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Home » Online Forex Trading Blog » EU and US at Ratings Crossroads

EU and US at Ratings Crossroads


In baseball parlance, the EU is trailing the ratings agencies in the bottom half of the last inning while the U.S. is into extra innings with the rating agencies’ Mighty Casey at the plate. The rating agencies’ message to Washington and the EU is consistent. On Main Street, it is time to put up or shut up.

Washington has the ability to avoid default but the uncompromising Tea Party enjoys playing Russian Roulette with the taxpayer’s money and best interests. In the U.S. this crisis has been looming ever since 60 Tea Party freshmen joined the Republican caucus in January. What Tea Party members, like Eric Cantor, do not understand is that they were elected to trim government and pare spending but not immediately and not at the expense of the country’s proud AAA credit rating.

Despite Republican claims, the credit agencies have made it clear that to miss or delay the August 2nd round of payments would constitute a reduction in the credit rating for the world’s biggest and proudest economy. The results will crush the needy and those serving abroad.

President Obama has given Congress until Friday to bring him an acceptable spending reduction plan that precludes an increase in the nation’s debt ceiling. The Washington political environment looks like one of those old Clint Eastwood westerns with dubbed Spanish, except understanding the dubbed movies is easier than comprehending what the Tea Party is attempting to accomplish.

In Europe, the stakes are high after details of the latest banking stress tests revealed that only eight of 90 banks tested failed. The results of the tests are downplayed by both credit agencies and investors. The 2010 stress have been doubted ever since all Ireland banks passed in good standing. The banks that failed the 2011 European Banking Agency (EBA) stress tests reflected a shortfall of 2.5 billion euros or $3.54 billion.

However, analysts suggest the euro zone banks are much deeper in the hole than the stress tests reveal. The EBA has nominal authority over the euro zone banks. In fact, one German bank refused to participate. In any case, the stress tests do not reflect the bank’s exposure to foreign debt.

For example, Greece which may well enter default status first, has 100 billion euros in sovereign debt. 66% is held by Greece while 9 percent is held by German banks and 8 percent by French banks. Additionally, Greece has billions of euros in non-sovereign debt with which French banks have tremendous exposure.

The European Central Bank (ECB) is opposed to default and has delivered its message to euro zone governments. Chairman Trichet stated that it will not accept defaulted bonds as collateral and that actions to prevent defaults must be burdened by the zone banks.

A meeting to pre-approve actions to prevent Greece’s default are scheduled for this Thursday. German Chancellor Angela Merkel, who is in the opposition’s crosshairs at home, says she will not attend unless all terms are agreed upon before that time.

Germany’s largest bank, Deutsche Bank is generally regarded as the most stalwart bank in western Europe. However, has a mere 50 billion euros to support 1.7 trillion euros in assets.

How Did It Happen?

One of the contributing factors to the euro’s slide is the culture of non-transparency and secrets surrounding all European banks. It is tough to teach an old dog new tricks. This scenario is leaving Europe’s general population dazed.

The failure of the PIIGs, Portugal, Italy, Ireland, Greece and Spain was predicted more than a year ago. These countries ran exorbitant debt to GDP ratios and when the real estate market began to falter banks and consumers were caught short, the revenues for the countries had no way to recover.

Spain has the largest real estate losses. Loose lending practices were prevalent throughout the region, but especially concentrated in Spain, where real estate transactions were being consummated like the failed Countrywide Financial Corp. model. Spain’s real estate situation is worse than the continued U.S. housing slump. Ireland’s banks are in the same condition. The difference between the PIIGs and the U.S. is that the PIIGs do not have the ability to create quantitative easing, nor any stimulus package to bailout banks.

In desperate attempts to solve their own deficit problems, Italy has approved a series of austerity cutbacks and upgraded their revenue collection policies. The first round of cuts is expected in 2013. There is a lot to like about Italy’s approach to rescue their deficit. Higher taxes on petrol, road usage, and privatization of certain state-run utilities will bring some relief. A sense that it is too little, too late permeates Italy.

The condition of the PIIGS appears to be in gradual decline. At stake is the entire concept of the single currency. Germany taxpayers have no stomach for more German capital being used to bailout other country’s irresponsible spending sprees. Along with the single currency issue, Chancellor Merkel’s leadership is in question.

The EU and U.S.

While the euro appears to have insurmountable objects ahead, it is holding value compared to the U.S. dollar. Had Obama’s $4.6 trillion spending cuts and modest revenue increases been approved, the dollar would be back on solid footing.

Everyday The Tea Party restrains plans that taxpayers approve, the Tea Party is fast becoming Lehman Brothers and Eric Cantor plays the role of Dick Fauld to perfection.

The United States has no credible reason to default on its obligations. The politically motivated Tea Party has no valid reason to endanger the country’s credit rating, which will cost billions in increased interest rates and hundreds of thousands of lost jobs. Tea Partiers should be prepared for dire circumstances. In recent polling, 71 percent of Americans blame Republicans for the debt ceiling crisis.

If the debt ceiling is not increased, all members of the House and Senate should be the first persons not to receive funds and their war chests should be distributed to seniors and the needy instead of for their hefty benefits and unneeded staff members.


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About the Author -

Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses. Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.

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