quality.
  
  Creating confusion: the BaFin ban
  
  Today, the BaFin announced a series of short-selling bans aimed at reducing financial system risk. The bans will begin at midnight tonight (18th-May) and last until 31 March 2011 (10.5 months). The ban will apply to naked short-selling of credit default swaps and Euro-area government bonds. In addition, the ban will apply to naked short-selling in shares of 10 German banks and insurers. The 10 names are: Allianz, Deutsche Bank, Commerzbank, Deutsche Boerse, Deutsche Postbank, Munich Re, Hannover Re, Generali Deutschland Holding, MLP and Aareal Bank.
  
  So what does that mean?
  
  We have more questions than answers at this point. First, naked short selling is well defined for cash markets – stocks and government bonds. It bans the selling of those when the seller can not deliver the asset to the buyer (within a proscribed period of time). These bans were put permanently in place for example in the US during the credit crisis. For CDS, “naked short-selling” is not well defined. There is no delivery of an underlying instrument in a short risk position in CDS (buying protection), hence some other definition of what “naked” means for CDS will be required. How “naked” is defined could render market making difficult or impossible. Enforcement is unclear as well as the jurisdiction of trading to which the BaFin ban applies. That latter point could become moot were FSA and othernational regulators to follow suit with similar bans. Finally the scope of what “Euro area” debt means remains undefined.....

How Euro Crisis Is Hurting China

On CNBC: Europe’s Debt Crisis Is Casting a Shadow Over China

Intersting issues pointed out in the article

The exchange rate issue.

• “The yuan has risen about 14.5 percent against the euro during the past four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries,” Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services.

Possible trade finance issue.

• Some economists warn that there may be much worse to come. The biggest reason why Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse.
  
  Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves, they tend to cut sharply the issuance of letters of credit for trade finance as a quick, easy way to conserve cash without violating the terms of other financial obligations, like established lines of credit for big corporations.
  
  Interbank lending rates surged late last week and on Monday and must now come back down very quickly to persuade banks to keep issuing letters of credit, Mr. Tao said. “Without trade finance, trade won’t happen,” he said.

Cancelled orders.

• “We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some,” said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters.
  
  “They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace,” Mr. Xu added.

The damage...

• The euro’s difficulties have also inflicted tens of billions of dollars in losses on the value of China’s $2.4 trillion in foreign exchange reserves, according to Western economists. China had been trying to limit its dependence on U.S. Treasury securities for those reserves in recent years, fearing that the United States might someday suffer from budget problems or inflation, and did so by expanding its holdings of European government bonds.
  

If $1 Trillion Only Buy Times, What Then??????

A vote of no-confidence from Angela Merkel?

What else can I conclude?

And I wonder.. how much time do they have? I really wonder.

• ECB: $1 trillion rescue package only buys time
  By JUERGEN BAETZ (AP) – 15 hours ago
  
  BERLIN — The euro750 billion ($1 trillion) rescue loan package only bought euro zone countries more time, but didn't resolve the continent's underlying debt problem, German Chancellor Angela Merkel and a European Central Bank official said.
  
  The market turmoil will only calm down if the 16 member states of the euro zone reform their economies and reduce their deficits, ECB chief economist Juergen Stark told the Frankfurter Allgemeine Sonntagszeitung newspaper on Sunday.
  
  Stark was quoted as saying about the loan package that "We bought time, not more than that." The euro was not in danger "but in a critical situation," he added.
  
  Merkel on Sunday defended the loan package as the right step to stabilize the currency, but she also acknowledged it only bought time.
  
  "We didn't do more than buy time to get the differences in competitiveness and budget deficits of euro-zone countries in order," she said at a conference of the Confederation of German Trade Unions in Berlin.
  
  In the past few days, Merkel has repeatedly urged euro-zone countries to trim their budget deficits. She also called for greater cooperation in financial and economic policy across Europe to ensure the currency's long-term stability.
  
  "The underlying problem are the high budget deficits in the euro-zone countries," she told daily Sueddeutsche Zeitung on Saturday.
  
  Defending the latest bailout package — which is unpopular among German voters — Merkel said it's not only the currency's stability that is at stake, but the European idea as a whole.
  
  "Because we know if the euro fails, then more is failing," the paper quoted her as saying.
  
  In the wake of Greece's debt crisis, the euro has come under intense pressure because of fears about problems spreading to other heavily indebted euro-zone countries. The euro sank to near a four-year low against the dollar on Friday in late New York trading, buying $1.2355.
  
  Another top German top banker, meanwhile, expressed doubts about Greece's ability to repay its huge debts in an orderly fashion.
  
  Dekabank's chief economist Ulrich Kater on Sunday told German news Web site Handelsblatt that he shares the doubts voiced by Deutsche Bank AG's chief executive Josef Ackermann.
  
  "It will be very, very difficult for Greece to orderly repay its debt," he was quoted as saying.
  
  He said Greece's new austerity measures and its lack of competitiveness were dooming its prospects for economic growth, making debt reduction difficult.
  
  Ackermann, CEO of Germany's biggest lender, caused outrage and nervousness on already jittery markets by publicly doubting Greece's ability to repay its debt and mentioning the possibility of a debt restructuring.
  
  In Athens, Greek Prime Minister George Papandreou said he is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis.
  
  "I wouldn't rule out" going after the U.S. banks, he said in a CNN interview aired Sunday.
  
  The government and many Greeks have blamed international banks for fanning the flames of the debt crisis with comments about Greece's likely default.
  
  The Greek leader also said a parliamentary investigation will soon examine the rapid swelling of Greece's debt and the country's banking practices.
  
  The European Union and the International Monetary Fund have approved a euro110 billion ($136 billion) bailout package for Greece.
  
  In an interview with German news weekly Der Spiegel to be published Monday, the European Central Bank president said Europe's economy "is in its most difficult situation since World War II or perhaps even since World War I."
  
