Archive for April, 2010

US 2010 Q1 GDP @ 3.2%

Friday, April 30th, 2010

US GDP rose at annualized rate of 3.2% in the first quarter of 2010, preliminary setting the platform for the third consecutive quarter of growth, the Commerce Department reported today. Economists had expected GDP to increase by 3.4% for the Q1′s advanced estimate. Final revisions to Q4′s economic activity of 2009 indicated a 5.6% growth rate.

The smaller gain for the first estimate of economic growth in Q1 (compared to Q4) was comprised of advances in consumer spending offset by decelerations in investments and trade.

Coming off of its largest growth rate since Q1 of 1984, total private domestic investment increased by just 14.1% in the first quarter of 2010 (was 46.1% for Q4). This resulted in a contribution of 1.67 percentage points (pp)to GDP. Within fixed investments (rising only 0.7% after a 5.0% gain in the prior quarter), money spent on equipment and software fell from a gain of 19.0% to one of 13.4%. Nonresidential investments (rising 4.1% over the quarter) added 0.38pp to GDP, whereas residential investments subtracted 0.29pp after falling 10.9% in Q1.

Net exports of goods and services ate 0.61 pp away from GDP, after exports rose roughly a quarter of its growth from Q4 of 2009 (current 5.8% gain vs. 22.8%) and imports rose 8.9%. Correspondingly, the 0.66pp contribution from exports was washed by the 1.28pp imports subtracted from GDP. Exports of goods dipped over the month, rising 6.7% (had risen 34.1%) and imports of services rose into positive territory, from a decline of 1.9% to a gain of 8.7%.

Consumer spending was the only component of GDP whose growth for the first quarter of this year was larger than its growth in Q4 of 2009. Rising by 3.6%, consumer spending added 2.55pp to GDP. This is personal consumption expenditure’s largest growth since the first quarter of 2007 and its largest contribution since the fourth quarter of 2006. Money spent on goods and services contributed to spending’s performance, rising by 6.2% and 1.4% respectively. Within goods, consumption of durables jumped from a 0.4% gain to a gain of 11.3%, adding 0.79pp to GDP. Spending on services added 1.15pp to GDP after last quarter’s contribution of 0.49pp.

Government spending and investments fell by 1.8% in Q1 — the second consecutive decline having fallen by 1.3% in Q4. This decline resulted in a reduction of 0.37pp from GDP.

Final sales of domestic goods grew 1.6% over the quarter.  Core PCE index, a measure of inflation, rose 0.6%, as expected, after rising 1.8% for Q4

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Italy Auction Calms Bond Market Fears

Thursday, April 29th, 2010

ITALY today went some way towards soothing concerns over contagion of Greece’s debt woes, successfully completing a key auction of two of its bonds. Italy, which has the deepest and most liquid bond market among non-core sovereign issuers, was the first among the periphery to auction paper after a flurry of ratings downgrades from Standard & Poor’s. The auctions of €6.5billion of Italian three-year and ten-year notes were both covered about 1.5 times, signalling strong investor demand for the debt despite the escalating crisis in Greece and recent credit rating downgrades for Portugal and Spain.

“The auction result dismisses investors’ fears over contagion effects on Italy,” UniCredit fixed income strategist Chiara Cremonesi said in a note.

It also confirms investors view that the better economic, fiscal and rating outlook for Italy puts it in a favourable positioning among the periphery group. Analyst expect Italy to continue benefiting from this favourable positioning over the next months. Italy’s bond auction came ahead of an even more crucial test for the Eurozone bond markets next week, as Spain attempts to get away a €3billion auction of its five-year debt in the wake of S & P’sdowngrading the country’s sovereign credit rating to AA on Wednesday. I still find a little difficult to understand why the rating agencies have taken so long when we knew the European countries were experiencing debt issues 10 years ago. It may have been a political motivator, but why now when economies are fragile?

Meanwhile, Portugal – which was downgraded to A– status by S&P on Tuesday yesterday announced plans to buy back some of its expiring bonds on 3 May, in a bold attempt to reassure investors that the country has the cash available to redeem its debt. Portugal plans to buy back €1billion worth of a €5.63billion bond expiring on 20 May, a move analysts described as “psychologically a good sign”. The country has conducted five auctions so far this year, buying back around €1.76bn in various maturities.

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External Debt By Countries

Thursday, April 29th, 2010

There are various measures of debt that a country may be compared against. The two most important measures of debt should be measured by against the gross domestic product (GDP) and the other element is by external debt. Today we’re focusing on the external debt of a country and then at later time, zero in on percentage of debt vs. GDP.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank.  Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy.

