Wall Street Blames Europe for Sell-Off
June 25, 2012
Plunging over 150 points to 12.490.or over 1.2%, Wall Street blamed the latest sell-off on lingering Eurozone problems, pointing to Spain’s request for an urgent banking system bailout. When Greeks voted June 17 to stay on the euro, it didn’t fix the fundamental problem in the Eurozone: How to spread what’s left of the wealth to keep struggling Eurozone economies afloat. With the Frankfurt-based European Central Bank refusing to print more euros and pass unrepayable debt to future generations, the burden falls on Germany to keep the euro alive. German Chancellor Angela Merkel has made it clear she expects the Greeks to live up to draconic austerity measures forcing Greeks to scale back state salaries, future health care and pension benefits. Greece’s conservative leader Antonis Samaras doesn’t speak for the majority when he insists Greeks wish to stay in the Eurozone.
Launched in 1999, the euro promised unparalleled prosperity to many of Europe’s struggling economies. Joining a common currency offered Europe’s less stable economies a chance for an inflation-proof currency, preventing the kind of periodic devaluations playing internal havoc on various economies, making cross-border commerce difficult. While the euro worked for Germany, France, Belgium, the Netherlands and Finland, its inflated value hurt the Eurozone’s less export-driven economies, like Greece, Portugal, Spain, Ireland and Italy. It didn’t take long for banks to run out of cash, forced to borrow from the ECB at high interest. Despite recent bailout promises, Spain’s banking system remains on life-support, especially now that borrowing costs have gone through the roof. Like anyone in financial trouble, they pay higher interest rates.
Wall Street doesn’t need much to sell-off and take profits. Last week’s spectacular 600-point rise in the Dow was bound to take a step back. “Right now it’s all about Europe, and confidence is pretty low,” said Doug Cote, chief market strategist for ING Investment Management. The policies that they are proposing are too little too late,” suggesting, that temporary fixes won’t work. While everyone has an opinion about the euro, the fact remains that Wall Street takes profits, using any global or national excuse to sell-off. Worries in Spain stem not from the Eurozone’s $125 billion bank bailout plan but from fears that Spain can’t afford the exorbitant interest rates and eventually default on its bonds. Like the U.S. in 2007-08, Spain suffers from a collapsed real estate bubble, causing record numbers of defaults and mortgage foreclosures, leaving banks cash-strapped.
Whatever happens to President Barack Obama’s heath care bill this week, the economy will still drive the 2012 election. A recent Associated Press-GfK indicated the 60% of the public, both Democrats and Republicans, believe it makes no differences who’s president when it comes to the economy. If that’s true, Obama’s approval ratings still seem correlated to Wall Street. “It’s the same headline risk that we’ve been dealing with the God knows how long,” said Chip Cobb, senior vice president of Bryn Mar Trust Asset Management in Pennsylvania, tired of Europe raining on Wall Street’s parade. “Everybody wants something to happen sooner or later, and nothing’s happening,” referring to real changes in the Eurozone. Long-term changes needed to form a real economic union with a common tax base are far off and won’t fix the Eurozone’s current cash-crunch
Ten-year Spanish bonds yields rose 0.16% to 6.58%, rapidly approaching the prohibitively costly 7% yields seen in Greece and Portugal. European banking stocks dropped 3-4% attesting to growing worries about unfeasible borrowing costs. When Eurozone finance ministers meet this week in Brussels, they’ll have much fish to fry with Cypress also asking for a banking bailout. “This will be a decisive week for Europe,” said German foreign minister GuidoWesterwelle, speaking at a meeting of European foreign ministers in Luxemburg. Spain and Cypress’s request for bailouts unnerved markets, triggering sell-offs on both side of the Atlantic. When finance ministers meet in Brussels over the weekend, they’ll have to discus a long-term fix, including a Eurozone banking reserve fund to stabilize banks. So far, there’s no consensus on how to fund the massive capital requirements.
Getting through the June 17 Greek election only temporarily helped Wall Street recover its losses. “What the market wants is action,” said ING’s Cote, hoping Eurozone finance minister can find a long-term fix to the current financial crisis. Pressure mounts on Germany and the ECB to create a real financial union and shoulder the mounting burden of Eurozone debt. With bond yields going through the roof, it’s no longer feasible to expect cash-strapped economies to pay exorbitant borrowing costs without increasing the chance of defaults. Wall Street expects the Eurozone to come up with a long-term fix, not kicking the fiscal can down the road. With a Eurozone breakup unthinkable, it’s time for the ECB and Germany to support a real fiscal union—including the needed common tax base—or take the painfully real but orderly steps to dissolve the Eurozone.
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