Quote:NEW YORK (Dow Jones)--The euro plunged Thursday as mounting concerns over sovereign debt problems in Europe piled pressure on the common currency and helped drive a stampede out of stocks, commodities and riskier currencies.



In a very volatile trading session, the euro sank to its lowest level against the dollar in eight months, trading well below the key $1.38 level, while falling as much as 3.8% against the yen, the biggest single-day decline since July 8.



Fears that Greece's debt woes will escalate and spread to other European economies heightened investor anxiety about the health of a global economic recovery,

Quote:BRUSSELS — The swelling public deficits in Portugal, Spain and Greece have plunged the eurozone into the biggest crisis in its 11-year life, presaging years of belt-tightening, analysts warn.



It is a vicious financial circle; the more fears over deficits and debts grow, the harder it becomes for the troubled eurozone nations to borrow money to stay afloat.

With 16 EU nations now using the euro the problems are resonating throughout bloc. The euro fell below 1.36 dollars on Friday, its lowest level in over eight months.



One risk is the "free loader" effect, said Patrick Artus, leading economist with Natixis.

That happens when other countries are forced to come to the aid of an ailing eurozone member "to avoid a default risk that would be very dangerous for the euro zone as a whole."

On the other hand if financial markets are not convinced that countries facing problems will be bailed out there will be a rise in risk premiums or worse.



National governments are doing all they can to keep the financial vultures at bay.

Spain and Portugal are particularly keen not to be tarred with the same brush as Greece, which has debts over 294 billion euros (412 billion dollars) and a 12.7-percent deficit, far beyond EU limits of three percent of output for eurozone members.

But the investors are jittery.



The Ibex-35 index of most traded Spanish stocks closed down 1.35 percent on Friday after plunging nearly six percent on Thursday amid growing concerns over the state of the economy.

Investors have no "objective" reason to worry about the state of Spanish public finances, Spain's secretary of state for the economy Jose Manuel Campa assured.

"Markets take decisions by evaluating perceived risk, which from a subjective point of view, are high. But from an objective point of view, there is no reason for this at the moment," he told AFP.

Portuguese Finance Minister Fernando Teixeira dos Santos insisted that his country had "nothing to do with Greece" and lashed out at investors targeting his country as "prey".

"Investors have an animal spirit," he said. "There is something irrational in the way they behave."



Eurozone officials have also rushed to reinforce the assurances about the countries of southern Europe which are in the fiscal spotlight, nicknamed "Club Med" by Germany or, unhappily, PIGS if the fallen Celtic Tiger economy of Ireland is included -- Portugal, Ireland, Greece, Spain.



Luxembourg Prime Minister Jean-Claude Juncker, the head of the Eurogroup of finance ministers, stressed that Spain and Portugal pose no risk to eurozone stability.

The European Union last week approved Greek efforts to tame its debt crisis but placed Athens under unprecedented economic scrutiny.



European Central Bank chief Jean-Claude Trichet did his best to support Athens but could only manage to say that the Greek government plans to reduce the country's growing deficit and debt "are steps in the right direction".



Athens most recently promised measures including a public salary freeze, an increase in petrol taxes and a hike in the retirement age.

However the moves have upset unions more than they have assuaged market sentiment.

Quote:BEIJING (Reuters) - Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.

Quote:Germany's Choice

February 8, 2010 | 2326 GMT

By Marko Papic and Peter Zeihan

[url="http://www.stratfor.com/weekly/20100208_germanys_choice?utm_source=GWeekly&utm_medium=email&utm_campaign=100208&utm_content=readmore&elq=f6249160952545258143c665be882f9b"]link[/url]

The situation in Europe is dire.



After years of profligate spending, Greece is becoming overwhelmed. Barring some sort of large-scale bailout program, a Greek debt default at this point is highly likely. At this moment, European Central Bank liquidity efforts are probably the only thing holding back such a default. But these are a stopgap measure that can hold only until more important economies manage to find their feet. And Europe’s problems extend beyond Greece. Fundamentals are so poor across the board that any number of eurozone states quickly could follow Greece down.



