Rogoff Predicts “A Bunch Of Sovereign Defaults”
The euro has been pressured by the Greek debt crisis since late last year. In December 2009 Greece suffered two downgrades by Moody’s and Fitch rating agencies. The Greek fiscal crisis has dragged the euro down in currency markets and many investors fear a default by the troubled EU member. Earlier in the month Harvard University Professor Kenneth Rogoff, a former economist for the International Monetary Fund, said that out of control debt may force several countries to default and could force the US to cut spending. It was Rogoff who predicted the failure of several large American banks in 2008. At a forum in Tokyo Rogoff said that following a banking crisis, “we usually see a bunch of sovereign defaults, say in a few years. I predict we will again.” Rogoff said that the United States is likely to tighten monetary policies which would in turn send “shockwaves” through markets. Rogoff also said that US fiscal policy will not be addressed until rising bond yields prompt “very painful” spending cuts and tax increases. At present the US faces an unheard of budget deficit of $1.6 trillion dollars this year.
Rogoff Pessimistic About Europe
Rogoff, who co wrote a history of the current financial crisis in 2009, told the Tokyo forum, “Most countries have reached a point where it would be much wiser to phase out fiscal stimulus. Rogoff said nations would be wise to, “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.” Rogoff said that Greece will probably be bailed out by the IMF and not the European Union. Rogoff believes that Greece will develop several austerity measures and that the EU will probably provide Greece with a bridge loan which will not save Greece in the long run. Rogoff stated, “It’s like two people getting married and saying therefore they’re living happily ever after. I don’t think Europe’s going to succeed.”
Rogoff Predicted 2008 Crisis
Rogoff believes that investors will demand higher rates to lend to debtor nations including the United States. According to last November’s IMF forecast the US’s borrowing will amount to 99.5% of annual economic output in 2011.Rogoff said that global recovery and growth will be slow. Rogoff said, “In rich countries — Germany, the United States and maybe Japan — we are going to see slow growth. They will tighten their belts when the problem hits with interest rates.” Rogoff has a reputation for accurate predictions. In 2008 just before the collapse of Lehman Brothers Rogoff warned, “the worst is yet to come in the U.S.” and also predicted the collapse of major investment banks. Rogoff’s assessment of the global financial situation is sobering.
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Euro Hits One Year Low vs. Yen
The euro is now at a one year low against the Japanese yen as investors seek safe haven assets due to the Greek fiscal crisis and US Fed Chairman Bernanke’s sobering assessment of the US economy. On Wednesday ratings agency Standard and Poor’s said it may cut Greece’s rating by a couple of notches by next month. The euro has fallen more than 10% since December 2009 due to concerns about Greece and other EU nation’s ability to pay their debts. The Athens government has proposed several austerity measures causing widespread social unrest. The yen was the big winner in Asian trading as rising risk aversion fuelled a yen rally in currency markets. Lee Hardman of BTM-UFJ stated, “The yen is in favour against the euro on safe-haven demand, fuelled by risk-aversion on concerns over sovereign debt risks of the peripheral euro zone members. A possible Greek ratings downgrade has added further pressure.”
Aussie and Kiwi Under Pressure
The euro declined 1.3% vs. the yen trading at 120.60 yen and against the US dollar the euro traded at 1.3510. High yielders like the Aussie and Kiwi dollars came under pressure due to Japanese stop loss selling. The Aussie lost more than 1% against the yen trading at 79.50 yen. The pound fell to a nine month low vs. the yen and the yen gained about 1% on the US dollar. Paul Mackel of HSBC stated, “The yen does tend to strengthen when times get tough and I would also say it is likely to remain in favour going into the Japanese fiscal year-end.”