  Jean-Claude Trichet said the euro zone's debt crisis had provoked a market reaction similar to that at the height of the global financial crisis in 2008.
  
  "The markets didn't function anymore, it was almost like in the wake of the Lehman (Brothers) bankruptcy in September 2008," Trichet was quoted as saying.
  
  Trichet also urged European leaders to take further action to address the crisis' underlying problems, calling for a "quantum leap" in control of financial and economic policy across the 16-nation currency zone.
  
  "We need improved structures, to avoid and sanction wrongdoing," Trichet was quoted as saying.
  
  Stark also urged European Union leaders to swiftly introduce new rules to increase stability and growth, stressing the need for new automatic sanctions for countries that don't abide by the EU's debt rules. "The process has to be depoliticized," he said.
  

EMU Only Got Themselves To Blame For Euro Crisis

On Uk Telegraph: Forget the wolf pack – the ongoing euro crisis was caused by EMU

• Forget the wolf pack – the ongoing euro crisis was caused by EMU
  
  Jean-Claude Trichet tells us the world faced a second Lehman crash in the days and hours before EU leaders launched their €720bn (£612bn) defence fund. If the European Central Bank’s president is correct, we are in trouble. The EU-IMF package is already unravelling. What will the West do for its next trick?
  
  By Ambrose Evans-Pritchard
  Published: 5:37PM BST 16 May 2010
  
  Mr Trichet was ash-white at the Brussels summit a week ago. He distributed charts of credit stress to every eurozone leader. By the time he had finished his hair-raising discourse, everybody round the table finally understood what they faced.
  
  “The markets had ceased to function,” he told Der Spiegel. “There is still a risk of contagion. It can happen extremely fast, sometimes within hours
  
  The spreads on Greek, Iberian, and Irish bonds have, of course, dropped since the ECB stepped in with direct purchases. But the euro rally fizzled fast, to be followed by a fresh plunge to a 18-month low of $1.24 against the dollar. European bank stocks have buckled again. Spain’s IBEX index fell 6.6pc in capitulation fever on Friday.
  
  Geneva professor Charles Wyplosz said EU leaders made the error of overselling up their “shock and awe” package before establishing any political mechanism to mobilise such sums. “The fund is an empty shell,” he wrote at Vox EU. “Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements.”
  
  Brussels was unwise to talk of smashing the “wolf pack” speculators and defeat the “worldwide organised attack” on the eurozone. As Napoleon said, if you set out to take Vienna, take Vienna. Besides, the language of the EU priesthood – ex-ECB board member Tomasso Padoa-Schioppa talks of the advancing battalions of the “anti-euro army” – frightens Chinese and Mid-East investors needed to soak up EU debt. These metaphors are a mental flight from the issue at hand, which is that vast imbalances – masked by EMU, indeed made possible only by EMU – have been decorked by the Greek crisis and now pose a danger to the entire world.
  
  One can only guess what Mr Trichet meant when he said we are living through “the most difficult situation since the Second World War, and perhaps the First”. Is this worse than Credit Anstalt in the summer of 1931, the event that brought down central Europe’s banking system and tipped Europe into depression?
  
  Or was Mr Trichet alluding to something else after witnessing the Brussels tantrum by President Nicolas Sarkozy? According to El Pais, Mr Sarkozy threatened to pull France out of the euro and break the Franco-German axis at the heart of the EU project unless Germany capitulated. To utter such threats is to bring them about. You cannot treat Germany in that fashion.
  
  Chancellor Angela Merkel has put the best face on a deal that has so damaged her leadership. “If the euro fails, then Europe fails and the idea of European unity fails,” she said. Too late, I think. The German nation is moving on. I was struck by a piece in the Frankfurter Allgemeine proposing a new “hard currency” made up of Germany, Austria, Benelux, Finland, the Czech Republic, and Poland, but without France. The piece entitled The Alternative says deflation policies may push Greece to the brink of “civil war” and concludes that Europe would better off if it abandoned the attempt to hold together two incompatible halves. “It can be done,” the piece says.
  
  What makes this crisis so dangerous is not just that Europe’s banks are still reeling, with wafer-thin capital ratios. The new twist is that markets are no longer sure whether sovereign states are strong enough to shoulder rescue costs. The IMF warned in last week’s Fiscal Monitor that the tail risk of a “widespread loss of confidence in fiscal solvency” could no longer be ignored. By 2015 public debt will be 250pc in Japan, 125pc in Italy, 110pc in the US, 95pc in France, and 91pc in the UK.
  
  There is a way out of this crisis, but it is not the policy of wage deflation imposed on Ireland, Greece, Portugal, and Spain, with Italy now also mulling an austerity package. This can only lead to a debt-deflation spiral. The IMF admits that Greece’s public debt will rise to 150pc of GDP even after its squeeze, and that Spain’s budget deficit will still be 7.7pc of GDP in 2015.
  
  The only viable policies – short of breaking up EMU or imposing capital controls – is to offset fiscal cuts with monetary stimulus for as long it takes. Will it happen, given the conflicting ideologies of Germany and Club Med? Probably not. The ECB denies that it is engaged in Fed-style quantitative easing, vowing to sterilise its bond purchases “euro for euro”. If they mean it, they must doom southern Europe to depression. No democracy will immolate itself on the altar of monetary union for long.
  

The EU/IMF Bailout In The Eyes Of The Forex pros.

The EU/IMF bailout in the eyes of the forex pros.

Here are comments made by Kathy yesterday on the EU/IMF Bailout plan... Why Euro is Falling Despite the EU/IMF Plan

• How much money is involved?
  
  In U.S. dollar terms, the rescue package is worth approximately $1 trillion. In euro terms, the EU/IMF have agreed to a EUR750 billion plan that would involve up to EUR440 billion in loan guarantees, EUR60 billion in emergency funding from the European Union and EUR250 billion from the IMF. The ECB also started to buy government bonds but failed to provide any specifics. Although 27 different nations are involved in the bailout, most of the money will come from the 16 members of the Eurozone.
  
