Euro Hits 11-year Low in Wake of Greek Election

Euro hits 11-year low in wake of Greek election

The euro hit an 11-year low versus the US dollar on Monday as Greece's anti-austerity Syriza party swept to victory in a snap election, putting Athens on a collision course with international lenders.

The single currency dropped to $US1.1098, a level not seen since September 2003, as official projections showed Syriza was set to win 149 seats in the 300-seat parliament, taking 36.3 per cent of the vote.

The euro fell to as low as ¥130.16, its lowest level in more than 11 years. The euro also fell against sterling, hitting a seven-year low of 74.06 pence.

In the near term, traders are looking to whether Syriza will secure an outright majority, which would raise the risk of a standoff with Greece's European lenders over austerity measures as well as the stance of Syriza leader Alexis Tsipras.

"Usually politicians say populistic things before an election. So now the question is how much they are going to stick to the promises made to the Troika," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

Market participants saw the risk that euro selling would pick up during the Asian session if Syriza secures an outright majority.

Such a scenario could trigger a test of $US1.10, where large options lay, according to several research notes.

But some analysts also said long-term impact may be more nuanced as most investors expect Tsipras to work with the European Union and other international lenders at the end of the day.

"The market was largely anticipating a victory," said Sebastien Galy, senior foreign exchange analyst at Societe Generale in New York.

"At the moment, the market believes that if there is any (debt) restructuring it would only involve the official sector and for now, the possibility of Greece leaving the euro zone even with the incoming government is small," he added.

The euro also remained on the defensive after Thursday's announcement of quantitative easing by the European Central Bank.

It has sold off dramatically from $US1.21 at the start of the year and lost more then 3 per cent against the US dollar last week, in the wake of aggressive asset-buying measures announced by the ECB to shore up the region's struggling economy.

Losses in the single currency provided a broad boost to the US dollar, with dollar index rising to 95.186, near 11-year high of 95.331 hit on Friday.

Against the yen, which benefitted from safe-haven flows after Greek election, the dollar stood little changed at ¥117.77.

Meanwhile, the Aussie sank as low as $US0.7850, its lowest since mid-2009, while the kiwi fell to more than three-year trough of $0.7407. 

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China Launches New World Bank Rival

China Launches New World Bank

China and India are backing a 21 country $100 billion Asian Infrastructure Investment Bank (AIIB) to challenge to the World Bank and Asian Development Bank.

Memorandum of understanding were signed with 21 Asian countries in Beijing Friday. Australia, Indonesia and South Korea were absent following hidden pressure from Washington.

The development bank was proposed a year ago by Chinese President Xi Jinping, and is to offer financing for infrastructure projects in underdeveloped Asian countries.

Headquartered in Beijing, former chairman of the China International Capital Corp investment bank Jim Liqun, is expected to take a leading role.

The bank will initially be capitalized with $50 billion, most of it contributed by China. The country is planning to increase authorized capital to $100 billion. With that amount the AIIB would be two-thirds the size of the $175 billion Asian Development Bank.

India will be the second largest bank shareholder though Kuwait, Qatar, Mongolia, Kazakhstan, Pakistan, Nepal, Oman, and all the countries of the Association of Southeast Asia, except Indonesia are involved.

Australia, Indonesia and South Korea did not participate following US claims of ‘concerns’ about a rival to Western-dominated multilateral lenders.

Japan, China's main rival in Asia, which dominates the Asian Development Bank along with the United States, did not attend but had not been expected to do so.

Indonesia refused to participate claiming it needs time to discuss China’s proposal.

The Australian Financial Review said US Secretary of State John Kerry had personally asked Australian Prime Minister Tony Abbott to “steer clear” from joining AIIB.

"Australia has been under pressure from the US for some time to not become a founding member of the bank and it is understood Mr. Kerry put the case directly to the prime minister when the pair met in Jakarta on Monday following the inauguration of Indonesian President Joko Widodo," the paper said.

South Korea, one of America’s closest allies in Asia, is alse prevaricating. Its finance ministry said it spoke with China to request more time to consider details such as the AIIB's governance and operational principles.

US officials have said they do not want to support an initiative Washington thinks is unlikely to promote good environmental, procurement and human rights standards in the way the World Bank and ADB are required to do.

But Chinese officials are convinced the American opposition is an attempt to contain the global rise of China and its ambition to remain the dominant power in Asia.

“You could think of this as a basketball game in which the US wants to set the duration of the game, the size of the court, the height of the basket and everything else to suit itself,” Wei Jianguo, a former Chinese commerce minister, told the Financial Times.

Matthew Goodman, scholar at the Center for Strategic and International Studies in Washington DC believes the initiatives of a BRICS Bank and AIIB “represent the first serious institutional challenge to the global economic order.”