And so the rest of the eurozone is watching and waiting nervously while casting occasional glances in the direction of Berlin in hopes the eurozone’s leader and economy-in-chief will do something to make it all go away. To truly understand the depth of the crisis the Europeans face, one must first understand Germany, the only country that can solve it.



Germany’s Trap



The heart of Germany’s problem is that it is insecure and indefensible given its location in the middle of the North European Plain. No natural barriers separate Germany from the neighbors to its east and west, no mountains, deserts, oceans. Germany thus lacks strategic depth. The North European Plain is the Continent’s highway for commerce and conquest. Germany’s position in the center of the plain gives it plenty of commercial opportunities but also forces it to participate vigorously in conflict as both an instigator and victim.



Germany’s exposure and vulnerability thus make it an extremely active power. It is always under the gun, and so its policies reflect a certain desperate hyperactivity. In times of peace, Germany is competing with everyone economically, while in times of war it is fighting everyone. Its only hope for survival lies in brutal efficiencies, which it achieves in industry and warfare.



Pre-1945, Germany’s national goals were simple: Use diplomacy and economic heft to prevent multifront wars, and when those wars seem unavoidable, initiate them at a time and place of Berlin’s choosing.



“Success” for Germany proved hard to come by, because challenges to Germany’s security do not “simply” end with the conquest of both France and Poland. An overstretched Germany must then occupy countries with populations in excess of its own while searching for a way to deal with Russia on land and the United Kingdom on the sea. A secure position has always proved impossible, and no matter how efficient, Germany always has fallen ultimately.



During the early Cold War years, Germany’s neighbors tried a new approach. In part, the European Union and NATO are attempts by Germany’s neighbors to grant Germany security on the theory that if everyone in the immediate neighborhood is part of the same club, Germany won’t need a Wehrmacht.



There are catches, of course — most notably that even a demilitarized Germany still is Germany. Even after its disastrous defeats in the first half of the 20th century, Germany remains Europe’s largest state in terms of population and economic size; the frantic mindset that drove the Germans so hard before 1948 didn’t simply disappear. Instead of German energies being split between growth and defense, a demilitarized Germany could — indeed, it had to — focus all its power on economic development. The result was modern Germany — one of the richest, most technologically and industrially advanced states in human history.



Germany and Modern Europe



That gives Germany an entirely different sort of power from the kind it enjoyed via a potent Wehrmacht, and this was not a power that went unnoticed or unused.



France under Charles de Gaulle realized it could not play at the Great Power table with the United States and Soviet Union. Even without the damage from the war and occupation, France simply lacked the population, economy and geographic placement to compete. But a divided Germany offered France an opportunity. Much of the economic dynamism of France’s rival remained, but under postwar arrangements, Germany essentially saw itself stripped of any opinion on matters of foreign policy. So de Gaulle’s plan was a simple one: use German economic strength as sort of a booster seat to enhance France’s global stature.



This arrangement lasted for the next 60 years. The Germans paid for EU social stability throughout the Cold War, providing the bulk of payments into the EU system and never once being a net beneficiary of EU largesse. When the Cold War ended, Germany shouldered the entire cost of German reunification while maintaining its payments to the European Union. When the time came for the monetary union to form, the deutschemark formed the euro’s bedrock. Many a deutschmark was spent defending the weaker European currencies during the early days of European exchange-rate mechanisms in the early 1990s. Berlin was repaid for its efforts by many soon-to-be eurozone states that purposely enacted policies devaluing their currencies on the eve of admission so as to lock in a competitive advantage vis-à-vis Germany.



But Germany is no longer a passive observer with an open checkbook.



In 2003, the 10-year process of post-Cold War German reunification was completed, and in 2005 Angela Merkel became the first postwar German leader to run a Germany free from the burden of its past sins. Another election in 2009 ended an awkward left-right coalition, and now Germany has a foreign policy neither shackled by internal compromise nor imposed by Germany’s European “partners.”



The Current Crisis



Simply put, Europe faces a financial meltdown.