  What was announced?
  
  In a nutshell, the following was announcements were made:
  
  1. New EU Special Purpose Vehicle to distribute the new loans – this is where the big questions remain (see below)
  
  2. New Swap Lines with Fed, BoE, SNB and BoC to ease liquidity – in other words, the Fed will ease demand for dollars by reopening the spigot vis a vis other central banks.
  
  3. ECB Government Bond and Corporate Debt Purchases ¬– Undermines credibility of central bank
  
  The EUR60 billion in emergency funding will be made available immediately but it could be sometime before the larger loan guarantee package is made available.
  
  According to the ECB:
  
  In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:
  
  1. To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional.
  
  2. To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.
  
  3. To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.
  
  4. To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.
  
  What are the unanswered questions?
  
  With Angela Merkel’s Party losing majority, it will take a few days if not a few weeks to get the rescue plan through the upper and lower houses of Parliament. We saw how long it took to get to get the Greek bailout plan approved and we can only imagine how long it will take for this plan to be passed.
  
  1. What will be the exact mechanics behind how the Special Purpose Vehicle that will provide the loan guarantees to member states? What are the rules and terms of contribution and aid?
  
  2. How long will it take before the SPV is approved by individual nations?
  
  3. Will Greece accept these terms? Will they amend it?
  
  4. Can all of the Eurozone countries afford to contribute to the plan and will the countries seeking aid be able to handle the tough conditions that may accompany the loans?
  
  5. The IMF supposedly has $268 billion left, where are they getting the rest of the money? Most likely U.S. taxpayers!
  
  6. What is the size and scope of the ECB’s bond purchases?
  
  What are the implications for the EUR/USD?
  
  Considering that the ECB’s decision to buy government and corporate bonds is akin to Quantitative Easing, it offsets some of the positive impact on the euro. The ECB has pledged to sterilize the intervention which would neutralize the monetary policy impact but complete sterilization may be more of a medium term goal than a near term one. Comments from ECB member Weber suggests that he may be one of the critics voting against government bond purchases as he warned of the significant risks. In the near term, the rescue plan will help to limit losses in the euro and we believe that Thursday’s low of 1.2521 in the EUR/USD will become the currency pair’s near term bottom. However gains should limited until some of the above questions are answered. Don’t forget, in early September 2008 when US Treasury Secretary Hank Paulson put the “bazooka” on the table by effectively nationalizing Fannie and Freddie hoping the markets would calm down but just days later Lehman collapsed and the entire financial system went into a tail-spin.
  
  
  

Shocked But Not Awed At All By Latest Bailout Fiasco

Exactly. Totally shocked at what they are doing but hey don't listen to me, just read what the experts are saying.

Mish: Shock and Awe Part II; Show of Force Rises to $962 billion; Fed Joins the Battle; Short Squeeze Coming, Then What?

• What's Next?
  
  To defend the Euro, the ECB now is committed to throw up to $1 trillion at interventions in public and private debt.
  
  What's next? Direct intervention in the stock market?
  
  Bear in mind when this fails (which I guarantee you it will but I cannot state the timeframe), these clowns will think the reason was they did not throw enough firepower at it.
  
  Step back for a second. The problems are too much debt, too much government spending, and a massively unbalanced global economy. None of these actions address any of the fundamental issues.
  
  Short Squeeze Coming
  
  Judging from the action in futures this evening, shorts are going to be forcibly ejected Monday, perhaps for several days.
  
  This will create a huge air pocket underneath. We saw this action once before, in Fannie Mae and financials..... While the timeframe is unknown, these attempts to "defend the Euro" are highly likely to hasten its demise.

And as noted by Mish: "World Needs Dollars To Defend The Euro and the Fed to reopen dollar swap program

In another posting from Mish does a compilation: Voices of Reason in Sea of Insanity

• John Hussman: Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It's certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two - the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.
• Meredith Whitney: "Here's a statistic that I find fascinating. This is just for the top four banks. If you look at nonperforming assets - that's loans that haven't paid over 120 days - the size of that is 1.5 times all of the chargeoffs that banks have incurred since 2005. So you think credit has stabilized, mortgages have stabilized? .... "There's huge growth in non-performing assets. These are numbers, apples-to-apples, on the four big banks. The issue is when does that stuff that's not paying come to market, and when do banks recognize the chargeoffs? I think you're going to see more of that in the second quarter and the third quarter. Does the supply move in the second quarter and then you report it in the third quarter? The timing may be weighted more to the third quarter. I just don't know. I think you see a huge leg down in asset prices when you see the supply reach the market. So no, it's not factored into valuations. No, it's not factored into bank guidance. And yes, I think it's going to be a big problem for the banks."
• Bill Cara: If these so-called public servants were schooled in economics and not politics they would understand that shifting a debt burden from one group to another does not eliminate the burden. The owners of capital – the ones who hold unencumbered assets – are today asking themselves how long will such insanity last?
• Caroline Bum: There is no question we live in an interconnected world. Subprime mortgage defaults by homeowners in Irvine, California, infected banks in Europe and Asia, thanks to the miracle of securitization.... So yes, European banks that hold Greek debt are vulnerable to losses. The interbank lending market is showing signs of stress. And the austerity measures required in Europe’s peripheral countries may spill over into reduced U.S. exports. That’s not the kind of contagion we keep hearing about. On the other hand, it would be a mistake to interpret the flight-to-quality into U.S. Treasuries last week as a sign of immunity. The U.S. is already infected with the debt virus. It’s still in its incubation period.
• BC: But when private debt growth and associated increasing returns to financial capital have been the primary source of growth since the early '80s to early to mid-'70s, increasing government borrowing and spending to make up for the loss of debt growth in the private sector only results in government debt eventually growing faster than exponential vs. incomes, production, and GDP, setting the stage for fiscal insolvency atop private sector debt-deflation.

