Legal Eurozone Rescues
Research for Online Investors

by John Dalt

9/07/11

Germany’s Constitutional Court ruled early this morning that rescues extended to Greece, Ireland and Portugal by Germany and the other eurozone countries are not illegal.  Under the European Union Maastricht Treaty, that governs the eurozone monetary union, countries are not allowed to assume other country’s debts.  German law requires parliamentary approval of financial matters.

The court ruled the bailouts did not amount to assuming other country’s debts and that the German government had acted within the law, but that going forward the Parliament would have to approve aid.

The market is rallying today on relief as they are correctly reading this cleared the path for more rescues in the future.  The market is not correct in believing this path is going to be smooth and without drama.

German Politicians call for ouster of Greece from eurozone

This morning Angela Merkel’s party members called for the expulsion of Greece from the eurozone, because the Greek government is not passing the reforms and privatization plans they agreed to in July.

European “debt inspectors” and representatives of the International Monetary Fund (IMF) were in Athens last week.  They left with no agreement from the government to implement the agreed changes in government spending and taxes.  Greece is counting on a second $78 billion dollar bailout to meet their cash needs.  German Finance Minister Wolfgang Schaeuble warned Greece would not get the first installment of $5.7 billion dollars if the government did on deliver on its commitments.

European debt inspectors are scheduled to visit Athens again next week to review progress by the government.  Interest rates on 10-year Greek bonds have climbed to 20% out of concern the government would not cut spending to meet their deficit target of 7.5%

Italy’s Finance Minister promised austerity measures and a balanced budget amendment when their bonds were under attack by the “bond vigilantes.”  Now that that European Central Bank (ECB) has been buying their bonds and brought the interest rates back down the government has “slow walked” any legislation to make structural changes.

This is the nature of bailouts.  As they used to say in the old west, “Nothing concentrates the mind like a public hanging.”  Governments under pressure to make changes will make changes.  Once the pressure is off, the changes seem to be forgotten.

Angela Merkel has been outspoken in her view that changes be made by countries in crisis before any rescue aid is provided.  This has created uncertainty in the bond markets as bond owners do not know if the milestones will, or can, be met by governments in crisis.  This creates wild fluctuations in interest rates on the affected country’s bonds as the tide of legislation ebbs and flows.

These wild swings in bond rates and corresponding plunges in European equity markets have caused heartburn in stock markets world-wide.  This phenomenon will not change.  We are in a headline driven market.

Most economic indicators are pointing to slower activity and there are few “levers” left for central banks and governments to influence growth.

Switzerland pegged their Franc to the Euro on Tuesday in an effort to protect their exporters.  The Swiss Franc was considered a “safe-haven” currency because of the country’s budget restraint.  The Franc fell 8.4% in value yesterday.

This is the condition of the developed world economies.  Governments and central banks are racing each other to reduce their currencies value against other country’s currencies for competitive reasons.

Is it any wonder that precious metals are pushing against resistance for higher highs?  Precious metals were lower this morning, but we don’t believe the “bubble” has popped.  There are too many politicians blowing hot air into the “bubble.”

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The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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