US Economy - Abandoning Treasurys for safer bets overseas

"US treasury bonds are not as safe a bet as the once were," said Michael Hasenstab, who manages the Templeton Global Bond Fund /quotes/comstock/10r!tpinx (TPINX 13.39, -0.08, -0.59%) . Countries that didn't have the massive amounts of leverage and indebtedness before the recession "are coming out of this a lot quicker and without the overhang and inhibitors the U.S. is experiencing."

Hasenstab and other bond investors have begun to question whether the U.S. Treasury bond market can still be called the safest investment in the world, as attention to Washington's growing deficit spending has come into sharper focus with the debt problems that are engulfing Greece, Portugal and Spain.

From Australia to Brazil, an emerging crop of nations that are in comparatively better fiscal shape are increasingly seen as a surer return on the investment.US

For more: Abandoning Treasurys for safer bets overseas - MarketWatch

Charlemagne: Financial fortress Europe

The rules of the euro zone—supposedly based on a Germanic vision of budgetary discipline and an independent European Central Bank (ECB)—are clearly in flux. The ECB started buying government bonds on the financial markets on May 10th: precisely the step urged on it by EU politicians and big banks. Allies of the ECB’s boss, Jean-Claude Trichet, insist he was reacting to market pressures, not assaults on his independence. But the episode caused angst in Germany, and beyond.
EU leaders agreed to a €60 billion facility controlled by the European Commission, funded by borrowing against the EU’s central budget, and so ultimately guaranteed by all 27 members of the EU. The legal basis was a bit of the Lisbon treaty that empowers the commission to send emergency money to countries hit by natural disasters or other “exceptional” crises. But leaders resisted a second, much more ambitious move by the commission: to use the same treaty clause to create a stabilisation fund of unlimited size that it would also control, this time borrowing against loan guarantees from national governments.
Instead, at the insistence of Germany and allies like the Netherlands and Finland, the largest part of the euro-zone defence system, a war chest of up to €440 billion, will be run as a “special purpose vehicle” controlled by national governments. It will not be controlled by the commission, and will issue money only under tough conditions set by the IMF.
For more: Charlemagne: Financial fortress Europe | The Economist

Clegg's in my 'inner circle' now, says Cameron, as he calls coalition a 'progressive alliance'

David Cameron proclaimed himself to be a 'Liberal Conservative' at the helm of a 'progressive alliance' today as he defended his coalition with the Lib Dems.

The Prime Minister borrowed the description Labour had touted as they tried to secure a deal with Nick Clegg's party before it collapsed, forcing him to side with the Tories.

He also insisted that the arrangement was not simply a marriage of convenience between the Conservatives and Lib Dems.

For more: Clegg's in my 'inner circle' now, says Cameron, as he calls coalition a 'progressive alliance' | Mail Online

U.S. Economy Needs Wall St. Reform Bill

America needs Wall Street. The US economic dynamism is directly connected to the ability of the Wall Street investment houses to pool together money and invest in Main Street businesses throughout the country. But over the last decade, Wall Street has diverted from this traditional mission and has focused more of its energy on a growing speculative casino-like market that added no real value to the overall economy. The US Congress needs to reset the rules of the market to rein in the casino and reorient Wall Street back to the traditional investment activities that make it so indispensible to the free market economy.

For the complete report: U.S. Economy Needs Wall St. Reform Bill | Hartford Business

'Europe Must Lay a New Foundation for the Euro'

On Wednesday, the European Commission presented a proposal for tighter rules to keep euro-zone members within strict debt and deficit limits and help prevent another crisis like the one in Greece. The Commission wants euro-zone governments to coordinate their budget policies with other members in advance, to prevent overspending. The proposal, which could mean autonomous nations have less control over their own economies, may see finance ministers discussing budget plans with other EU members before they present them to their own national parliaments.

"Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension, that they don't put at risk the stability of the other member states," European Commissioner for Economic and Monetary Affairs Olli Rehn said in a statement.

The plan also calls for the creation of a permanent mechanism for providing financial assistance to cash-strapped euro-zone members. Such a mechanism could eventually replace the €750 billion package that EU finance ministers agreed on earlier this week, European Commission President Jose Manuel Barroso said.

