The Euro Takes the Road Well Traveled
Justin Burkhardt | June 13, 2012
Paths emerge. The EU has options. Yet they continually choose the well-beaten road of fiscal suicide. Leaders of the currency bloc made a weekend announcement that they will be issuing yet another bailout for Spain’s faltering economy in the amount of $125 billion. The goal for this endeavor is to shore up Spain’s banking crisis prior to the election in Greece with the hope that it would decrease the probability of a Greece exit.
The announcement had an immediate impact on the markets this week, and investors responded by increasing the 10-year Spanish borrowing cost by 22 basis points to 6.69%, the highest level since the country's introduction to the Euro. This move has several implications one of which is that it will increase the country's interest payment making it more difficult for them to pay off their debt.
The issued funds will be used to recapitalize the Spain's newly nationalized bank, which is holding billions of dollars in underperforming debt mostly in bad property loans.
The perspective here is that this bailout is nearly the equivalent of 10 percent of the country's GDP and will increase their “debt-to-GDP ratio” by more than 90%. Piling on debt in this amount is not manageable for any country yet alone one that is in a full-blown recession.
Rob Carnell, chief international economist at I.N.G. in London, said, “the Spanish plan appears to be a flop because it doesn’t make Spain grow, it doesn’t address the government debt problem or the problems in the housing market”. The unintended consequence is that this bailout had no conditions so it bolsters the anti bailout parties in Greece.
How much longer can this merry-go-round ride continue?
Rise and Fall - Euro Follows Projected Path:
Last week I presented two possible scenarios for the coming wave in the EUR.USD, both possibilities yielding the same end result. The pair played out just as projected retracing 38.2% of the previous downtrend to form a strong “B” wave and then pivoted for the reversal.
Indicators On Watch:
- EUR German Consumer Price Index (Wednesday)
- USD Advance Retail Sales (Wednesday)
- EUR Euro-Zone Consumer Price Index (Thursday)
- USD Consumer Price Index (Thursday)
- USD U. of Michigan Confidence (Friday)
The Euro rallied against the dollar last week making a strong climb to 1.2670 for a 38.2% reversal of the previous downtrend and then began to pivot for the reversal. This new rally was the projected “B” mentioned above and is just about over. My projection for the coming “C” wave is that it will zigzag down similarly to what we saw in wave “A”. This decline should fall to a conservative target of 1.1891 before demonstrating any sign of a significant trend reversal.
Editor & Currency Strategist
Disclosure: I have no positions in any stock mentioned, and no plans to initiate any position within the nxt 72 hours.