From Ambrose Evans-Pritchard: Europe plays its last card to save monetary union

• No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and -- the two clinchers -- Spain and Italy. "We have a serious situation, not just in one country but in several," she said.
• German Chancellor Angela Merkel accused the financial industry of playing dirty. "First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous," she said. "Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight".
• For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt
• The judges have denied an immediate injunction on aid to Greece, saying that it would to be too "dangerous" to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal. One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads.
  
  Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.
  
  The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
  
  While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.

Jim Rogers: http://jutiagroup.com/2010/05/10/jim-rogers-on-currency-crisis/

• What is your sense? Do you think that the Eurozone is going to shrink because of what we are witnessing in Portugal, Greece and Spain?
  
  Eventually the euro is unfortunately going to break up. I am afraid because it keeps weakening itself from within. If they would let Greece go bankrupt, for instance, it would strengthen the euro, and it would strengthen the Eurozone because people would know you have to maintain a sound economy, you have to maintain a sound currency and everybody would jump in and buy the euro. I would buy more if that would be case. Weakening from within and continuing to lend money and paper over problems is not a solution for a sound currency. I do own the euro, don’t get me wrong, but I do not think this is the proper approach.
  
  We are also seeing the impact of the crisis on most commodity markets. Do you think that this is just temporary and commodity is still the place for investors to be?
  
  Yes, gold is making all time highs in some currencies. So some currencies are doing well during this period of time. But to your bigger question, if the world economy gets better then obviously commodities are going to do better because the world would use more and there are shortages developing. But let’s assume the worst, let’s assume the world economies does not get better, the things continue to get there, then I would rather be in commodities in most things because governments are going to print even more money, and whenever you’ve had to print money throughout history, it led to higher prices for real goods whether it is silver or natural gas, whatever it happens to be. So, I would rather own commodities over the next two or three years.
  

Jesse: http://jessescrossroadscafe.blogspot.com/2010/05/ecb-to-buy-bonds-in-secondary-market-to.html

• When a central bank turns to buying the bonds in order to support their price, or more properly the interest rate paid, this is the beginning of the end, the point at which the national currency becomes little more than a Ponzi scheme, creating more money to pay the interest on the old money.
  
  Now both the US Federal Reserve the Bank of England, and the ECB have fallen into this. We are seeing the controlled demolition of the fiat currencies of the developed world. This will resolve itself no later than 2018, and probably before that. For that is the outer bound of when the US will be unable to service its debt without at least a selective default, a draconian diktat, or resort to hyperinflation.

On Washington's Blog: Americans Have Been Bailing Out Foreign Banks for Years ... And We're Getting Ready To Do It Again

• So not only are Americans bailing out our own too big to fail banks, but we're bailing out foreign mega-banks as well. Even though bailing out Europe might make sense if America was flush with cash, things are different now. As Congressmen Kucinich and Filner wrote last June:
  Our country and this body cannot afford to spend American tax payer dollars to bail out private European banks.

Zero Hedge highlighted this clip: "Goldman Can Create Shorts Faster Than Europe Can Print Money"

• "Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money."
  
  

Early Views On Euro Defence Package

On CNBC. European Union Strikes $670 Billion Crisis Deal

• The European Union agreed on a 500 billion-euro ($670 billion) emergency fund in the early hours of Monday to protect highly indebted eurozone countries from the "wolfpack" of financial markets.

On AP: EU ministers agree on euro defense package

• "We are placing considerable sums in the interest of stability in Europe," she said after marathon 11-hour talks in an emergency finance ministers' meeting. The talks were called on Friday night after a eurozone summit in Brussels amid concerns that the financial crisis sparked by Greece's runaway debt problems had begun to spread to other financially troubled eurozone countries such as Portugal and Spain.
  
  The EU's monetary affairs commissioner, Olli Rehn, said the agreement "proves that we shall defend the euro whatever it takes."
  
  "We are facing such exceptional circumstances today and the mechanism and the mechanism will stay in place as long as needed to safeguard financial stability," the ministers said in a statement.

From Yves: Is the Eurozone Shock and Awe Enough?

• There are several layers of complicating factors, however. The first is that the German electorate has signaled its unhappiness with bailouts, presumably restricting future action if this measure falls short. From the Wall Street Journal:
  
  In Germany, projections showed Ms. Merkel’s center-right alliance Sunday lost a crucial regional election amid a voter backlash against aid for Greece. That means her government is set to lose its majority in Germany’s upper house.
  
  Second, even though the rescue is intended for the 16 eurozone members, it requires approval of the EU, which includes 11 non-eurozone members like the UK (presumably, that is for the €60 billion EU loan). The message from the UK seems to be that it will support this deal, but don’t expect any future help.
  
  But what is most striking is the European Central Bank’s silence, at least for now. As we noted earlier, EU banks are experiencing sharp rises in bond spreads and short term funding costs due to worries to about exposures to risky sovereign debt, as well as other dodgy assets sitting on their balance sheets. A large group of banks was petitioning the ECB for it to buy sovereign debt from them to provide relief. The ECB may be hoping that these rescue measures may prove sufficient to alleviate pressure on the banks, but my correspondents were skeptical. As one noted, “But it looks like it’s all coming from euro zone governments. I suppose since nobody is really questioning solvency of France or Germany, that might help, but how do Spain, Portugal and Italy contribute? And God will it be DEFLATIONARY if it’s not ECB money.”
  
  The last point is key. If deflation kicks in within the countries at risk (forget Greece, the eurozone ought to be in triage mode) the debt burden become worse. All the rescue operation has done is buy breathing room while making the eventual outcome worse. While having the ECB support the operation may offend some tender sensibilities, it can offset the deflationary pressures and make Portugal and Spain more viable short term.
  