The crisis is rooted in Europe’s greatest success: the Maastricht Treaty and the monetary union the treaty spawned epitomized by the euro. Everyone participating in the euro won by merging their currencies. Germany received full, direct and currency-risk-free access to the markets of all its euro partners. In the years since, Germany’s brutal efficiency has permitted its exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Conversely, the eurozone’s smaller and/or poorer members gained access to Germany’s low interest rates and high credit rating.



And the last bit is what spawned the current problem.



Most investors assumed that all eurozone economies had the blessing — and if need be, the pocketbook — of the Bundesrepublik. It isn’t difficult to see why. Germany had written large checks for Europe repeatedly in recent memory, including directly intervening in currency markets to prop up its neighbors’ currencies before the euro’s adoption ended the need to coordinate exchange rates. Moreover, an economic union without Germany at its core would have been a pointless exercise.



Investors took a look at the government bonds of Club Med states (a colloquialism for the four European states with a history of relatively spendthrift policies, namely, Portugal, Spain, Italy and Greece), and decided that they liked what they saw so long as those bonds enjoyed the implicit guarantees of the euro. The term in vogue with investors to discuss European states under stress is PIIGS, short for Portugal, Italy, Ireland, Greece and Spain. While Ireland does have a high budget deficit this year, STRATFOR prefers the term Club Med, as we do not see Ireland as part of the problem group. Unlike the other four states, Ireland repeatedly has demonstrated an ability to tame spending, rationalize its budget and grow its economy without financial skullduggery. In fact, the spread between Irish and German bonds narrowed in the early 1980s before Maastricht was even a gleam in the collective European eye, unlike Club Med, whose spreads did not narrow until Maastricht’s negotiation and ratification.



Even though Europe’s troubled economies never actually obeyed Maastricht’s fiscal rules — Athens was even found out to have falsified statistics to qualify for euro membership — the price to these states of borrowing kept dropping. In fact, one could well argue that the reason Club Med never got its fiscal politics in order was precisely because issuing debt under the euro became cheaper. By 2002 the borrowing costs for Club Med had dropped to within a whisker of those of rock-solid Germany. Years of unmitigated credit binging followed.



The 2008-2009 global recession tightened credit and made investors much more sensitive to national macroeconomic indicators, first in emerging markets of Europe and then in the eurozone. Some investors decided actually to read the EU treaty, where they learned that there is in fact no German bailout at the end of the rainbow, and that Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. They further discovered that Greece now boasts a budget deficit and national debt that compares unfavorably with other defaulted states of the past such as Argentina.



Investors now are (belatedly) applying due diligence to investment decisions, and the spread on European bonds — the difference between what German borrowers have to pay versus other borrowers — is widening for the first time since Maastricht’s ratification and doing so with a lethal rapidity. Meanwhile, the European Commission is working to reassure investors that panic is unwarranted, but Athens’ efforts to rein in spending do not inspire confidence. Strikes and other forms of political instability already are providing ample evidence that what weak austerity plans are in place may not be implemented, making additional credit downgrades a foregone conclusion.



Germany’s Choice



As the EU’s largest economy and main architect of the European Central Bank, Germany is where the proverbial buck stops. Germany has a choice to make.



The first option, letting the chips fall where they may, must be tempting to Berlin. After being treated as Europe’s slush fund for 60 years, the Germans must be itching simply to let Greece and others fail. Should the markets truly believe that Germany is not going to ride to the rescue, the spread on Greek debt would expand massively. Remember that despite all the problems in recent weeks, Greek debt currently trades at a spread that is only one-eighth the gap of what it was pre-Maastricht — meaning there is a lot of room for things to get worse. With Greece now facing a budget deficit of at least 9.1 percent in 2010 — and given Greek proclivity to fudge statistics the real figure is probably much worse — any sharp increase in debt servicing costs could push Athens over the brink.



