By Ilene
On Thursday, Euro-area leaders stepped up their efforts to resolve the ongoing Greek debt crisis, announcing €159Bn ($229Bn) in new aid for Greece. They arranged for bondholders to foot part of the bill and expanded the power of the €440Bn Euro rescue fund to buy debt across stressed European nations - “after a market rout last week sparked concern the crisis was spreading.
The fund can also aid troubled banks and offer credit-lines to repel speculators.” The Euroland leaders hope to construct a financial “firewall” around struggling countries like Spain and Italy, while assuaging fears that the debt crisis is spreading. French President Sarkozy compared the transformation of the bailout fund to the creation of a “European Monetary Fund.”
Hopes for saving the Eurozone from multiple defaults by weaker EU members strengthened the Euro against the Dollar. We view the solution as another attempt to kick the can down the road. It was, however, a substantial kick and probably good for at least a few months. It whacked the Dollar, and conversely rallied the equity market.
As Bruce Krasting wrote,
The fund can also aid troubled banks and offer credit-lines to repel speculators.” The Euroland leaders hope to construct a financial “firewall” around struggling countries like Spain and Italy, while assuaging fears that the debt crisis is spreading. French President Sarkozy compared the transformation of the bailout fund to the creation of a “European Monetary Fund.”
Hopes for saving the Eurozone from multiple defaults by weaker EU members strengthened the Euro against the Dollar. We view the solution as another attempt to kick the can down the road. It was, however, a substantial kick and probably good for at least a few months. It whacked the Dollar, and conversely rallied the equity market.
As Bruce Krasting wrote,
“The Council of the European Union statement makes it pretty clear that the Euro folks are going to do everything they can (including direct intervention in the bond market) to stop the spread of contagion. I think they will succeed in maintaining market peace for a few months. But sometime this fall the issue of default by some Euro members will rise up again. It has to. I think the leaders in Europe are dreaming.”U.S. Debt Ceiling Deadlock
In the United States, a fierce battle over raising the debt ceiling raged on, with both sides refusing to negotiate a settlement.
A team of six senator, three Republicans and three Democrats, the “Gang of Six,” put together a decade-long, $3.7 Tn deficit reduction plan. President Obama remarked to reporters before the Tuesday White House press briefing that the Senate “Gang of Six” proposal was a “very significant step” towards resolving the impasse, representing a “potential for bipartisan consensus.”
The proposal, however, drew considerable opposition. House members of both parties feel their side had given away too much. “We don’t have to increase the debt ceiling,” says three-term Rep. Paul Broun (R) of Georgia, who voted against the bill. “There are other ways to raise revenue without going into receivership,” he added, suggesting that the government could increase federal revenues by opening up energy reserves or selling unused federal buildings.
Robert Borosage of Politico was also displeased:
“[T]his isn’t a New Deal or a Fair Deal. It’s a Raw Deal — one that every citizen concerned about rebuilding the middle class should oppose. It would add to unemployment in the short term, increase Gilded Age inequality, leave seniors more vulnerable and shackle any possibility of rebuilding America. It puts the burden of deficit reduction on the elderly, the poor and the vulnerable; endangers jobs and growth; and lards even more tax breaks on the rich."But, in the end, Boehner said on Sunday evening the path forward does not include an agreement between him & the President. If last-ditch talks fail, they will have to take responsibility if the unimaginable — a government default — happens in 10 days and the checks stop going out.”
Debt Ceiling & the Markets
One fear regarding a U.S. default is that creditors will demand higher interest in return for issuing new debt. Considering how enormous the U.S. debt load currently is (roughly $14.5Tn), higher interest rates would add a crippling burden to an already high burden. This leads to the question of how the markets would react if the U.S. defaults on its debt obligations.
Discussing the market on Friday, Russ Winter observed,
".....the best comment I’ve spotted on the causa proxima of all this was made in the public feedback section of another site. Someone who goes by the name ‘sbernard’ used the term ‘hubris obliviana.’ It’s such an apt descriptor that I’m going to adopt it as a Winterism. Wrote sbernard:
‘The truth is that Wall St suffers from a serious disease called hubris obliviana, fueled by endless government interventions, bailouts, stimulus, and Fed money expansion. One of the ‘unexpected’ consequences of this monetary heroin in that Wall St has lost all perception of risk. They reflexively have too much unending faith in the power of government to fix all their troubles. Thus, they are setting us all up for even more risk — risk the government cannot avert because it is the (weak link)!’”
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