What is the true underlying strength of the Euro? Hope & Other People’s Money (OPM)

Posted on January 20, 2012


Ancient Greece, considered to be the cradle of civilization for the western world is where it all began. No, not the development of culture and sophistication, but the decline of the euro zone empire.

The addiction of excessive, cheap borrowing, major economic slowdown on the verge of recession,  and fear of sovereign debt default  has spread from Greece to Ireland, to Portugal, Spain and most disconcertingly Italy due to its massive debt. The market’s apprehension that these countries’ lack of ability to pay their respective government debt has created an atmosphere of major financial instability in the European banking sector.  In addition, there is continuing uncertainty in trade and industry that is hindering growth and exports.   So why is the euro trading at 1.28 to the U.S. dollar as opposed to parity or even below that? On October 26th, in 2000,  the euro traded as low as .8230. At that time Europe’s fiscal steadiness and solidity was far stronger than the anxiety and trepidation that exists in today’s fearful economic environment.
Through never ending meetings of European politicians, central bank officials and big business leaders continue to seek out viable and confidence building solutions. Austerity programs , private and public write-offs (HOPE), new loans and bailout funds, (OPM) are the buzz words of the day.  The artificial rhetoric accomplishes its objective for a short period of time, and the EURO strengthens. Recently, the ECB provided $623 billion dollars in lifeline loans for banks as a guaranteed source of liquidity (OPM) hoping that they will begin to lend to businesses, and the EURO strengthens. This may be just another band-aid if the banks hold onto the money to shore up their own financial portfolio. The ECB plans to add another three-year longer-term refinancing operation,  at the end of February. That may total 1 trillion euros (OPM) should the central bank loosen collateral requirements, and the EURO gets stronger. On Wednesday, 1/18/12, the IMF announced that it is seeking to raise an additional $500 billion dollars from its participating countries. This increase will augment the IMF’s capacity (OPM) to aid smaller countries that might be hurt by the euro zone crisis, and the EURO gets stronger. Do you see a pattern here?

So far, the oratories and the bailouts are buying time.  Unless pragmatic debt negotiations, and hard compromises result in realistic solutions, the real value of the Euro will seek a new level…one much lower.

-Joel Borshof

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