  But the real problem is that there appears to be no impetus towards a longer term solution. How do solve imbalances within the eurozone? Without a plan to develop a plan on that front, this simply rearranging the deck chairs on the Titanic.

From Ambrose Evans-Pritchard: Europe prepares nuclear response to save monetary union

• Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.
  
  The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
  
  While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.

From Mish $645 Billion Boondoggle to Defend the Euro from the "Wolfpack"

• I do not know what tomorrow or even next week brings, but what I do know is you cannot defend the Euro by printing 440 billion of them.
  
  So Trichet did not like it when the Euro was at 1.33 and he was furious when it hit 1.60. Now that it is back to 1.27 he wants to defend the Euro.
  
  Is this clown ever happy?
  
  As I said before, all this talk about defending the Euro is nonsense. The EU is defending a piss poor decision to let Greece into the EU. Now, under guise of "defending the Euro" they are willing to print 440 billion of them.
  
  No doubt the finance ministers will be cheering tomorrow. Let's see for how long.

Trichet Talks About Euro Economic Outlook

It's really embarrassing.

This is what ECB Bank President Jean-Claude Trichet said when asked about the Euro Zone Economic outlook at a news conference. Posted on CNBC. hEuro Zone Economic Outlook Uncertain: Trichet

• Default is, for me, out of question. It's as simple as that," he said. "We did not discuss the matter and I have nothing else to say than that."
• Greece and Portugal are "not in the same boat," he said when asked about Lisbon's problems.
• He did not want to comment on the euro's slide against the dollar, but said the single European currency benefited from the central bank's staunch fight against inflation.
  "The euro is a good store of value…over 12 years we maintained price stability in an exemplary manner," Trichet said.
• He also said the bank did not discuss the option of buying euro zone government bonds during its meeting.
• "We consider that belonging to the euro… has brought about an enormous amount of advantages," Trichet said when asked about increased criticism of the euro.
  "Of course it also calls for responsible attitude" in regards to fiscal policies, stricter reforms and "the appropriate monitoring of unit labor costs," Trichet added.

Why France, UK And Germany Are In Deep Mess!

Posted earlier: The Pain In Spain and Could Greek Financial Crisis Hit UK Hard?






On Zero Hedge, Tyler writes one important warning! The CDS Traders' Verdict Is In - UK In Deep Shit... As Are France And Deutschland

• Portugal... Spain...Greece...these are all last week's news based on CDS trading patterns. Indeed, this week saw the biggest trade unwinds of all top 1000 CDS entities (including all corporates) precisely in these three names. As the PIIGS implosion is finally being appreciated by everyone and their grandmother, the "speculators" are booking massive profits: the net cover/rerisking in Portugal and Spain was a massive $500 million net notional unwinds in each in the week ended April 30. Also known as taking profits. Greece and Ireland were also in the top 5, so as we have repeatedly claimed, the market will no longer make the news in Club Med. So where will it? No surprise there - the UK, France and Germany. The smartest money in the world is now actively betting the core of the eurozone is where the next CDS blow up will take place. With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names. The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million. Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net notional derisking. This week the number is even higher: $558 million. There is now over $1 billion in net risky bets made that the UK may not last. And Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind. .....

Do see the tables posted in the posting The CDS Traders' Verdict Is In - UK In Deep Shit... As Are France And Deutschland

What Do You Expect After Greece Is Declared Junk?

What do you expect after S&P downgraded Greece's credit ratings were slashed to junk? (What took them so long to make this downgrade?)

Here is snippet from S&P:

------------------

Overview

• We have updated our assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to place Greece's public debt burden onto a sustained downward trajectory.
• We are lowering our ratings on Greece to 'BB+/B' from 'BBB+/A-2' and assigning a negative outlook.
• The negative outlook reflects the possibility of a further downgrade if the Greek government's ability to implement its fiscal and structural reform program materially weakens in our view, undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume.

....

Rationale

The downgrade results from Standard & Poor's updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory. We believe that the government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising. Moreover, in our view, medium-term financing risks related to the government's high debt burden are growing, despite the government's already sizable fiscal consolidation plans. Our updated assumptions about Greece's economic and fiscal prospects lead us to conclude that the sovereign's creditworthiness is no longer compatible with an investment-grade rating.

As a result of Greece's rising commercial borrowing costs, the authorities have requested extraordinary support from the Eurozone and the International Monetary Fund (IMF). We anticipate further information in the coming weeks from EU members regarding the terms and duration of support for Greece. We believe that a multiyear European Economic & Monetary Union (EMU)/IMF support program is likely, which should, in our opinion, significantly ease Greece's near-term liquidity challenges. Nevertheless, in our view, pressures for more aggressive and wide-ranging fiscal retrenchment are growing, in part because of recent increases in market interest rates. In our revised projections, we forecast Greece's net general government debt-to-GDP ratio reaching 124% of GDP in 2010 and 131% of GDP in 2011.

We continue to believe that the size and scope of the Greek government's fiscal consolidation program, and the government's political will to implement it, are the main drivers of our sovereign ratings on Greece. Sustained success in this regard could, in time, be reflected in lower market interest rates on Greece's debt. Early indications show that the government is likely to meet its 2010 deficit target. The authorities are also moving ahead with their
structural reform agenda, adopting tax reform in April, while proposals on pension reform are expected in May.

Nevertheless, we believe that the dynamics of this confidence crisis have raised uncertainties about both the government's administrative capacity to implement reforms quickly and its political resolve to embrace a fiscal austerity program of many years' duration. Based on our updated assessment, we estimate that the adjustment needed in Greece's primary fiscal balance relative to that of 2008 in order to stabilize the government debt burden amounts to at least 13% of GDP--a very high level compared with that which other sovereigns have been able to achieve. The government's resolve is likely, in our opinion, to be tested repeatedly by trade unions and other powerful domestic constituencies that will be adversely affected by the government's policies. At the same time, we expect official lender support to be highly conditional and revocable, and as such, we do not believe that it provides a floor under Greece's sovereign ratings.