For more:The World from Berlin: 'Europe Must Lay a New Foundation for the Euro' - SPIEGEL ONLINE - News - International

The crooks who control the financial community: Exclusive: Waddell is mystery trader in market plunge

A big mystery seller of futures contracts during the market meltdown last week was not a hedge fund or a high-frequency trader as many have suspected, but money manager Waddell & Reed Financial Inc, according to a document obtained by Reuters. Regulators and exchange officials quickly focused on Waddell's sale of 75,000 e-mini contracts, which the document said "superficially appeared to be anomalous activity."

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said in congressional testimony on Tuesday that it had found one sale that was responsible for about 9 percent of the volume in e-minis during the sell-off in the U.S. markets. Gensler said there was no suggestion that the trader, whom he did not identify, did anything wrong in only entering orders to sell. Gensler said data showed that the trades appeared to be part of a bona fide hedging strategy.

Note EU-Digest: so far nothing but talk on regulation. When is this kind of financial manipulation affecting the stability of currencies and Governments going to end. Someone should put these crooks in jail.

For the complete report: Exclusive: Waddell is mystery trader in market plunge | Reuters

US faces same problems as Greece, says Bank of England – Telegraph Blogs

Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive. Just two of the nuggets from one of the most extraordinary press conferences.

Within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work. But if that is to happen there needs to be also a mechanism to enable other countries that have lost competitiveness to regain competitiveness. That requires actions, probably structural reforms, changes in wages and prices, in the countries that need to regain competitiveness. But it also needs a solid and expansionary state of domestic demand in the stronger economies in Europe.

For more: US faces same problems as Greece, says Bank of England – Telegraph Blogs

Europe's single currency down, but not out

European Central Bank (ECB) President Jean-Claude Trichet isn't sugar-coating the issue. In an interview with the German magazine Der Spiegel, he said that Europe is in the most difficult situation since the Second World War, possibly even the First World War. Despite the dire straits, however, Trichet sees a way out of the crisis.
"What we need is a quantum leap in mutual surveillance of economic policies in Europe," Trichet told Spiegel. "We need improved mechanisms to prevent and punish misconduct."
Part of the problem in the eurozone comes from countries ignoring the European Stability and Growth Pact, which sets a budget deficit limit of three percent of a country's gross domestic product (GDP).

For more: Europe's single currency down, but not out | Europe | Deutsche Welle | 15.05.2010

IMF - US faces one of biggest budget crunches in world

America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.

For more: US faces one of biggest budget crunches in world – IMF – Telegraph Blogs

Dutch Liberals take polls lead ahead of elections

The Dutch Liberals (VVD) have taken the lead in two new polls ahead of June 9th parliamentary elections, the first time they have led an electoral poll since losing government and the first sign that the Labour Party (PvdA) may not cruise to victory.

The government fell on February 20th in a dispute over the future of the Dutch mission in Afghanistan.

The TNS-NIPO poll put the Liberals on 30 seats, compared with 29 for the Labour Party and 22 for the Christian Democrats of prime minister Jan Peter Balkenende.

For more: Dutch Liberals take polls lead ahead of elections - The Irish Times - Thu, May 13, 201

U.S. trade deficit at 15-month high

Americans spent $40.4 billion US more on imported goods than they earned in exports in March, the U.S. Commerce Department reported Wednesday. Economists saw the 2.5 per cent increase in the trade deficit — to a 15-month high — as a sign of a rebounding economy and rising demand.

The White House has been facing growing political pressure to impose trade sanctions on China if Beijing doesn't allow its currency to rise in value against the dollar. Treasury Secretary Timothy Geithner was expected to raise the issue when he and Secretary of State Hillary Clinton go to China for two days of high-level talks later this month.

U.S. exports should be helped by a strengthening global economy, but the question is how the debt crisis in the 16 countries of the eurozone — which buy 15 per cent of American exports — will affect trade.

The White House has been facing growing political pressure to impose trade sanctions on China if Beijing doesn't allow its currency to rise in value against the dollar. Treasury Secretary Timothy Geithner was expected to raise the issue when he and Secretary of State Hillary Clinton go to China for two days of high-level talks later this month. U.S. exports should be helped by a strengthening global economy, but the question is how the debt crisis in the 16 countries of the eurozone — which buy 15 per cent of American exports — will affect trade.