From the perspective of German finances, letting Greece fail would be the financially prudent thing to do. The shock of a Greek default undoubtedly would motivate other European states to get their acts together, budget for steeper borrowing costs and ultimately take their futures into their own hands. But Greece would not be the only default. The rest of Club Med is not all that far behind Greece, and budget deficits have exploded across the European Union. Macroeconomic indicators for France and especially Belgium are in only marginally better shape than those of Spain and Italy.



At this point, one could very well say that by some measures the United States is not far behind the eurozone. The difference is the insatiable global appetite for the U.S. dollar, which despite all the conspiracy theories and conventional wisdom of recent years actually increased during the 2008-2009 global recession. Taken with the dollar’s status as the world’s reserve currency and the fact that the United States controls its own monetary policy, Washington has much more room to maneuver than Europe.



Berlin could at this point very well ask why it should care if Greece and Portugal go under. Greece accounts for just 2.6 percent of eurozone gross domestic product. Furthermore, the crisis is not of Berlin’s making. These states all have been coasting on German largesse for years, if not decades, and isn’t it high time that they were forced to sink or swim?



The problem with that logic is that this crisis also is about the future of Europe and Germany’s place in it. Germany knows that the geopolitical writing is on the wall: As powerful as it is, as an individual country (or even partnered with France), Germany does not approach the power of the United States or China and even that of Brazil or Russia further down the line. Berlin feels its relevance on the world stage slipping, something encapsulated by U.S. President Barack Obama’s recent refusal to meet for the traditional EU-U.S. summit. And it feels its economic weight burdened by the incoherence of the eurozone’s political unity and deepening demographic problems.



The only way for Germany to matter is if Europe as a whole matters. If Germany does the economically prudent (and emotionally satisfying) thing and lets Greece fail, it could force some of the rest of the eurozone to shape up and maybe even make the eurozone better off economically in the long run. But this would come at a cost: It would scuttle the euro as a global currency and the European Union as a global player.



Every state to date that has defaulted on its debt and eventually recovered has done so because it controlled its own monetary policy. These states could engage in various (often unorthodox) methods of stimulating their own recovery. Popular methods include, but are hardly limited to, currency devaluations in an attempt to boost exports and printing currency either to pay off debt or fund spending directly. But Greece and the others in the eurozone surrendered their monetary policy to the European Central Bank when they adopted the euro. Unless these states somehow can change decades of bad behavior in a day, the only way out of economic destitution would be for them to leave the eurozone. In essence, letting Greece fail risks hiving off EU states from the euro. Even if the euro — not to mention the EU — survived the shock and humiliation of monetary partition, the concept of a powerful Europe with a political center would vanish. This is especially so given that the strength of the European Union thus far has been measured by the successes of its rehabilitations — most notably of Portugal, Italy, Greece and Spain in the 1980s — where economic-basket case dictatorships and pseudo-democracies transitioned into modern economies.



And this leaves option two: Berlin bails out Athens.



There is no doubt Germany could afford such a bailout, as the Greek economy is only one-tenth of the size of the Germany’s. But the days of no-strings-attached financial assistance from Germany are over. If Germany is going to do this, there will no longer be anything “implied” or “assumed” about German control of the European Central Bank and the eurozone. The control will become reality, and that control will have consequences. For all intents and purposes, Germany will run the fiscal policies of peripheral member states that have proved they are not up to the task of doing so on their own. To accept anything less intrusive would end with Germany becoming responsible for bailing out everyone. After all, who wouldn’t want a condition-free bailout paid for by Germany? And since a euro-wide bailout is beyond Germany’s means, this scenario would end with Germany leading the EU hat-in-hand to the International Monetary Fund for an American/Chinese-funded assistance package. It is possible that the Germans could be gentle and risk such abject humiliation, but it is not likely.



Taking a firmer tack would allow Germany to achieve via the pocketbook what it couldn’t achieve by the sword. But this policy has its own costs. The eurozone as a whole needs to borrow around 2.2 trillion euros in 2010, with Greece needing 53 billion euros simply to make it through the year. Not far behind Greece is Italy, which needs 393 billion euros, Belgium with needs of 89 billion euros and France with needs of yet another 454 billion euros. As such, the premium on Germany is to act — if it is going to act — fast. It needs to get Greece and most likely Portugal wrapped up before crisis of confidence spreads to the really serious countries, where even mighty German’s resources would be overwhelmed.