As previously noted, the government's multiyear fiscal consolidation program is likely to be tightened further under the new EMU/IMF agreement. This, in our view, is likely to further depress Greece's medium-term economic growth prospects. Under our revised assumptions (see below), we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not regain the 2008 level until 2017. Moreover, we find that Greece's fiscal challenges are increasing pressures on the banking and corporate sectors. In particular, we see continuing fiscal risks from contingent liabilities in the banking sector, which could in our view total at least 5%-6% of GDP in 2010-2011.

....

Outlook

The negative outlook reflects the possibility of a further downgrade if, in our view, the Greek government's ability to implement its fiscal and structural reform program is undermined by domestic political opposition or materially weakens for other reasons, including even weaker economic conditions than we currently assume.

We could revise the outlook to stable if we perceive that political support for government economic policies remains robust and Greece's economic growth prospects prove to be more benign than we currently anticipate.

---------------

On Bloomberg Businessweek: RBS Says Medium-Term Outlook for Euro Is ‘Extremely Challenging’

• April 27 (Bloomberg) -- The medium-term outlook for the euro remains “extremely challenging” because of risks the Greek debt crisis persists and extends to other countries in the region, according to Royal Bank of Scotland Group Plc.
  
  Regardless of how Greece “is resolved in the short term, investors will remain underweight euro for the foreseeable future and a short-covering rally on a short-term resolution would be limited,” Greg Gibbs, a currency strategist in Sydney, wrote today in a report. The euro is “defying gravity,” which is “at odds with European sovereign debt markets,” he said.

On the UK Telegraph, Ambrose Evans-Pritchard reports: ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

• “We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.
  
  “The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”
  
  Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.
  
  This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.
  
  Mr Cailloux added: “This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”
  
  Yields on 10-year Portuguese bonds spiked 48 basis points to 5.67pc, replicating the pattern seen as the Greek crisis started.
  
  Portugal’s public debt will be just 84pc of GDP by the end of this year, far lower than that of Greece, at 124pc. However, its private debt is much higher and data from the IMF shows that its external debt position is worse.
  
  Interest payments on foreign debt will be 8pc of GDP this year. Portugal’s net international investment position is minus 100pc of GDP, the worst in the eurozone.
  
  The interest rate on a €9.5bn (£8.2bn) issue of Italian notes jumped to 0.814pc, up from 0.568pc in March. The bid-to-cover ratio was wafer-thin, falling to 1.02. Italy has the world’s third biggest debt in absolute terms.
  
  The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.
  
  But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.
  
  The markets are already looking beyond the €40bn to €45bn joint rescue for Greece by the IMF and the EU, questioning whether some form of debt restructuring or managed default can be avoided over the next year or two, or even whether the rescue plan can work at all in a country trapped in debt deflation with no way out through devaluation.
  
  Professor Willem Buiter, a former member of Britain’s Monetary Policy Committee and now global economist for Citigroup, said there may need to be a “voluntary restructuring” of debt.
  
  “It is quite likely that a haircut of, say, 20pc to 25pc will be imposed on creditors as parts of the deal,” he said.
  
  The bond markets are already “pricing in” a default of some kind in Greece, where rates on 2-year debt spiked close to 15pc in panic trading yesterday. The European Commission and the International Monetary Fund both insist that restructuring is out of the question but investors have become cynical after months of EU rhetoric and foot-dragging by Berlin.
  
  The ECB cannot lightly risk a second sovereign crisis erupting, with dangers of a spillover into Spain.
  
  The exposure of Spanish-based banks to Portuguese debt exceeds $80bn, according to the Bank for International Settlements. There were early signs of strain in the Spanish banking system yesterday.
  
  Banks were forced to pay a premium in the domestic “repo” market on fears of counterparty risk, although the Bank of Spain has so far won plaudits for ensuring that banks have large safety buffers.
  
  It is unclear why the markets are becoming skittish over Italian bonds. Public debt is 115pc of GDP but this is offset by very low household debt.
  
  Italian citizens are among the most frugal savers in the OECD club of rich states. Moreover, the government has weathered the financial crisis with a budget deficit in remarkable good health.

Portugal ratings were cut too.

• Portugal’s Rating
  
  Portugal’s long-term local and foreign currency sovereign issuer credit ratings were cut yesterday to A- from A+ at S&P, which cited “fiscal and economic structural” weakness and also gave the nation’s debt a negative outlook.
  
  “The downgrade was more aggressive than expected,” said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, referring to the reduction in Portugal’s debt rating. “If Portugal comes under attack, you get to Spain pretty quickly. ( source: here )

And of course with Greece debts no considered junk, I would ass-u-me that banks holding these Greek debts would soon need to replace those debt with capital.

And the markets tumbled. FTSE 100 suffers worst fall since November

How?

Have you check at the implications of last night events? Did you see what the charts are showing? Are you looking at the relevant charts?

Arrrghhhh... terrible way to start the morning eh?

Some light humour based on Goldman Sachs. (in case you need to ask, remember the movie 'A Few Good Men' starring Tom Cruise and Jack Nicholson?)

• "You want the truth? You can't handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who's gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman's death, while tragic, probably saved the financial system. And that Goldman's existence, while grotesque and incomprehensible to you, saves pension funds. You don't want the truth. Because deep down, in places you don't talk about at parties, you want us to fill that investment gap. You need us to fill that gap. "We use words like credit default swaps, collateralized debt obligation, and securitization? We use these words as the backbone of a life spent investing in something. You use 'em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We'd rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don't give a damn what you think you're entitled to!" ( Source: here )

The Greece Aid Doesn't Solve Anything, It Just Buys Time!