CBC News - Money - U.S. trade deficit at 15-month high

The second debt storm hits nations

The debt mountain that brought down some of the world's biggest banks and dragged the international financial system to the brink of disaster has simply shifted to governments. Now it's threatening countries around the globe -- and, if left unchecked, could rip the very fabric of Europe's economic system and wreck economic recoveries in the U.S., China and Latin America.

The impact on markets has been severe. The euro has slumped more than 12% against the dollar since the sovereign-debt crisis flared in southern Europe. Gold has marched to new highs as investors seek a safe haven and, perhaps most alarming, it is now more expensive to buy insurance against national default than it is to insure against corporate failure. "The sovereign-debt crisis spun out of control in the past week, and we see no easy way to resolve it," said Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research.

Some investors and analysts are increasingly concerned that governments may be no more capable of repaying their debts than the banks and insurance companies they saved. And, they warn, if a major country comes close to default, it could trigger a financial meltdown that would eclipse the panic that followed the bankruptcy of Lehman Brothers in 2008.

"Even though the current epicenter of the crisis is focused on the euro zone, the overall fiscal position of the single currency area is stronger than that of the U.S., the U.K. and Japan", said Xerion's Arbess of Perella Weinberg Partners.

For more: The second debt storm hits nations - MarketWatch

Greek Debt Crisis: Bond Vigilantes Attack the Weak Link of the Eurozone - DailyFinance

As the past week's tumultuous and disconcerting events on Wall Street demonstrated, the fate of Greece is indeed relevant to not only the health of Europe's economy but also the U.S. economy, due to the financial ripples and shock waves that could result if policymakers fail to address the Greek situation correctly. The decline and fall of financial giants Bear Stearns and Lehman Brothers, although without question rooted in their dubious, high-risk business practices and extremely overleveraged positions, were nonetheless accelerated by today's bond vigilantes. In the recent financial crisis, bond vigilantes shorted the now-infamous subprime mortgage-backed securities, many of which were vastly overvalued based on the false assumption that the subprime borrower category would have low default rates.

Now, the bond vigilantes are selling and shorting -- and in some cases, refusing to "roll over" -- investments in sovereign debt: the bonds issued by the debt-plagued governments of Greece, Portugal and Spain, among others. And that's weighing on investor confidence and roiling the markets.

The problem with the "leave the euro" solution is that it by no means is cost-free or ripple-free. Creating new, softer currencies that are by their very nature worth less than the euro implies that those banks and institutions that lent money to Greece, Portugal and Spain are probably going to paid back in currencies that are worth less -- thus decreasing the value of the investments. Lenders and investors want their money returned in hard currencies -- euros, dollars, pounds, Swiss francs or yen -- not in currencies worth slightly more than gum wrappers. Hence, any "leave the euro" plan would almost certainly send another shock wave through the world's stock and bond markets as they reacted to the likelihood of investments in those troubled countries losing value.

For more: Greek Debt Crisis: Bond Vigilantes Attack the Weak Link of the Eurozone - DailyFinance

Britain's New PM Faces Deep Divisions In Coalition : NPR

At their first Cabinet meeting Thursday, Cameron and his deputy, Liberal Democratic leader Nick Clegg, sought to demonstrate their unity by imposing a 5 percent salary cut on themselves and their ministers.

The cut also signaled their determination to deal with Britain's record budget deficit, a process that could mean much economic pain for the British public and a huge challenge for the ruling coalition formed earlier this week after intense post-election negotiations.

For more: Britain's New PM Faces Deep Divisions In Coalition : NPR

Europe Ahead: ECB Publishes Monthly Report While Trade Gap to Widen in UK , Top Story - ecPulse.com

The European Central Bank (ECB) is going to release their monthly report, where the central bank releases a statement that explains why the bank decided to leave interest rates steady at 1.00%. Also, the ECB will explain the current situation while giving out some futuristic expectations for the euro zone over the medium term.

The bulletin will have no surprises for market, as it will reveal that the current interest rate of 1.00% is appropriate while conditions are stabilizing in the economy. Concerning inflation rates, officials will mention that there are low inflationary pressures over the medium term, yet are inline with the central bank expectations.