Chinese Finance Minister Lou Jiwei said the AIIB will set high standards, safeguard policies and improve on bureaucratic, unrealistic and irrelevant policies, according to the Xinhua news agency.

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Valukas Report On The Lehman Brothers Collapse

Lehman Brothers is back in the news in a big way after the report on the reasons for the investment bank's collapse in September 2008 submitted by Anton R. Valukas, the examiner appointed by the  US Bankruptcy Trustee, was released the other day. According to this website, the 2,200-page report took one year to prepare by a team of 70+ contract attorneys and cost $38 million.

There are quick summaries and detailed commentaries available from numerous financial news sites and blogs, if you don't particularly enjoy wading through a mean 9-volume report. Neither do I, but there's something about poring over the raw report and forming my own opinion therefrom that I find challenging, so I've started reading the Valukas report. I'll probably write something about my own take on this matter in a later post.

Now, for those of you who'd like to get a flavor of the original report, too, I've embedded below for your convenience the complete 9-volume report on Lehman Brothers' collapse which I found at Scribd.com. Here's a guide to the contents of each volume, to give you an overview of the report's coverage and help those who may want to skip sections and read selectively:

Volume 1- Sections I and II: Introduction, Executive Summary and Procedural Background 
               - Section III.A.1: Risk
Volume 2- Section III.A.2: Valuation
               - Section III.A.3: Survival
Volume 3- Section III.A.4: Repo 105
Volume 4- Section III.A.5: Secured Lenders
               - Section III.A.6: Government
Volume 5- Section III.B: Avoidance Actions
               - Section III.C: Barclays Transaction
Volume 6- Appendix 1
Volume 7- Appendices 2 - 7
Volume 8- Appendices 8 - 22
Volume 9- Appendices 23 - 34
Lehman Brothers Examiners Report COMBINED

Gold/Silver Stake for Zombie Terrorist Bankers : Max Keiser

Italy's new prime minister, Mario Monti, has began work on forming a new 'technocrat' government to tackle the country's towering debt. An economist and former EU-commissioner, he now has to implement structural economic reforms to pull Italy out of its financial chaos. For more on this, RT talks to Max Keiser, financial analyst and host of the Keiser Report.

Fed's Evans: Global Economy Growing Less Than Expected

The global economy is growing less than expected and countries should not bet on exports as a growth driver, Chicago Federal Reserve Bank President Charles Evans said on Wednesday.

"The global economy is not expanding as vigorously as previous forecasts had expected," Evans said in the question and answer session following a speech at the European Economics and Financial Center in London.

"The idea that any country is going to be able to get a leg up by expanding exports seems difficult to imagine in the current environment," he added.

In his speech, Evans said the U.S. Federal Reserve should ease monetary policy further to help the job market.

Evans also said that the U.S. banking sector was doing fine but the demand for loans was not high at the moment.

Market Turmoil Turns all Eyes Towards the Fed

Monday's dizzying stock market dive has heightened speculation that the Fed could take steps to ease market jitters that some fear could help topple a teetering economy into recession. The recovery is already sputtering amid weakening manufacturing activity, sluggish retail sales and European debt woes.

"I'm looking for (the central bank) certainly to do something," says Nigel Gault, chief U.S. economist of IHS Global Insight.

Yet Gault, like many economists, says any move likely would involve a largely symbolic change in the language of its policy statement, rather than another big purchase of Treasury bonds aimed at lowering interest rates. And Conrad DeQuadros of RDQ Economics notes the Fed's mission is to keep inflation and unemployment low — not to respond to stock market gyrations.

Plus, "It's too soon to give up on expectations that growth will pick up" in the second half of the year, says Jim O'Sullivan, chief economist of MF Global.

Last fall, the Fed launched $600 billion in Treasury purchases to lower interest rates, following a similar $1.7 trillion stimulus during the financial crisis. Last year, however, the central bank worried about deflation, or falling prices, that could have derailed the recovery. This year, inflation has increased to about 2%, and pumping more money into the economy would fuel concerns about rising prices, DeQuadros says.

What's more, he says, borrowing costs are already at historic lows. "It's not … interest rates that's holding back the economy," he says.

Other Fed options:

•The central bank has been saying interest rates are expected to remain near zero for "an extended period" that's widely understood to mean several months. The Fed could provide a more specific, longer time frame. Policymakers also could clarify they won't sell the Fed's more than $2 trillion in securities for a similarly extended period.

•Exchange short-term bonds in its portfolio for longer-term ones to further lower interest rates for mortgages and other loans.

•Cut the interest rate on reserves that banks keep at the Fed to encourage them to lend more. The rate is already 0.25%. "I don't think (the current rate) is causing banks not to lend," DeQuadros says.