Here is a brief summary of the Greek Aid from Kathy.

• The euro has strengthened significantly over the past 24 hours as EU officials finalize a prescription for Greece. Here are the details:
  
  1) bilateral loans from European governments for 3 years
  
  2) up to €30bn lending by euro area members states for the first year, in addition to the IMF’s contribution (€12.5 to 15bn reportedly)
  
  3) lending rates near 5% calculated as 3-month euribor plus 300bp spread with further 100bp for more than 3 years and plus 50bp for operational cost
  
  4) IMF loans priced according to their formula (currently 3.25% for a loan of 10x quota)
  
  The package is larger than the market had anticipated and the rate is much lower than market rates. ( http://www.kathylien.com/site/eurusd/terms-of-eu-support-for-greece )

On FT.com Markets rally on Greek aid resolution

• Greece’s borrowing costs fell sharply and its stock market rallied on Monday as investors welcomed details of a proposed €30bn rescue by eurozone nations.
  
  Share prices in Athens rose 3.5 per cent, their biggest one-day gain since early January. Bank stocks jumped more than 6 per cent after heavy losses last week.
  
  “The solid form given to the Greek aid package, whether they use it or not, has given the market a much-needed psychological boost,” said Mike Berg, strategist at 4Cast consultancy.
  
  The euro also benefited. The currency enjoyed its best single-day gain since August last year, adding 1.43 per cent before easing to $1.3583, up 0.7 per cent by mid-afternoon in New York. Two-year Greek borrowing costs fell 0.78 percentage points to 6.11 per cent, having dropped as low as 5.42 per cent in early trade.
  
  The Greek government is set on Tuesday to borrow €1.2bn in six and 12-month loans to repay existing debts. The sale is expected to go smoothly.
  
  However, former International Monetary Fund officials said there was uncertainty over how the eurozone would work with the IMF, which would be involved in a rescue.
  
  Morris Goldstein, a former deputy director of the fund’s research department, said the lines of responsibility in the emerging deal were unclear.
  
  Mr Goldstein said both groups might want to take the lead should Greece ask for aid.
  
  The fund, he said, would insist on playing a leading role in setting the conditions for lending. These were likely to involve tough fiscal targets, more transparency on public finance data and possibly some structural reform to hold down wages and reduce costly pension rights.
  
  “This has the makings of a strange dog’s breakfast,” said Mr Goldstein. “If a regional grouping can set IMF conditionality, what is the point of the fund anyway? This could create a very dangerous precedent.”
  
  The rescue package agreed by eurozone members at the weekend would set interest rates of about 5 per cent – higher than eurozone countries’ own borrowing costs, but lower than the levels available to Greece in the markets.
  
  Analysts said the details of the rescue plan had left questions unanswered, including whether it implied that eurozone members were now liable for each others’ debts.
  
  The ongoing struggles of the eurozone to reach a deal have also left a “sour taste” in investors’ mouths, said Simon Derrick, head of currency strategy at Bank of New York Mellon.

Bull on the Euro? Euro gains on Greek aid, but downtrend intact (Kathy featured again. :D )

• NEW YORK, April 12 (Reuters) - The euro advanced to its highest level against the U.S. dollar in nearly a month on Monday after euro zone finance ministers agreed on a financial aid package for Greece.
  
  The finance ministers approved a 30 billion euro ($40.5 billion) rescue package of loans, which Greece could tap if needed. At least 10 billion euros are also expected from the International Monetary Fund.
  
  The euro zone, however, pared gains as investors sought details about the plan. Analysts also said the bailout package was not a game-changer for the euro and many still expect the currency to head lower in the next few months.
  
  "The package has the size and terms the market wanted to see and it came quicker than expected," said Jens Nordvig, senior currency strategist at Nomura Securities in New York.
  
  "There is still procedural uncertainty about activation and disbursement, but the bottom line is that we now have something concrete for the first time in this saga, and that should be important for markets."
  
  The massive financial safety net boosted investor appetite for riskier assets, lifting U.S. stocks and briefly helping the Australian dollar rise to its highest in five months, before it fell later in the session.
  
  Investors, however, were still cautious, prompted in part by the need for clarification of details on how the aid mechanism could be activated.
  
  Christoph Steegmans, a German government spokesman, said on Monday that euro zone leaders, not those of the full European Union, would need to meet to activate the aid package for debt-ridden Greece. Earlier, Steegmans had said such a decision would require a full meeting of EU leaders.
  
  When asked by Reuters to clarify the point, he said a meeting "of government leaders from euro zone countries" would be needed.
  
  EURO RALLY NOT "EARTH-SHATTERING"
  
  The euro rose to $1.3691, its highest since mid-March, according to Reuters data, before trimming gains to $1.3581 in late afternoon, up 0.6 percent on the day. From trough to peak, the euro has climbed about 4 cents since last Thursday.
  
  "That said, the euro/dollar rally has not been earth-shattering and that fits with the notion that there are medium-term asset allocation shifts at play, a negative for the euro," said Nordvig of Nomura Securities.
  
  "I am pretty comfortable with (Nomura's) existing path for euro/dollar, which sees a moderate move lower in Q2 to $1.32, followed by a further slight decline in Q3 to $1.30."
  
  Analysts also expect short-term unwinding of net euro short positions, which were reduced slightly after hitting record highs a few weeks ago. That could probably take the euro to $1.38-$1.40 in the short term.
  
  The single euro zone currency is still down more than 5 percent against the dollar and 4.6 against the yen in 2010 to date, making it an underperformer among major currencies.
  
  The high-yielding Australian dollar AUD= briefly rose as high as US$0.9382 on improved risk appetite in Asia before retreating to US$0.9285, down 0.5 percent.
  
  The dollar rose 0.1 percent against the yen to 93.25 yen JPY=, with a possible revaluation in China's yuan currency in focus. Chinese President Hu Jintao visits Washington this week for a nuclear security summit and is expected to hold a one-on-one meeting with U.S. President Barack Obama on Monday.
  