In this definition, IMF defines the key elements as follows; (a) Outstanding and Actual Current Liabilities: Here debt liabilities include arrears of both principal and interest. (b) Principal and Interest: When this cost is paid periodically, as commonly occurs, it is known as an interest payment. All other payments of economic value by the debtor to the creditor that reduce the principal amount outstanding are known as principal payments. However, the definition of external debt does not distinguish between whether the payments that are required are principal or interest, or both. Also, the definition does not specify that the timing of the future payments of principal and/or interest need be known for a liability to be classified as debt. (c) Residence: To qualify as external debt, the debt liabilities must be owed by a resident to a nonresident. (d) Current and Not Contingent: Contingent liabilities are not included in the definition of external debt. These are defined as arrangements under which one or more conditions must be fulfilled before a financial transaction takes place. However, from the viewpoint of understanding vulnerability, there is analytical interest in the potential impact of contingent liabilities on an economy and on particular institutional sectors, such as government.

Generally external debt is classified into four heads i.e. (1) public and publicly guaranteed debt, (2) private non-guaranteed credits, (3) central bank deposits, and (4) loans due to the IMF. However the exact treatment varies from country to country. For example, while Egypt maintains this four head classification, in India it is classified in seven heads i.e. (a) multilateral, (b) bilateral, (c) IMF loans, (d) Trade Credit, (e) Commercial Borrowings, (f) NRI Deposits,and (g) Rupee Debt. (h) NPR Debt

Sustainable debt is the level of debt which allows a debtor country to meet its current and future debt service obligations in full, without recourse to further debt relief or rescheduling, avoiding accumulation of arrears, while allowing an acceptable level of economic growth. World Bank and IMF hold that “a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.” According to these two institutions, external debt sustainability can be obtained by a country “by bringing the net present value (NPV) of external public debt down to about 150 percent of a country’s exports or 250 percent of a country’s revenues.” High external debt is believed to have harmful effects on an economy. For example Greece has approached unsustainable debt to meet it’s payment obligations. The reason is due to the bond market raising it’s rate to borrow making it almost impossible to borrow outside of Europe. No country that’s tied to the Euro Pact can print the Euro currency to pay off it’s obligations.

There are various indicators for determining a sustainable level of external debt. While each has its own advantage and peculiarity to deal with particular situations, there is no unanimous opinion amongst economists as to one sole indicator. These indicators are primarily in the nature of ratios i.e. comparison between two heads and the relation thereon and thus facilitate the policy makers in their external debt management exercise. These indicators can be thought of as measures of the country’s “solvency” in that they consider the stock of debt at certain time in relation to the country’s ability to generate resources to repay the outstanding balance.

Examples of debt burden indicators include the (a) debt to GDP ratio, (b) foreign debt to exports ratio, (c) government debt to current fiscal revenue ratio etc. This set of indicators also covers the structure of the outstanding debt including the (d) share of foreign debt, (e) short-term debt, and (f) concessional debt in the total debt stock.

A second set of indicators focuses on the short-term liquidity requirements of the country with respect to its debt service obligations. These indicators are not only useful early-warning signs of debt service problems, but also highlight the impact of the inter-temporal trade-offs arising from past borrowing decisions. Examples of liquidity monitoring indicators include the (a) debt service to GDP ratio, (b) foreign debt service to exports ratio, (c) government debt service to current fiscal revenue ratio etc. The final indicators are more forward looking as they point out how the debt burden will evolve over time, given the current stock of data and average interest rate. The dynamic ratios show how the debt burden ratios would change in the absence of repayments or new disbursements, indicating the stability of the debt burden. An example of a dynamic ratio is the ratio of the average interest rate on outstanding debt to the growth rate of nominal GDP.

Now onto the juicy stuff. I’ve provided a list countries in ranking order directly from the CIA website.

1. Ireland – 1,312%  -  External debt (as % of GDP): 1,312%   -  Gross external debt: $2.32 trillion   -  2009 GDP (est): $176.9 billion

2. United Kingdom – 425.9%  -  External debt (as % of GDP): 425.9%   -  Gross external debt: $9.15 trillion   -  2009 GDP (est): $2.15 trillion

3. Switzerland – 382.2%  -  External debt (as % of GDP): 382.2%   -  Gross external debt: $1.21 trillion (2009 Q3)  -  2009 GDP (est): $317 billion

4. Netherlands – 376.6%  -  External debt (as % of GDP): 376.6%   -  Gross external debt: $2.46 trillion (2009 Q3)   -  2009 GDP (est): $654.9 billion

5. Belgium – 328.7%  -  External debt (as % of GDP): 328.7%   -  Gross external debt: $1.25 trillion   -  2009 GDP (est): $381 billion

6. Denmark – 316%  -  External debt (as % of GDP): 316%   -  Gross external debt: $627.6 billion   -  2009 GDP (est): $198.6 billion

7. Sweden – 264.3%  -  External debt (as % of GDP): 264.3%   -  Gross external debt: $881.5 billion   -  2009 GDP (est): $333.5 billion