Why Keynesianism Doesn’t Work: Part 1

Any economic theory faces the same tests as any other scientific theory. It isn’t good enough to say well, look, it worked this time but didn’t seem to that time. A theory needs to be able to explain all the evidence: one counter-example is enough to kill a theory.

And Keynesianism, or at least the crude type that is argued over in politics today, has failed just such a test as Don Boudreaux Russ Roberts reminds us.

According to that basic set of theories about how the economy works, there should have been a huge recession in 1946/1947. In both the UK and the US: all those returning servicemen with no jobs. All that huge amount of government borrowing to pay for the war stopping, there should have been a plunge in aggregate demand and thus something between a recession and another Depression.

And yes, economists like Paul Samuelson were predicting exactly that.

According to the prescription, the two governments should have borrowed vastly more, spent more again, in order to prevent such a failure of the economy. This isn’t arcane, this is just straight simple Keynesianism.

However, that’s not what actually happened. The soldiers came home, the governments reduced the borrowing and the spending (the UK actually ran budget surpluses for several years) and yet the economy boomed. There was no recession, certainly not a depression, unemployment did not soar.

We can argue until the cows come home about whether Roosevelt’s New Deal ended the Depression (I think not, it extended it, your view may differ), whether Obamanomics will lead us out of our current difficulties (I think not) But Keynesianism as Keynesianism faces a much sterner test than this.

What happened to the 1946/7 recession? If it’s not possible to explain that absence within the confines of the theory then the theory is wrong, or at least incomplete, whatever we might say about the other two periods we love to argue about.

Tim Worstall

Greece Deal Constitutes Default

A French scheme involving private lenders in a second rescue package for Greece would "likely" amount to a default in the eyes of leading credit rating agency Standard & Poor's, it stated on Monday, in a blow to European efforts to avoid that assessment.

"It is our view that each of the two financing options described in the (French) proposal would likely amount to a default under our criteria," the London-based agency said in a statement.

Such a finding would precipitate a banking crisis, since the European Central Bank has warned that it would then stop accepting Greek bonds as collateral for loans to Greek private banks.

The European Union and International Monetary Fund (IMF) are currently preparing Greece's new bailout - it needs up to 120 billion euros (174 billion dollars) to remain solvent beyond 2012 - after its parliament last week approved prerequisite austerity measures.

Germany and other bailout-weary governments have insisted that the private sector share in the risk this time, unlike in the case of the first 110-billion-euro rescue package.

Under the French proposal, financial institutions would receive new Greek 30-year bonds - representing about 70 per cent of their original holdings - in lieu of debt set for repayment in the short term.

That would give Greece more time to repay its loans, taking some of the pressure off of its troubled economy. The remaining 30 per cent of the debt's value would be paid as cash when the bonds mature.

Banks and insurance companies in France and Germany are among the major investors in Greek debt.

German financial institutions also on Thursday agreed in principle with that country's government to roll over Greek debt under a formula modelled on the French plan, but modified to suit Germany.

Standard & Poor's, however, deemed that the general approach would not lower the risk of Greece going bankrupt in the future and lead investors to receive "less value" than originally promised - thus meeting its criteria for a default.

"Greece's near-term reliance on EU/IMF official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness," it said.

It, however, also noted that the French proposal is still being worked on and is "just one" of several approaches being considered.

"We understand that the ... proposal may change, and it is possible that it could take a form that results in a different rating outcome," Standard & Poor's said.

A spokesman for EU Economy Commissioner Olli Rehn on Monday declined to comment on the credit rating agency's findings.

EU finance ministers are expected to "clarify the outline" of the next Greek bailout when they meet on July 11, including the issue of private lenders, he said.

"The precise modalities and scale of private sector involvement... will be determined in the coming weeks," EU spokesman Amadeu Altafaj told reporters in Brussels.

"Exploratory talks have been taking place in Europe. But it's not one size fits all."

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A First Step To Sound Money

Here’s a hypothetical situation. Suppose you had $1.5 million. At today’s gold price that would buy approximately 1,000 ounces of gold. Suppose now that President Obama, the Congress, and the Federal Reserve began managing the American economy in such a way that by the end of President Obama’s second term, the dollar was back to where it was when President George W. Bush began his first term. Were that to happen, your $1.5 million could purchase 5,660 ounces of gold.

So, do you think you should have to pay taxes on the increase in the value of your money?

If the idea strikes you as crazy, let us refer you to the legislation introduced today at the Senate by James DeMint, Rand Paul, and Michael Lee. It’s called the Sound Money Promotion Act, and The New York Sun is happy to lay claim to being the first newspaper to endorse it. The measure, as it is characterized in a press release posted by Senator DeMint, would remove the tax burden on gold and silver coins that have been declared legal tender by either the federal government or state governments.