  Currency investors are also likely to focus on first-quarter U.S. corporate earnings, which unofficially starts with the release of Alcoa Inc. (AA.N) results on Monday.
  
  "If earnings are healthy, stocks could extend their gains, which will help sustain risk appetite in the forex market. With the VIX index falling to the lowest level (since July 2007), equity investors are optimistic and not anticipating any major surprises," said Kathy Lien, director of FX research at GFT in New York.

However, not all are optimistic. Ask Stephen Roach.

• April 12 (Bloomberg) -- The aid package offered by European governments “just buys Greece time” as the country still faces a “massive fiscal adjustment,” Morgan Stanley Asia Ltd. Chairman Stephen S. Roach said.
  
  “It may certainly reduce the possibility of default on a near-term basis,” Roach said today in a telephone interview with Bloomberg Radio from China. “But you have to ask yourself how the heck is Greece going to do the type of massive fiscal adjustment that they have supposedly agreed to in a short period of time to get these funds.”
  
  Forced into action by a surge in Greek borrowing costs to an 11-year high, euro-region finance ministers said yesterday they would offer as much as 30 billion euros ($41 billion) in three-year loans in 2010 at around 5 percent. As much as 15 billion euros would also come from the International Monetary Fund.
  
  “The economy is already in recession and they can only get deeper,” Roach said. “I think that will undermine the willingness of Greece to stay the course of this fiscal adjustment.” The aid deal “just buys time, that’s all it does,” he said.
  
  The Greek government has yet to request a European lifeline, confident that this year’s planned budget cuts will stem speculation that it’s heading for the euro region’s first- ever default. ( source: http://www.businessweek.com/news/2010-04-12/greek-aid-package-just-buys-time-morgan-stanley-s-roach-says.html )

Just for the record: Greece needs to borrow around 11 billion euros by the end of May to refinance its debt. ( Read more: here )

Eurozone Debt Crisis Weighs Heavy On The Euro

On AP Newswire: Eurozone faces 2010 debt crisis

• Eurozone faces 2010 debt crisis
  By William Ickes (AFP) – 22 hours ago
  
  FRANKFURT — The eurozone's new year heralds a debt crisis that has alarm bells ringing and markets tracking government plans to tame the growing shortfall.
  
  Officials have borrowed heavily to pull the 16-nation zone out of its first recession, and debt levels are set to smash a huge hole in the ceiling set by the European Union in its Stability and Growth Pact.
  
  Soaring budget deficits, low growth and banking sector support "are feeding into significantly higher public debt levels," the European Commission has warned.
  
  Average eurozone "public debt could reach 84 percent of GDP (gross domestic product) by 2010, an increase of 18 percentage points from 2007," it said, far above the pact's limit of 60 percent.
  
  Government debt ratings have been downgraded in Greece by all three major international agencies, and by some of them in Ireland and Spain as well.
  
  The Fitch agency has urged all governments with top ratings to tame debt, mentioning in particular Britain, which is not a eurozone member, along with France and Spain, which are.
  
  Germany, long considered the cornerstone of eurozone fiscal discipline, forecasts public debt at around 78 percent of GDP this year, while in France, the second biggest eurozone economy, public debt jumped to a record 75.8 percent in the third quarter of 2009.
  
  Greece says its shortfall come to 120 percent of output in 2010.
  
  Debt is raising the cost of borrowing for many countries and adding to the weight of reimbursing obligations on future budgets.
  
  With unemployment rising and weak growth expected in 2010, officials cannot count on increased tax revenues for much help in paying down debt, a lot of which is owed abroad.
  
  "The (economic) crisis is weighing on the sustainability of public finances and potential growth," the EU commission has warned as economists leave open the possibility of a "double dip" recession this year.
  
  Finances will be undermined further by an ageing population that will need expensive health care in the years to come.
  
  But tightening the financial screws, as many capitals have pledged to do, could choke off an economic recovery if officials act too soon, analysts warn.
  
  Natixis economist Patrick Artus said that in the near term, "it will not be possible to return to less expansionary monetary policies, at the risk of creating huge problems" as money pumped out to boost activity has begun to generate fresh problems of its own.
  
  They include new speculative bubbles in emerging economy assets, commodities and possibly even real-estate, a key factor in the mid-2007 financial meltdown.
  
  Failing to act on deficits and debt however will spark a reaction at some point from financial markets which will demand higher interest payments on loans, especially from highly exposed countries like Greece.
  
  On Friday, the yield, or interest on 10-year Greek bonds was a hefty 2.36 percentage points higher than that for benchmark German bonds.
  
  Before the financial crisis erupted in August 2007, the spread was just 0.29 points, and in early December, Greek Prime Minister George Papandreou warned: "Either we eradicate the debt, or the debt will eliminate the country."
  
  The Greek debt debacle constitutes one of the eurozone's biggest tests ever as Europe's single currency begins its 12th year in existence.
  
  That has weighed on the euro, which traded for 1.44 dollars on Thursday ahead of the New Year holiday.
  
  Markets want to know if solidarity will prevail within the 16-nation bloc, as most analysts expect, or whether it will plunge into an existential crisis.
  
  European Central Bank governing council member Ewald Nowotny has underscored a "no bail-out" principle contained in EU treaties, while German Chancellor Angela Merkel, head of Europe's biggest economy, has suggested otherwise.
  
  Merkel said last month that "we all share a common responsibility," for Greece.

Quote: "...public debt could reach 84 percent of GDP (gross domestic product) by 2010"

Now this is a massive problem, yes? 84% of GDP is rather .... insane!

And the Euro is showing much weakness lately!

The chart of the Euro versus MYR.

And the chart of the Euro versus the USD.



The longer term picture of the Euro since 2008 is rather suggestive!!