Bernanke Offers Grim Assessment of US Labor Market
Fed Chairman Ben Bernanke offered a congressional committee a sobering assessment of the US economy. In testimony offered to the House Financial Services Committee Bernanke cited a weak labor market and tame inflation as reasons for the Fed to keep interest rates low for an “extended period.” The US has lost about eight and a half million jobs during the current recession. About the labor market Bernanke told congress, “Notwithstanding the positive signs, the job market remains quite weak.” Bernanke also told congress that the Federal Open Market Committee (FOMC) is prepared to support the US economy with stimulus measures for ‘some time.’ Bernanke stated, “The FOMC continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period” Bernanke’s testimony squelched speculation that the Fed may hike rates in the near future.
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US Consumer Confidence at 10 Month Low
The US dollar and the Japanese yen posted gains as jitters about the pace of global recovery sent many investors in search of safe haven assets and currencies. The yen gained after US data showed consumer confidence at a ten month low. The euro was pressured further by a report by the Munich-based Ifo institute that showed that German business confidence fell for the first time in almost a year. John Doyle of Tempus Consulting Inc. in Washington stated, “We’re seeing a slight breakdown to risk as the poor data sparked a flight to safety. The report showed U.S. consumers are not ready to open their wallets if the labor market continues to be so distressed.” High unemployment figures have plagued the US economy since the start of the global recession. Global stocks hit three week highs on Tuesday as traders anticipate Fed Chairman Bernanke’s congressional testimony on Wednesday and Thursday. Investors are waiting for Bernanke to clarify any exit strategies that the Fed may take to withdraw emergency measures put in place at the beginning of the recession. Apprehension ahead of Bernanke’s testimony has prompted a rise in risk aversion benefiting the dollar and yen.
Euro Pressured by French, German, Italian Data
On Tuesday early demand for euros declined after the German business confidence report. French consumer spending numbers and Italian confidence data were both below forecast adding to the Euro’s troubles. Klaus Abberger an economist at the Ifo think tank said the German economy may have contracted during the first quarter. The German economy is the Euro Zone’s largest. Currency analysts say that investors are very wary about Greece’s debt problems and wonder if the austerity measures proposed by Greece are enough to prevent a bailout of the troubled nation. German Chancellor Angela Merkel severely criticized speculation against the euro saying that banks and financial institutions that were bailed out with taxpayer money are taking advantage of the Greek debt crisis. In a speech in Hamburg Merkel lashed out at speculators saying, “The debt that had to be accumulated, when it’s going badly, is now becoming the object of speculation by precisely those institutions that we saved a year-and-a-half ago. That’s very difficult to explain to people in a democracy who should trust us.”
Goldman Sachs Criticized by German Official
Gunther Krichbaum, head of the German parliament’s European Union committee, said in a statement to reporters that investment banks like Goldman Sachs should be given the “red card” if they helped Greece hide its financial crisis. Gerald Corrigan, a Goldman Sachs chairman said the bank did “nothing inappropriate” when it arranged Greek currency swaps designed to reduce Greece’s debt by 2.37 billion euros ($3.2 billion USD).
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Skepticism About Fed Promises
The greenback rose against most major currencies after the Fed’s unexpected rate hike pared risk appetite. The dollar pared gains vs. the euro as data showed that the US cost of living rose less than forecast. Prices, excluding those for food and energy, declined for the first time since 1989. The Japanese yen gained vs. the South African Rand and the Kiwi dollar after the Fed’s actions pushed Asian stocks 2% lower. Boris Schlossberg of GFT Forex in New York stated, “We had a shock to the system yesterday with the Fed’s discount rate hike. The first reaction was to take risk off the table.” Despite the Fed’s repeated promise to keep rates low for ‘an extended period’ skepticism if growing in financial markets about the Fed’s promises. Sumitomo Mitsui Banking Corp. said the Fed’s move was a “misjudgment of historical proportions.”
Fed Says Moves Will Not Lead to Tighter Financial Conditions For Borrowers
Tokyo strategist Daisuke Uno said that the Fed’s rate increase “won’t produce any positive effects.” Many experts believe that if US economic conditions deteriorate that the US which depends on foreign money to fund its deficit could experience “an unsavory rise in interest rates.” The Fed said its moves were intended “intended as a further normalization” of lending and that the “modifications are not expected to lead to tighter financial conditions for households and businesses” and do not indicate any change in monetary policy. Some analysts believe the Fed may have raised rates as a method of “protecting the dollar in case China takes a retaliatory step, such as cutting the amount of U.S. government debt it buys amid heightening tensions between the two nations.” The dollar reached a nine month high vs. the euro as many investors believe the rate hike is a clear indication that the Fed intends to withdraw emergency stimulus measures.
