As the vicious cycle of credit downgrades for eurozone countries continues, news that the International Monetary Fund (IMF) wants to help is making the rounds. What is the IMF’s plan and will it be enough to save Europe (NYSEArca: FXE)?
The International Monetary Fund has a Plan!
The IMF has a plan to shore up the world’s finances. I said they have a plan! The Washington-based institution wants another $500 billion to bulk up its $380 billion lending capacity and another $100 billion for tip money. It’s the additional tip money that will allegedly serve as a “protection buffer.” Apparently, the $500 billion the IMF requested two years ago wasn’t enough “buffer.”
To show its enthusiasm for the IMF’s plan, Europe said it would chip in $200 billion of money that it doesn’t have. From whom or from where they will obtain the this $200 billion allotment is unknown. In response to the IMF’s efforts, the European Commission’s spokesperson, Amadeu Altafaj said, “We would warmly welcome contributions from G20 countries.” No doubt they would.
Elsewhere around the world, China, Japan, South Korea and the United States have voiced mild support for contributing to the IMF’s war chest.
Assuming the IMF gets the $600 billion stash it seeks, not all of it would be used to help Europe exclusively.
Post Downgrade Bond Auctions
It’s still early, but thus far European bond auctions have gone relatively well in 2012.
Spain just sold 6.6 billion euro in government debt that matures in four, seven and 10 years. The yield was 5.40% or slightly less than the 5.54% paid by the country in December.
France sold 9.5 billion euro in debt. The interest rates on French debt decreased slightly, despite the loss of its AAA-rated status.
For now, everything is wonderful. (Not really, but I had to say something other than “humbug.”)
A European Styled Recession
A recession in Europe is not like a recession in the United States (NYSEArca:SCHB) or a recession in China (NYSEArca: FXI) or like a recession anywhere else in the world.
Stalling economic growth, interestingly, isn’t the only problem. Europe’s striking workers are the other part.
The 48-hour walkout by Greek workers staged late last year was the biggest yet. Protestors crippled airports, government offices, stores, taxi service, and even the many local but beloved bakeries. Pension benefits are being cut, taxes are being raised and Greeks are mad. Angry citizens aren’t necessarily the ideal formula for meeting or exceeding the rosy GDP projections by government staffed economists.
In Spain (NYSEArca: EWP), the unemployment rate has soared to 21.5% and unemployed citizens have crowded the streets. The same phenomenon is playing out in Italy. Is this the sort of environment that will lift these countries out of recession? Being a policeman in riot gear seems to be one of the few steady jobs.
The World Bank cut its global growth estimates by the most in three years. And even then, the Bank admits current estimates may still be too high, given the backdrop of Europe’s debt crisis (NYSEArca: VGK).
Central Banking Update
The European Central Bank (ECB) has been criticized for not doing enough to quell the region’s debt problem. Unlike the Federal Reserve Bank in the United States, the ECB has avoided massive purchases of government bonds within the region. Although it’s made small purchases of government debt issued by eurozone members, it hasn’t been enough to close the gap in yield spreads between eurozone countries.
Yet, for all of its criticism, the ECB can take some of the credit for this week’s successful bond auctions. It flooded the financial sector (NYSEArca: EUFN) with cheap money in December and it’s been buying Italian and Spanish debt, albeit in limited dosages. Without this, it’s doubtful 2012 European bond auctions would be going this well.
Contrary to popular opinion, the ECB is not completely worthless. White elephants have a meaningful purpose, although I’m not sure what exactly it is.
Conclusion
In our Weekly ETF Picks, I’ve written extensively about the euro (NYSEArca: FXE). For the euro trade recommendation we made last quarter, it’s already gained more than 20%. It’s important to have a clear understanding of the big picture of what’s unfolding in Europe.
As Europe’s leaders continue to make public statements that contradict their private behavior, major hidden forces are at work. The stage is being set for the euro’s next big move and in a true show of what they think about the euro, financial regulators and banks have been acting in unison to do the unthinkable. |