On its face it might seem an odd bill. But looks at the hypothetical situation above from the opposite end of the telescope, so to speak. It seeks to block tax authorities from treating gold and silver coins as though they were mere commodities and start treating them, at least in tax law, as though they were what the Founders of America thought they were, which is money. Gold and silver coins are already treated this way, as legal tender, inside the state of Utah, whence Senator Lee was elected.

This is because Utah was the first state in our modern time to exercise its constitutional power to make gold and silver coins legal tender. It did so earlier this year, ahead of as many as a dozen states that are at various stages of looking in to the question of how to protect themselves against the collapse of the United States dollars that are being issued by the Federal Reserve. They are all being energized by the fact that the value of the dollar has collapsed to barely a fifth of what it was, if that, at the start of the 21st century.

One of the states considering making gold and silver coins legal tender is South Carolina. That was remarked on by Mr. DeMint, one of its senators at Washington, in introducing the bill. He attributed the dollar’s collapse in recent years to “the government’s reckless over-spending, continued bailouts, and the Federal Reserve’s easy money policy” and said that in addition to fiscal discipline the country would need “monetary discipline to restrain further destructive monetizing of our debt.” The legislation, he said, “would encourage wider adoption of sound money measures.”

The press release introduced by Senators DeMint, Lee, and Paul noted that Standard & Poor’s has recently downgraded America’s outlook to “negative” from “stable,” meaning, the senators asserted, “there is a one in three chance of an actual credit downgrade in the next two years.” They asserted that the Federal Reserve is now buying 70% of U.S. Treasuries, set to surpass the holdings of both Communist China and Japan combined.

How far the three senators will get with the Sound Money Protection Act is hard to say. Its implication — a recognition of gold and silver as the true constitutional money — is, in the current context, radical. But it's no more radical than the Founders, who, when they twice used the word “dollars” in the Constitution, were referring to a coin containing 371 ¼ grains of silver. They codified that as the definition of the dollar in the Coinage Act of 1792. They also referenced gold in the 1792 Act, with a value of 15 times that of silver. We are in a time when understanding the concept of constitutional money will point the way to the policies needed to steer our country out of its current difficulties.

Will Greek Austerity Measures Work?

Today the Greek Parliament, flying in the face of violent and deadly protests, voted to adopt austerity measures designed to reduce Greece's mountainous debt and settle very shaky nerves in the euro zone.

Even if this plan is passed, though, will the euro - and the EU - be on the path to recovery?

It's hard to say, but I believe that the austerity plan - while not perfect - takes sufficient aim at Greece's bloated public sector.

Greece is notorious for being a state consumed by the public sector, which amounts for about 40% of its GDP. The average retirement age in Greece's public sector is 61, well below what it should probably be. The austerity plan should help with these matters.

What is not being addressed, however, is corruption. Corruption is widespread in the Greek public sector, causing hundreds of millions of euros to be paid out each year in under-the-table bribes for basic public services. In fact, corruption may be one of the key reasons why the Greek economy is so weak - systemic reasons aside.

Corruption has to be addresed by the Greek government in order for any austerity plan to be successful. Pay cuts, salary freezes, and layoffs may work to a degree, but corruption and grafts have to be squashed as a part of any package dealing with the public sector.

It's too early to say if these plans will work or not. Besides, even if they do, you still have a dire situation in Italy, Portugal, Spain, and Ireland that has to be handled. But, the markets will probably view this as a positive development, and in the short term, things could be worse.

Why the Misery Index Is Higher Than the Feds Let On

The Dow Jones Industrial Average continues its hiatus from doom and gloom yesterday – up more than 100 points so far today on what would be its fourth consecutive winning session.

A four-day winning streak may not seem like much, but as The Daily Reckoning faithful will recall, the Dow has fallen for six straight weeks. Perhaps the Blue Chips will fall for a seventh straight week, but so far the Dow is solidly in the black.

Sure, the reasons for lightening up on stocks remain just as compelling today as they did last week (and the five weeks before that), but that doesn’t mean the stock market has to fall every day.

Greece is still racing towards an inevitable default, America’s governmental finances – from Washington to Sacramento – are still sickly and the US economy’s performance still continues to disappoint.

So, yeah, stocks might drop again tomorrow…http://www.blogger.com/img/blank.gif

But there is “a time for everything,” as the writer of Ecclesiastes observed about three millennia ago…and the Byrds re-iterated about three decades ago. And this week – so far – is simply not the time for selling.

Ample time remains for selling stocks, of course,…and also for buying them. But when it comes to buying, you know our view: Stick with the companies that provide indispensable goods and services. Stick with the companies that provide the world’s “must haves,” rather than the world’s “like to haves.”

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