That is the cost of making Europe “work.” It is also the cost to Germany of leadership that doesn’t come at the end of a gun. So if Germany wants its leadership to mean something outside of Western Europe, it will be forced to pay for that leadership — deeply, repeatedly and very, very soon. But unlike in years past, this time Berlin will want to hold the reins.

Quote:The European single currency is facing an 'inevitable break-up' a leading French bank claimed yesterday.

Strategists at Paris-based Société Générale said that any bailout of the stricken Greek economy would only provide 'sticking plasters' to cover the deep- seated flaws in the eurozone bloc.

The stark warning came as the euro slipped further on the currency markets and dire growth figures raised the prospect of a 'double-dip' recession in the embattled zone.

.............

Quote:Feb. 24 (Bloomberg) -- Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.



Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”



The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.



Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

...

Quote:A secretive group of Wall Street hedge fund bosses are said to be behind a plot to cash in on the decline of the euro.

Representatives of George Soros's investment business were among an all-star line up of Wall Street investors at an 'ideas dinner' at a private townhouse in Manhattan, according to reports.



A spokesman for Soros Fund Management said the legendary investor did not attend the dinner on February 8, but did not deny that his firm was represented.



At the dinner, the speculators are said to have argued that the euro is likely to plunge in value to parity with the dollar.

The single currency has been under enormous pressure because of Greece's debt crisis, plus financial worries in Portugal, Italy, Spain and Ireland.



But, it has also struggled because hedge funds have been placing huge bets on the currency's decline, which could make the speculators hundreds of millions of pounds.



The euro traded at $1.51 in December, but has since fallen to $1.34. Details of the secretive dinner emerged days after Mr Soros, chairman of Soros



....A

Quote:Mumbai, India

This weekend we went to a wedding reception in Mumbai.



There were beautiful women dressed in brightly colored traditional gowns. Men favored western business suits, but a few sported the outfits usually worn at Hindu weddings…with flowing, colored tunics, baggy white pants and little embroidered slippers. <img src='http://www.india-forum.com/forums/public/style_emoticons/<#EMO_DIR#>/biggrin.gif' class='bbc_emoticon' alt='' />



These were the men and women who are leading the Indian economy in one of the most remarkable growth stories in economic history. India has been upstaged by China. The middle kingdom’s story…from communist rags to capitalist riches in a single generation has a lot of dramatic punch. But India’s story may have a longer run. Because India grows without relying too heavily on exports. And it seems to have a large class of people who may be capable of keeping that growth on track.



“I now work for Blackrock,” said a pretty young woman. “I did my undergraduate work at the University of Texas. Then I worked in New York for a while.



“My sister lives in Georgetown, not far from you…”



Another man was a Sikh, with a turban on his head.



“I’m a metallurgist. I believe in machines. When I have money, I buy machines. I don’t trust stocks…”



It was a Sikh who assassinated Indira Ghandi. The Sikhs – a military caste – were regarded with deep suspicion for a while. Incidentally, the French prohibit people from wearing a turban when they get an official photograph. This is to provide the government with an accurate picture of the person, presumably. But since the Sikhs wear their turbans all the time, a more accurate picture would show what the man looks like with his turban on…



“I went to the University of Nevada,” said one of the guests. “I went to MIT,” said another. “I went to the University of Pennsylvania…”



“I got a patent on…. I’m a biochemist… I’m on the board of… I run a business that…”



One after the other, the résumés were impressive. These are people who have money, training, ambition, [color="#FF0000"]manners[/color]… <img src='http://www.india-forum.com/forums/public/style_emoticons/<#EMO_DIR#>/laugh.gif' class='bbc_emoticon' alt=':lol:' />



“There is no Social Security in India,” explained a colleague. “And no welfare. We’re too poor for that. People know they have to work to support themselves and their families. And the economy is still an entrepreneurial economy. The people who have money usually run their own businesses. The money is still in the hands of entrepreneurs instead of professional managers. It’s more like the economy in the US during the early part of the 20th century, in other words, than like today’s US economy.”

