Epsilon capital management’s first quarter european economic round
Epsilon Capital Management’sFirst Quarter European Economic Round Up http://www.prlog.org/11865410-epsilon- capital-managements-first-quarter- european-economic-round-up.html
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PRLog (Press Release) - May 03, 2012 -This is Epsilon Capital Management’s 4 PartSeries on the European Economy for the first quarter of 2012.
The first quarter of 2012 witnessed several comforting developments in Europe. Greece fulfilled the pre-condition for securing its secondbailout by convincing its private creditors to accept a 53.5% write-off on its debt.
The deal eased concerns about a disorderlydefault by Greece on its sovereign debt. Following up on the liquidity-infusing program it introduced late last year, the European Central Bank (ECB) carried out another round of its Long-Term Refinancing Operation (LTRO), this time handing out to about 800 banks a total of €529.5 billion in 3-year loans at a very low interest rate of 1%.
The move reduced not just the possibility of a financial contagion from Europe in the event of a sovereign default, but also the volatility in the continent’s bond market. Many of the banks thattook the cheap ECB loans promptly increased their purchases of higher-yielding government bonds, which brought down, albeit temporarily, the borrowing costs of highly indebted countries such as Spain and Italy.
The Euro-zone rescue fund also received a boost during the first quarter. To remain equipped tohandle any future bailouts, finance ministers of the single-currency bloc raised the total value of their financial firewall from the current €500 billion to €700 billion.
On the political front, 25 of the 27 European Union(EU) members signed a treaty or “fiscal compact” in early March to enhance the level of budgetdiscipline within the economic bloc. Since the U.K. and the Czech Republic stayed away, the accord took the shape of an inter-governmental agreement and not an EU treaty.
The fiscal compact, which must be ratified by 12 Euro-zone member states to take effect, aims to improve confidence in the euro by facilitatingbudget coordination among members as well as byimposing penalties on those who break fiscal rules.
These positive developments did cause brief spells of optimism but failed to assuage the global financial community completely as investors seemed to sense new threats on the horizon toward the end of the quarter.
Their concerns shifted from Greece to other highly indebted countries in the region — chiefly Spain and others such as Italy and Ireland. Although itsrecord-high unemployment rate and the weaknessin its banking system are well-documented, Spain triggered a new wave of worries after announcing its budget for this year.
Spain’s budget contained a slew of measures tosave €27 billion and turned out to be what the BBCdescribed as one of the harshest austerity drives in the country’s history. But far from impressing, it sparked off worries that such frequent andstringent austerity steps may crimp not just growthbut also the government’s ability to reduce its debt,and eventually force the country to seek a bailout.
According to several newspaper articles published in early April, the bigger question on investors’ minds seemed to be whether the Euro-zone wascapable of bailing out an economy as big as Spain.