8. Austria – 256.2%  -  External debt (as % of GDP): 256.2%   -  Gross external debt: $827.9 billion   -  2009 GDP (est): $323.1 billion

9. France – 248%  -  External debt (as % of GDP): 248%   -  Gross external debt: $5.23 trillion (2009 Q3)  -  2009 GDP (est): $2.11 trillion

10. Portugal – 235.9%  -  External debt (as % of GDP): 235.9%   -  Gross external debt: $548.45 billion   -  2009 GDP (est): $232.4 billion

11. Hong Kong – 223.1%  -  External debt (as % of GDP): 223.1%   -  Gross external debt: $672.9 billion   -  2009 GDP (est): $301.6 billion

12. Finland – 220.2%  -  External debt (as % of GDP): 220.2%   -  Gross external debt: $402.24 billion   -  2009 GDP (est): $182.6 billion

13. Norway – 202.6%  -  External debt (as % of GDP): 202.6%   -  Gross external debt: $553.4 billion   -  2009 GDP (est): $273.1 billion

14. Spain – 186.1%  -  External debt (as % of GDP): 186.1%   -  Gross external debt: $2.55 trillion (2009 Q3)   -  2009 GDP (est): $1.37 trillion

15. Germany – 182.5%  -  External debt (as % of GDP): 182.5%   -  Gross external debt: $5.13 trillion   -  2009 GDP (est): $2.81 trillion

16. Greece – 170.5%  -  External debt (as % of GDP): 170.5%   -  Gross external debt: $581.68 billion   -  2009 GDP (est): $341 billion

17. Italy – 147.4%  -  External debt (as % of GDP): 147.4%   -  Gross external debt: $2.594 trillion (2009 Q3)   -  2009 GDP (est): $1.76 trillion

18. Australia - 124.3%  -  External debt (as % of GDP): 124.3%   -  Gross external debt: $1.025 trillion (2009 Q2)   -  2009 GDP (est): $824.3 billion

19. Hungary – 121.9%  -  External debt (as % of GDP): 121.9%  -  Gross external debt: $225.56 billion (2009 Q2)  – 2009 GDP (est): $184.9 billion

20. United States – 96.5%  -  External debt (as % of GDP): 96.5%    -  Gross external debt: $13.77 trillion (2009 Q3)  -  2009 GDP (est): $14.26 trillion

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Palm To be Rescued By HP

Wednesday, April 28th, 2010

Hewlett Packard said Wednesday afternoon that it will acquire Palm Inc. in a cash deal worth $1.2 billion ending months of speculation about the fate of the struggling handset maker. The proposed merger would transform HPQ 52.90, already the world’s top seller of personal computers, into a leading competitor in the rapidly growing smart-phone market an area pioneered by Palm. 

H-P said it will pay $5.70 in cash per share of Palm, representing a 23% premium over the company’s closing price on Wednesday. The transaction has been approved by the boards of both companies. Palm 4.63, has been the subject of takeover rumors for weeks, as slow sales of the company’s latest smart-phones have depressed the stock and made analysts question the company’s prospects.

H-P was one of several companies rumored to have an interest in Palm, which developed its own mobile operating system called webOS and has launched two handsets, the Pre and the Pixi — on the new platform. PC makers see potential growth in the mobile-device market outpacing that of traditional computers. Palm’s chairman and chief executive, Jon Rubinstein, is expected to remain with the company. The transaction is expected to close during H-P’s third fiscal quarter ending July 31. 

On H-P’s call Wednesday, Bradley outlined plans to “invest heavily” into Palm’s research and development activities, as well as its sales and marketing, in order to build up the business. He also said the company has put in place a “significant retention program” to keep Palm executives on board. 

This could be bad news for other smart-phone makers, like Apple, RIM, Nokia, and Motorola . “H-P has very deep pockets, so they can push lots of money at being competitive. Expect the stock to shoot up to the $5.70 range tomorrow morning.

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Markets Indicate Approaching Heavy Resistance

Wednesday, April 28th, 2010

I’ve become increasingly alert the last few weeks that the market has approached a significant resistance. We’re just touched the 200 day Moving Averages. We have made significant gains the last 2 months. I think markets have become exhausted. During the last 2 weeks, I’ve noticed Hedge Funds, Brokerages, and Mutual Funds quietly unloading and picking up shorts which explains the increased volume.

I’ve been also concerned with the amount of information coming out from Rating Agencies, Fed, and the SEC. It’s as if something is building up to the down side. If markets are to continue upwards, a healthy correction is needed. As I have been preaching all along, the recent announcements from the rating agencies that has oddly become subsequent, is oddly peculiar? Goldman Sachs under the spotlight claims that GS is singled out that they have knowingly shorted a fund that they had created. Yes, it’s immoral, but what about other banks. Yes, how could we forget that they are fragile and are owned by the taxpayers and Government. Get on with it, and fine Goldman the $1 billion.