Consumption is tight in euro zone after the cold weather had forced consumers to remain at home alongside the mounting job losses as unemployment is currently standing at 10.0% which is another factor weighing on spending levels, although economic data has been pointing to the fact that conditions are improving.

For more: Europe Ahead: ECB Publishes Monthly Report While Trade Gap to Widen in UK , Top Story - ecPulse.com

Spain cuts salaries as EU seeks to curb future crises

Europe moved Wednesday to curb future financial crises, with Spain announcing big public sector wage cuts and market sentiment buoyed by positive growth figures as several states shook off recession.

The European Commission, responding to a Greek debt debacle partially reflecting its own weak oversight, called on European governments to submit their national budgets to the EU for "peer review" before presentation to national parliaments.

"An early peer review of fiscal policies would help shape a fiscal stance for the EU and the euro area as a whole," a commission statement said.

For more: AFP: Spain cuts salaries as EU seeks to curb future crises

Europe’s Economy Grows at Faster Pace Than Forecast - by Simone Meier

Europe’s economy expanded at a faster pace than economists forecast in the first quarter as a global recovery boosted exports, helping the region overcome the Greek fiscal crisis and consumers’ reluctance to increase spending.

Gross domestic product in the 16 euro nations rose 0.2 percent from the fourth quarter, when it remained unchanged, the European Union’s statistics office in Luxembourg said today. Economists had forecast growth of 0.1 percent, the median of 31 estimates in a Bloomberg survey showed. Industrial production gained 1.3 percent in March from February, when it rose 0.7 percent, a separate report showed.

The euro-area economy may gather strength after European leaders earlier this week pledged a rescue package worth almost $1 trillion to counter a spreading Greek debt crisis and restore confidence. Concern about governments’ ability to tackle their deficits has pushed down the euro 11 percent against the dollar this year, helping bolster the region’s export-led recovery.

For more: BusinessWeek

Ash Disruption Eases as Europe Prepares for Holiday Travel Rush - BusinessWeek

Flight disruption from volcanic ash eased as the Icelandic eruption diminished and winds blew the dust cloud away from the region, suggesting one of Europe’s busiest weekends for travel may be free from airport closures.

While particles spewed from the Eyjafjallajökull volcano earlier this week are still affecting Spain, fresh ash is being carried east and north, away from European airspace, said Helga Ivarsdottir, a meteorologist at the Icelandic Met Office.

“Europe should be able to relax over the weekend, with the exception of the Faroe Islands and Scotland, which have to be on guard,” she said in a telephone interview. “The ash released in the past few days is now far south of Iceland and that could have an impact on air traffic, but as time passes the cloud gets thinner and is therefore of less concern for airlines.”

For more: Ash Disruption Eases as Europe Prepares for Holiday Travel Rush - BusinessWeek

Liberals will constrain Tories in British coalition

Details of the Conservative-Liberal Democrat coalition government are beginning to emerge. Here is a guide to the key cabinet posts confirmed so far.

For more: BBC News - Liberals will constrain Tories in British coalition

Nick Clegg's Britain -

By the time you read this, Nick Clegg may be Deputy Prime Minister of the U.K.—a heady achievement for the leader of a party that's been out of power almost continuously since David Lloyd George sent the Liberals into the wilderness in 1918. But the simplest way to understand that century of futility is that the Liberals, and now the Liberal Democrats, long ago ceased to represent the mainstream of British politics. Now that they've achieved a share of power, the question is what they'll do with it.

Mr. Clegg's Liberal Democrats have made electoral reform the centerpiece of their push for a share of the next British government. But it's hard to imagine a worse advertisement for their preferred electoral system—proportional representation—than the recent negotiations over the outcome of last week's vote.

the Liberal Democrats argue that this outcome understates their support among the electorate—in Thursday's balloting they captured 23% of the vote, compared to the Labour Party's 29% and the Conservatives' 36%. So, dissatisfied with what David Cameron's Tories offered over the weekend, Mr. Clegg on Monday turned to Gordon Brown and Labour, which lost 91 seats in the election, in an attempt to form what one Labour MP aptly described as a coalition of the defeated (the Lib Dems also lost seats in the election).

For more: Nick Clegg's Britain - WSJ.com