Will the Euro collapse, or will the global investment community switch its attention to the plight of the USA? Will there be warnings versus the dollar and the impending $15.5 trillion of US debt? Will the Euro be allowed to collapse given the monumental effort that’s been undertaken by the E.U. to create such a massive project? Surely it will continue to be worth more than the dollar if and when the Eurozone debt is under control and the budget to GDP deficit is finally back under 3% in all Eurozone counties?
The united states of Europe, united under a common fiscal policy and moving towards political unity, with the Euro finally replacing the dollar as a world reserve currency, is not written into the agenda of the right wing Neo Con’s in the USA. On current trajectory US debt, under whichever leadership the voters choose in 2012, could reach $20 trillion by 2015, at circa $15.5 trillion it is already circa 400% bigger than the combined Eurozone debt with less population. Individual states such as California, the eight largest economy on the planet are already bankrupt and yet the continued focus is on the Eurozone..Something is not quite ‘adding up’..
Japanese bank Nomura have published the first “what if” note to the financial and investment community. Released on Friday it’s already caused quite a stir given it discusses the practical issues regarding the potential destruction of the currency. The Wall Street Journal, not noted for its pro European stance, was first to print. The risk that the euro could break up is now so pressing that Nomura Holdings is advising investors to check the small print on their bonds, as legal frameworks may determine whether the assets stay in euros, or switch into “new” currencies that are expected to rapidly depreciate. The Japanese bank’s report, released on Friday, is the first major practical study of what a splintering of the 17-country currency would be like for investors.
“Breakup risk is for real,” said Jens Nordvig, senior currencies analyst for Nomura in New York and author of the 12-page paper. The report focuses on Greece, urging investors to “pay close attention to the redenomination risk of various assets” and whether the euro-area bonds or other instruments they currently hold are issued under English law, or local law.
Bonds issued under local law, such as Greek law, would be converted from euros into a new local currency a blow to any investors left holding the paper. “New” currencies, such as a new drachma, could rapidly fall in value by as much as 50%. Foreign-law debt would be more likely to remain in euros, assuming a smaller euro still existed at all, the bank said. If the euro finishes contracts would likely be redenominated into the currencies tied to their base country, or settled in a new European Currency Unit. In the most likely scenario, each currency would be linked to the ECU, as they were before the euro’s birth in 1999.
“The immediate conclusion from an investor perspective should be that assets issued under local law should trade at a discount to foreign-law obligations, given the greater redenomination risk for local-law instruments,” the bank said. The Institute of International Finance, a Washington-based international bank lobby group that is negotiating for Greece’s private creditors, insists that any new bonds issued by Greece to replace outstanding bonds as part of the push to involve the private sector in a restructuring, must be issued under English law. Even debt issued in Germany, the common currency’s biggest and safest economy, would be split into local and international piles if the euro were to crumble, but those investors would have a different problem than holders of other euro-zone debt. A reintroduced German Deutsche mark would almost certainly rocket higher. Germany would therefore have an incentive to keep its outstanding debt in euros, or a new equivalent to euros, to keep a lid on its debt repayment costs.
Much depends on whether a country’s decision to leave the euro were deemed illegal in itself. Greece could also decide to pay investors back significantly less than they are owed on foreign-law bonds, or default on them altogether.
USA Dollar Flight
Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency. Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 6.7 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.
Foreign demand for U.S. assets rose the most in 10 months in September. Net buying of long-term equities, notes and bonds totaled $68.6 billion, the highest since November 2010, compared with net buying of $58 billion in August, the Treasury Department said Nov. 16.
The dollar is up 6.5 percent in the past three months, recovering to about level this year with its nine peers, which include the Swedish krona and the Swiss franc. It’s trading about 4 percent below where it was in 1975, two years after President Richard Nixon ended the currency’s official ties to gold. The U.S. currency rose 1.7 percent to $1.3525 per euro in the five days ended Nov. 18, gaining for a third week in a row. It fell 0.4 percent to 76.91 yen. The greenback traded at $1.3522 per euro and 76.83 yen as of 2:35 p.m. in Tokyo today.
The dollar has been the world’s reserve currency since World War II, when the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. After global currencies began freely floating in 1973, it has remained the most-traded legal tender, accounting for 85 percent of the $4 trillion per day foreign exchange market, according to the BIS. Its share of foreign-exchange holdings has held steady at 61.6 percent since 2009 after peaking at 72.7 percent in 2001. The euro has stabilized at an average of 26.6 percent of reserves since 2007, up from 18 percent at its inception in 1999.
The MSCI All Country World Index sank 0.6 percent at 8:03 a.m. in London, set for its first six-day slump since August. S&P 500 futures declined 0.8 percent and Treasuries advanced. The yen strengthened against all 16 major peers, the dollar rose 0.4 percent to $1.3476 per euro and Malaysia’s ringgit lost 0.5 percent. Copper and oil retreated a third day.
The Stoxx Europe 600 Index sank 1.9 percent, extending last week’s 3.7 percent decline, as more than 40 stocks dropped for every one that rose. All 19 industries in the benchmark measure retreated more than 1 percent, with the gauge for mining stocks falling 3.3 percent. The euro depreciated 0.6 percent versus the yen, while the Japanese currency rose against all its major counterparts. The Dollar Index, which tracks the currency against those of six U.S. trading partners, snapped a two-day decline. The Australian dollar slumped 0.9 percent against the greenback, and slid 1 percent versus the yen. Copper sank 2.3 percent, zinc tumbled 1.9 percent and lead retreated 1.7 percent. West Texas Intermediate oil for January delivery slid 1.5 percent to $96.21 a barrel in New York
Japanese exports dropped more than forecast in October, Singapore said its growth may slow to 1 percent next year and China signalled the global economy faces an extended slide.
The reports may raise pressure on policy makers in export- reliant Asia to implement further stimulus measures. A record of the Bank of Japan’s Oct. 27 meeting today showed one board member favoured adding 10 trillion yen ($130 billion) in asset purchases, and Chinese Vice Premier Wang Qishan said his nation must adopt more “forward looking” and flexible monetary policy. Japan’s finance ministry reported today that shipments abroad fell 3.7 percent in October from a year before, the first drop in three months and an indication the nation’s rebound from the record March earthquake will slow.
Market snapshot at 10:30 am gmt (UK time)
The Nikkei index closed down 0.32%, the Hang Seng closed down 1.44% and the CSI closed up 0.12%. The ASX 200 closed down 0.34%. The STOXX index is currently down 2.38%, the UK FTSE is down 2.02%, the CAC is down 2.27% and the DAX is down 2.38%. The MIB is down 2.71% and the Athens exchange is down 2.88%, down 54% year on year. The British pound has lost its two days of gains versus its U.S. counterpart, falling 0.7 percent to $1.5700. It was little changed at 85.67 pence against the euro. The yen strengthened 0.6 percent to 103.40 per euro at 8:38 a.m. London time, adding to last week’s 2 percent gain. Japan’s currency climbed 0.1 percent to 76.81 against the dollar. The euro weakened 0.5 percent to $1.3462.
Economic calendar releases that may affect the afternoon session sentiment
15:00 US – Existing Home Sales October
This reports sales of previously owned homes in the US. The headline figure is the total value of properties sold. A survey of economists by Bloomberg shows a median forecast of 4.8 million as compared with the 4.91 million that was reported in the previous release. The month on month change predicted was -2.2% from -3.0% previously.