Fed Tightening Policies says Expert
Federal Reserve Bank of St. Louis President James Bullard said that fears of an increase in borrowing were ‘overblown, while Atlanta Fed President Dennis Lockhart said that the rate hike does not indicate a tightening of policy. Andrew Busch of Bank of Montreal in Chicago said, “The CPI report adds some credence to the commentary from Bullard and Lockhart. But when the Fed raises an interest rate, even the discount rate, it’s tightening policy. The U.S. is attempting to exit extreme monetary policy looseness. That should boost the dollar versus the euro.” The euro remains pressured by continuing concerns about the nation’s ability to implement austerity measures to address the ongoing fiscal crisis.
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Better Than Expected Housing and Industrial Data
The US dollar was supported by better than expected economic data and the minutes of a recent Fed meeting that showed Fed policymakers are discussing exit strategies from stimulus programs. Strong US housing and industrial production data pushed the dollar within reach of a seven month high. The euro fell once again against the dollar as Greek fiscal worries persist, putting immense pressure on the euro. Many experts and analysts believe that if Greece implements the harsh budget cutting measures necessary to solve the nation’ debt problems could slow euro zone growth and force the European Central Bank to postpone tightening monetary policies. The Fed minutes showed that several Fed policymakers want to sell securities as soon as the US economy is on a sure footing. Johan Javeus of SEB in Stockholm stated, “It hasn’t been a huge move but the Fed minutes have helped the dollar as they were perceived as hawkish. Whereas before there was a sense that the ECB would be ahead of the Fed in raising rates it now looks increasingly likely that the Fed will move before the ECB.”
Greece Struggles to Implement Unpopular Austerity Measures
The euro has fallen a full 5% since January due to concerns about the fiscal health of several EU nations most notably Greece. Many investors fear that Greece’s problems could spread to other EU nations and cause investors to lose confidence in euro zone assets. German Chancellor Angela Merkel’s government has taken a particularly hard stance against any EU aid to Greece. Greek Prime Minister George Papandreou said that Greece is not seeking a bailout but needed time to implement severe budget cutting measures. Measures include wage and pension reductions, higher taxes and fuel prices and raising the retirement age. The proposed measures have prompted several strikes by public sector employees and are unpopular throughout the country. At the present time there are no concrete policies in place to deal with the Greek debt crisis.
IMF Gold Sale Pressures Aussie and Kiwi Dollars
The Aussie dollar fell after the International Monetary Fund announced the sale of 191.3 tons of gold on the open market to raise funds for lending. Spot gold prices dropped after the IMF announcement putting downward pressure on both the Aussie and Kiwi dollars. The Aussie dropped 0.2% to $0.8960 and the Kiwi fell 0.2% to $0.7006 following the IMF announcement. Jonathan Cavenagh of Westpac stated, “The gold sale news is weighing on the Aussie especially against the U.S. dollar which is seeing a biddish tone.”
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Merkel Opposed to Greek Aid
Greek fiscal problems have pressured the multi nation euro in currency markets and the reaction has been strong in some quarters. Members of German Chancellor Angela Merkel’s coalition have expressed very vocal opposition to aid for Greece. A poll conducted by the German newspaper Bild am Sonntag newspaper showed that 53% of the Germans polled said that if necessary Greece should be thrown out of the European Union. Merkel has been somewhat unclear on the issue of support for Greece saying that it is up to the Athens government to fix its own problems. The poll also indicated that 67% of Germans do not want Germany or any other EU nations to give billions of credit to Greece. Michael Fuchs deputy head of Merkel’s conservatives in parliament, said in a statement to the Welt am Sonntag newspaper, “If we start now, where do we stop? I can’t explain to people on unemployment benefit that they won’t get a cent more but Greeks can draw a pension at 63.” During her first term Merkel raised the German retirement age from 65 to 67 in an attempt to control the nation’s deficit to meet European Union goals.