Quote:Greece's debt has been downgraded to junk status by Standard & Poor's amid concern it was not able to take steps needed to tackle its economic crisis.

The struggling nation is appealing for 40bn euros from eurozone governments and the IMF to shore up its finances and allow it to make debt repayments.



But there are fears it will not meet conditions needed to access the funds.

Earlier, Portugal's debt was downgraded as doubts intensified about countries with substantial debt relative to GDP.



S&P said it was lowering its rating on Greece's debt to BB+ from BBB-, hitting US and European markets.



In London, the FTSE 100 index closed down 2.6% with most of the losses following S&P's downgrade of Greece. On Wall Street, the Dow Jones index was 1.4% lower at 11,052.1 points.

Shares in Greek banks slumped by more than 9% , the largest one-day fall in bank shares for 18 months.

Quote:The clock is ticking -- Greece has to pay off some euro8.5 billion worth of debts by May 19, but cannot raise the money in the markets given current sky-high borrowing costs -- at one stage earlier, the yield on the two-year Greek bond spiked up to a massive 23 percent.



That means it needs its 15 partners in the eurozone and the International Monetary Fund to cough up the money promised earlier this month, including euro8.4 billion from Germany.



The downgrade for Spain was an ominous new blow, coming just as markets were recovering their poise after the double shock Tuesday of a Standard & Poor's downgrade for Greece -- to junk status -- and Portugal.



Greece and Portugal, up to now the focus of alarm, are relative economic minnows; Spain's economy is four times the size of Greece and is considered by some to be too big to rescue.



Though its overall debt burden is fairly modest at around 53 percent of national income compared to 115 percent for Greece, the country is running a high budget deficit and has done less than others to get a handle on its public finances.



The agency said it was cutting Spain's rating to AA from AA+ amid concerns about the country's growth prospects following the collapse of a construction bubble.



"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," Standard & Poor's credit analyst Marko Mrsnik said.



Spain still has an investment grade rating but could wind up paying more to borrow and may find itself under pressure to take tougher steps to cut spending.

Quote:May 3 (Bloomberg) -- China’s economy will slow and possibly “crash” in the next nine to 12 months, Marc Faber, the publisher of the Gloom, Boom & Doom report, said.



“The signals are all there, the symptoms of a major bubble are all there,” Faber said in a Bloomberg Television interview from Hong Kong. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”



The Shanghai Composite Index has plunged 12 percent this year, the fourth-worst performer among 92 gauges tracked by Bloomberg globally, as the government stepped up measures to cool the property market and ordered banks to set aside more deposits as reserves.



The latest increase of bank reserve ratios came yesterday after earlier moves failed to halt a record surge in real estate prices. In March, prices rose 11.7 percent across 70 cities from a year earlier, the most since data began in 2005.



The clampdown on property speculation may prompt investors to turn to the nation’s stock market, Faber said. Still, shares are “fully priced” and Chinese investors may instead become “big buyers” of gold, he said.

....

Quote:Overheating Risks



Manufacturing expanded in China at a faster pace in April, according to the Federation of Logistics and Purchasing’s Purchasing Managers’ Index. Exports climbed 29 percent in the first quarter, while consumer prices rose 2.7 percent in February, the largest increase in 16 months, adding to overheating risks in the world’s fastest-growing major economy.



BlackRock Inc. is among money managers reducing their holdings on Chinese stocks on expectations that economic growth has peaked. The BlackRock Emerging Markets Fund has widened its “underweight” position for China versus the MSCI Emerging Markets Index to about 7.5 percent from 4.6 percent at the end of March, the fund’s London-based co-manager Dan Tubbs said.



Faber, who joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China, said he “would rather stay away” from China and avoid industrial metals from copper to zinc as well as companies that are exposed to Chinese economic growth. He prefers wheat, corn, soybeans and other agricultural commodities.