Fundamentals Will Stop Euro Recovery In Its Tracks

Wednesday, March 31, 2010

The recent 2% snap back from 2010 lows at $1.3270 to $1.3445 may be the end of Euro strength indicated by new record unemployment of 10% in February. It was 8.3% in February 2009.
The Euro digested this kick in the stomach and even survived another one in the groin, this time ratcheting inflation being the cause without pain so far. Eurostat's flash estimate for inflation shot up to 1.5% in March from 0.9% a month earlier.
As if that were not enough, Germany reported an unprecedented 2009 record budget deficit of €105.5 billion on 6.7% higher expenses of €1.12 billion. In 2008 the deficit was a mere €5.2 billion.
It appears highly unlikely that Germany will manage to stay within the planned €80 billion deficit in 2010. None of the problems - rising social expenses, slashed tax receipts - has been solved neither in Germany nor the rest of the Eurozone.

GRAPH: The Euro is on the way to a new 1-year low against the US dollar for very fundamental reasons that have yet to be tackled on the old continent.
Media attention immediately switched from the Greek tragedy to Ireland
after Greece raised €5 billion in a 7-year issue at 325 basis points over Germany. Later, the spread widened to 342 basis points vs. Germany. Don't take your eyes off yet.Greece needs another €20 billion in the next 2 months and social protests continue to shatter the country.
It pays to keep a steady hand in volatile markets. In the case of Ireland first reports of a €18 billion hole were overtaken by € 32 billion and ended at €43 billion of new capital needed by banks as of Wednesday morning.
Even Ireland's central bank posted a loss of € 2.7 billion, a rarity in central bank circles. This may tell you something about their balance sheet when they cannot hide losses anymore.
So now it will be Ireland realizing that bad credit will come at higher prices.
The PIIGS train will stop, but not end, in Ireland. Portugal faces exploding deficits and 19% official unemployment in Spain make the Iberian peninsula a hotpot for the future of the Euro. And we have not yet talked about Italy where the central bank is run by former Goldman Sachs man Mario Draghi. Italy is not exactly known for proper bookkeeping but - as a remainder - it is also the place where double bookkeeping was invented more than half a millennium ago.
Youth unemployment is even worse, surpassing the 20% mark in most European countries except for Austria, Germany and the Netherlands. Faced with an ageing babyboomer generation it is ironic that demographics will create more job openings than applicants - but this will happen only in 2015.
As we have witnessed outright fraud in Greece, which cheated itself into the Euro by falsifying key economic data, the wild upswing in the sum of bad assets in Ireland's banking system strenghtens my belief that we are in for a long, long year of bad, bad surprises.
Loosely watching the ongoing problems of the banking sector in my home country Austria shall not make me jump to conclusions, although recent facts are worrying. Oesterreichische Volksbanken AG (OeVAG) may not escape either a shotgun wedding with either Raiffeisen or Erste group which would still be more face-saving than an outright nationalization of the technically bankrupt bank. According to Austrian media reports the 5th biggest bank is valued at only €650 million to €760 million. OeVAG got €1 billion from the government and has missed interest payments of €180 million so far. The world would be a perfect place if we all were banks who are kept operative at any cost, it appears.
France Keeps Fitch AAA Rating
In a not very convincing action Fitch affirmed Frances AAA rating on Tuesday, but with a big "but."
As FT Alphaville has found the words I was seeking for, here their take:
Hot off the ratings wire on Tuesday: Fitch has affirmed France’s sovereign rating at AAA.
Quel soulagement.
…et vive la France! (We presume.)
That said, it’s probably best not to break open the champagne just yet.
While the release reads très favorablement in general, the agency did stress France was expected to have one of the highest debt ratios among AAA-rated sovereigns come the end of 2010.
Pas bien.
Nevertheless, it’s still a big relief considering rumours were circulating earlier in the day that a cut could be on the cards on Tuesday.
All this does not make the Euro my current currency of choice, but neither do the other two ugly ducklings, Federal Reserve Notes and the Yen.
This brings again gold into the limelight as dollar strength has far outweighed the 10% correction from its all time high and when even Goldman Sachs forecasts a 2010 high of $1,360 in its Q2 global outlook for the yellow metal the downside should be limited to $1,065/70.
DISCLOSURE: Long gold/silver bullion. A short play on the Euro to ride to new 2010 lows with a stop at $1.36.


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