German Recovery Fragile
Last year Germany suffered the nation’s worst post war recession and German recovery stalled during the fourth quarter and German recovery is seen as fragile at the present time. One of Merkel’s coalition partners is even more adamant against any aid to Greece. The pro-business Free Democrats (FDP) are against aid to Greece. FDP budget expert Otto Fricke stated, “Solving this problem cannot be about aid for Greece. If anything, it’s about keeping any damage away from German tax payers.”
IMF Economist Says Helping Greece ‘Inevitable’
Former European Central Bank chief economist Otmar Issing said that any aid to Greece from EU nations would be ‘misguided.’ Issing was particularly critical of Greece’s generous pension system. Harvard University economist Kenneth Rogoff said that Germany could possible face the same problems as Greece in the future. In a statement to the Welt am Sonntag newspaper Rogoff warned, “Germany’s public finances are not on a sustainable path. There will come a time when Germany will have its own Greece problem … it won’t be as bad as in Greece, but it will be painful.” Rogoff who is a former International Monetary Fund chief economist said that helping Greece is inevitable. Rogoff stated, “As long as Germany isn’t ready to kick Greece out of the euro zone, it must help.”
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Greek Fiscal Problems Weigh on Euro
Greek debt woes have weighed heavily on the multi nation euro since late last year. In 2009 Greece’s rating was downgraded by two ratings services. Despite assurances by EU finance ministers who said the Euro Zone’s debt crisis is under control investors remained unconvinced. Despite slight euro gains against the US dollar on Monday the euro remains close to an 8-1/2 month low vs. the greenback. Debt concerns have spread to Spain and Portugal putting additional downward pressure on the euro. Investors and traders expressed concerns that the G 7 group of nations did not address currency issues during their weekend meeting. Risk aversion remains dominant in currency markets. David Song of DailyFX stated, “Risk trends are likely to drive price action in the currency market going into the North American session as the economic docket is fairly light for today,. Over the next few days, we will have to see how policy makers in Europe plan to deal with the issues that are coming from Greece, Portugal and Spain.”
Greek Unions Threaten Strike
Greek public service unions plan to challenge the austerity measures with a 24 hour strike on Wednesday. The strike threat prompted a rise in the cost of insuring Greece’s debt. The euro has fallen almost 10% from a 15-month high of $1.5145 hit last November. Last week’s selloff of Greek, Portuguese and Spanish debt hurt global markets and prompted the G 7 nations to address the crisis. EU finance ministers said they would make sure Greece adheres to the nation’s budget cutting plans. European Central Bank President Jean-Claude Trichet said he has confidence in Greece’s plans to address the crisis and U.S. Treasury Secretary Timothy Geithner said that the EU ministers, “made clear to us they will manage this with great care.”
IMF Bailout Plan Scrapped
Investors and traders expressed concerns that an expensive Greek bailout could upset recovery efforts and hurt financial markets. Michael Woolfolk of Bank of New York Mellon stated, “What I think is needed is an agreement on behalf of the EU to provide further support for Greece to further ensure that it doesn’t default.” A plan by the by the International Monetary Fund to bail out Greece was stopped by Jean-Claude Juncker, the leader of the euro zone finance ministers’ group. UBS analysts said before the G 7 meeting that an IMF bailout of Greece would offer the best solution to Greece’s ongoing debt woes. In a statement the Analysts stated, “An EU bailout that is half-hearted in its fiscal assistance would damage the euro zone’s credibility even further.”
Quick Forex Tip: The International Currency Trading market has no central exchange like stock and commodities markets. Currency markets are dispersed throughout the world and the primary trading centers are, in order of importance, London, New York and Tokyo. The geographic dispersal means that markets are always open somewhere in the world and traders can jump on the internet and hopefully make very profitable trades at any time of the day.
