European Debt Crisis Update

Uncertainty in Southern Europe continues to plague other euro-zone economies, despite the ECB’s pledge to buy an unlimited quantity of struggling countries’ government bonds. According to the European Commission, consumer confidence hit a 40-month low in September and most experts expect the euro-zone recession to worsen this year. The French PMI fell 4 points this month, marking one of the largest slides in recent history.

In Greece, the country is facing yet another budget shortfall. A report, to be released in October, will produce an estimate of this most recent Greek deficit. At that time, the ECB, IMF, and the euro-zone governments will have to determine how they will proceed with the Greek bailout plan and who will be forced to alleviate some of the Greek debt. Without greater concessions, Greece could go bankrupt as early as November and send the euro-zone into another possible crisis.

In Spain, the government is in talks with the ECB over a potential bailout and any conditions that would come along with said bailout. Additionally, the Spanish economy received a much-needed boost this past Thursday when it sold a significant amount of long-dated debt to foreign investors. This move has given Spain greater fiscal freedom to tackle some of its recent financial problems.
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Brandon Nesfield 

Payout on Greek Credit Swaps

One of the instruments in the European debt crisis was decided on Monday. The payout for the credit default swaps was structured was held at an auction on Monday in London. The investors who bought protection with the credit default swaps will receive a payout equal to 78.5 percent of the original value of the Greek bonds. The estimated total payout amounts to about $2.5 billion. The Greek debt situation and bonds have been crucial in undermining the Greek and Europe economies.
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Editorial Staff

Market Recap (Nov. 14)

After opening the week strong, the Dow Jones Industrial Average (DJIA) sustained severe losses at the opening bell on Wednesday, finishing the day down 3.2%. This overnight drop was caused predominantly by the news that Italy’s borrowing costs would continue to rise. Investors acted on concerns about the credit status of Italy and instability in the Eurozone in general. The market bounced back on Friday as plans for an interim government after the imminent resignation of Prime Minister Silvio Berlusconi began to emerge. As expected, Berlusconi resigned on Saturday as the lower chamber of Italy’s parliament approved new austerity measures in a revised budget bill. Mario Monti, an economist and former European commissioner, was announced as Berlusconi’s successor effective Sunday night. Investors will likely react favorably to this decision by parliament given the extremely negative perception that the international community at large held with respect to Berlusconi’s leadership.

Europe’s debt crisis remains one of the most significant roadblocks to sustainable increases in the markets. On the whole, the economy is slowly recovering as is reflected in generally fair valuations and better-than-expected quarterly earnings reports. Eurostat will release reports on industrial production and inflation within the Eurozone on November 14 and November 16 respectively. These reports will provide important insight into the overall economic health of the countries that investors have been so focused on. Investors are also worried about the increasing spreads in yield premiums between Germany and other large Eurozone countries such as France, Austria, and Belgium. If these spreads do not tighten over the next week, the market will likely fall off the gains it made late this past week.

Earnings reports from Walt Disney Corp. (DIS +0.95%) were released this week. Disney announced a rise in fourth-quarter earnings Thursday afternoon, giving investors a pleasant surprise. Bond markets were closed for Veteran’s Day on Friday but positive developments over the weekend in Europe (specifically in Italy) should promulgate a bond selloff on Monday that could push equities even higher. Of course, this increase will likely not be sustainable unless regulators can come up with a viable plan to keep Italy’s and other struggling countries’ borrowing costs low.
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Editorial Staff