Friday, October 28, 2011

UDPATED: SCROLL DOWN - Eurozone far from saved - in fact it failed its first test!

Wednesday night's European summit was, well, a very European summit. It lasted forever, included several dramatic moments, ended in the wee hours of the morning and delivered a highly complex result. Yet, the questions that Americans might now ask are quite simple: Has this leaders' conclave succeeded in stopping the spread of the "contagion" from the eurozone's sovereign debt crisis? Will the European financial disease reach America's shores and affect local jobs and livelihoods? The answer may seem somewhat paradoxical: While the Europeans have made strides to beat the virus, this crisis is anything but over.

Italy saw its borrowing costs rise to a euro-era high on Friday in a sale of euro7.9 billion ($11.09 billion) in government debt, a sign that investors remain nervous about the country's prospects despite a grand European plan to fight the debt crisis.

The interest rate demanded by investors to lend the Italian government 10-year money topped 6 percent in Friday's auction, the highest level since the launch of the euro, and surpassing the 5.86 percent paid in a similar debt auction a month ago. Demand exceeded the amount on offer 1.27 times, a relatively weak outcome.

The auction was the first test of investor confidence in Italy since European leaders agreed to boost an emergency bailout fund, get banks to take a loss on their Greek debt holdings and recapitalize European banks. Premier Silvio Berlusconi promised the EU new measures to promote growth in Italy, necessary to help cut the country's public debt, at 120 percent of GDP the second-highest in the eurozone.

Despite those measures, which seek to keep Italy from having to ask for a bailout, investors remained wary of buying the country's debt.


There are several things that you need to know about the eurozone crisis and Wednesday’s Summit agreement:

It isn’t over.
  1. The European Monetary Union’s (EMU) “architecture” is a failure.
  2. They spent too much and can’t possibly repay the debt.
  3. Banks will need to be bailed out.
  4. They will print money.

UPDATE: Euphoria may fade under debt deal scrutiny
EUROPEAN leaders may struggle to maintain the euphoria that drove the euro to its biggest one-day gain in more than a year as scrutiny deepens on their latest attempt to stem the region’s turmoil.

The weaknesses of Europe’s common currency area, ranging from its design to a persisting dearth of bank funding and anaemic economic growth, were not properly addressed in the measures revealed on Thursday to stem investor panic, said Harvard University economist Kenneth Rogoff and Jonathan Loynes at Capital Economics.

"My read of this is that the markets are cheered that they’re still alive," Rogoff — a former IMF chief economist — said as a compensated speaker at the Bloomberg FX11 Summit in New York on Thursday.

"Even in a fairly short period, doubts will start to grow again."

Fear made a swift return to the eurozone yesterday as Italy faced record borrowing costs in its first attempt to tap the markets since European leaders came up with new plans to rein in the sovereign debt crisis.

The lack of confidence in their proposals was laid bare when Rome would was forced to pay interest rates of more than 6 per cent to borrow money for 10 years by selling new bonds. The rate – the highest for new 10- year bonds since the country adopted the single currency – reignited concerns about Europe's ability to deal with the crisis as it threatened to spread to countries that are seen as too big to bail out.


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