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I have been an active trader and investor for more than 10 years, having traded financial instruments ranging from options to futures. I tend to focus on undiscovered companies that have exceptional value on their balance sheets, but lack coverage by traditional news and media sources. I built... More
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  • EU Scares Market into Support of Failing States 2 comments
    May 10, 2010 4:33 PM | about stocks: EUO

    The European Union announced an unprecedented $962 billion bailout package that will provided to support failing European states, purchase government and private bonds, and possibly to support the euro as a currency in the foreign exchange market. As a result, the EU has effectively scared the markets into supporting its failing states, according to some analysts.

    These actions led to a predictable rise in the value of the euro, lower bond yields, and higher European equity prices as bears and short-sellers scrambled to exit and cover their positions. Short sellers bet on the decline in the value of a security by borrowing and selling it immediately while promising to buy it back in the future – ideally at a lower price.

    The EUR/USD currency pair surged past 1.30 during the overnight Asian session, while futures in the U.S. are pointing to a 400 point rise at open. Meanwhile, Greece and Portugal spreads against the German bund have dropped significantly, returning to more normalized levels and the cost of insurance against default for many euro zone nations has become relatively cheap.

    The EU’s bailout package is large enough to cover Spain’s and Portugal’s gross issuance of public debt for the next two to three years, which removes near-term pressure to dramatically cut spending. As a result, bets on near-term defaults have been virtually wiped out and concerns about the euro zone breaking up have been eliminated for now.

    However, many economists are concerned that the EU may simply be delaying their budget and spending problems.

    “Like taking an ecstasy pill, the EU’s bailout has made things seem great in the near-term,” said Mark Taylor, a European risk analyst. “Unfortunately, greater problems could lie on the horizon, unless real changes are implemented; and with slow economic growth and a population accustomed to a heavy state spending, that could prove very difficult.”

    How long the high will last depends largely on the private sector’s ability to resume economic growth, according to many economists. If successful, it could be decades before another day of reckoning, but if not, Europe could find itself in the same situation in the nearer term. In the meantime, investors can expect a sharp rise in the EU as bears are scared off… for now.

    Disclosure: No positions
    Stocks: EUO
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  • Stone Fox Capital
    , contributor
    Comments (10069) | Send Message
    Possibly, but i don't think Spain deserved to have its debt get blown out like that. They aren't anywhere near as bad as Greece.
    10 May 2010, 04:58 PM Reply Like
  • Simon Monger
    , contributor
    Comments (21) | Send Message
    Author’s reply » In 2009, Spain's debt-to-GDP was close to 50% compared to Greece's 108%, according to the CIA's data. Of course, the possibility of default is therefore sharply lower. My point in mentioning Spain here was moreso to demonstrate the size of the bailout package.


    However, my main point in this article and others is to highlight the fact that the euro may not be sustainable in general. This is the first major recession that the euro has faced since its inception in 1999 and the inability for individual countries - which vary widely in terms of economic success - to control their monetary policy is causing major riffs.
    11 May 2010, 11:09 AM Reply Like
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