I will also post another interesting find later this week in regards to the technicals in the S & P and DJIA. It’s a scary thought but must be taken into context.

Remember the next country to be slammed by the rating countries is SPAIN.

Back in January, Dubai was downgraded. But that economy is insignificant to the world, but markets managed to correct 9.25%. Greece followed in March with Portugal announced yesterday. Spain and Italy is next. Then the final straw will be California-the 6th largest economy in the world. Remember you’re hearing it here first at Wall Street Grand

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Sovereign Debt Woes In Europe Hits Stocks Hard

Tuesday, April 27th, 2010

Stocks were absolutely hammered today, with traders panicking in the wake of debt downgrades for Greece and Portugal. Standard & Poor’s slashed its rating on Greek government debt to junk status, announcing, “Greece’s economic and fiscal prospects lead us to conclude that the sovereign’s creditworthiness is no longer compatible with an investment-grade rating.” S&P now maintains a “BB+” rating on Greek debt which, as The Wall Street Journal noted, is on par with its sovereign debt rating for Azerbaijian. Meanwhile, Portugal’s debt was downgraded by two notches, with S&P maintaining a negative outlook on both countries.

While most equities plunged into the red out of the gate, Goldman Sachs Group (GS) was a notable outlier. Shares of the banking behemoth ticked higher today as accused trader Fabrice Tourre “categorically” denied any involvement in securities fraud before a Senate subcommittee. Another big winner today was the CBOE Market Volatility Index (VIX), which spiked 30.6% by the close to end at 22.81 — marking the VIX’s largest-ever single-day percentage gain in the month of April.

The DJIA 10,991.99 suffered a massive blow today, ending below 11,000 for the first time since April 9. The Dow also settled below its 20-day moving average, breaching this trendline for the first time in more than two months. The blue-chip barometer gave up 213 points today.

Crude futures fell in sympathy with stocks today, as debt downgrades for Greece and Portugal prompted a flight to safety on Wall Street. The U.S. dollar was the direct beneficiary of this macroeconomic mayhem, while demand fizzled for riskier assets — including oil futures and equities. Additionally, traders continued to place bets ahead of this week’s inventory reports, which are expected to reveal an increase in domestic stockpiles. By the close, crude oil for June delivery dropped $1.76, or 2.1%, to settle at $82.44 per barrel.

On the other hand, gold futures benefited from the precious metal’s reputation as a safe-haven investment. Even as the euro lost ground to the U.S. dollar, the popular commodity hedge nevertheless trekked higher as traders sought a refuge from the tumultuous equity and currency markets. Gold for June delivery ended the day on a gain of $8.20, or 0.7%, at $1,161.70 per ounce.

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All Eyes on Goldman & Greece

Tuesday, April 27th, 2010

Standing before the Committee, Goldman Sachs is being grilled by law makers.  Markets have dropped 145 points as investors look into locking in some gains.

Some called for the synthetic collateralized debt obligations which are baskets of derivatives known as credit-default swaps to be banned. Derivatives and synthetic securities have been used to create imaginary value out of thin air. It’s a convoluted security to understand that touts  supposedly enormous gains.

More triple-A CDOs were created than there were underlying triple-A assets. This was done on a large scale in spite of the fact that all of the parties involved were sophisticated investors,” Soro’s added. “The process went on for years, and culminated in a crash that caused wealth destruction amounting to trillions of dollars. It cannot be allowed to continue.

Synthetic CDOs sat at the end of a long chain of boom-time transactions that began with the origination of mortgages and other loans. These assets were packaged up by investment banks and sold as asset-based securities, including residential mortgage-backed securities, or RMBS. CDOs were created by taking pieces of RMBS and other securities, packaging them up again and reselling them. Demand for such investments was so strong during the credit boom that there weren’t enough underlying assets to build new ones. So Wall Street came up with a way of creating CDOs that didn’t need actual assets. The result was synthetic CDOs. These are formed by writing credit-default swaps on bits of RMBS and other asset-backed securities. (These swaps pay out in the event of default.) Once enough of these derivatives contracts were written, investment banks bundled them up into new CDOs and sold them. More than $110 billion worth of synthetic CDOs were sold in 2006 and 2007, according to Thomson Reuters data.

Banks as we speak are taking a beating. It’s said that Merrill folded because the over leverage of the Synthetic CDO packaging.

Elsewhere in the News

U.S. stocks caved on Tuesday after Standard & Poor’s cut its rating on Greece. “If followed by Moody’s, Greek bonds will no longer be able to be used as collateral in borrowing from the European Central Bank. 

The euro fell more versus the dollar on Tuesday after Standard & Poor’s lowered Greece’s ratings to below-investment grade and cut Portugal’s long-term ratings by two notches. The euro dropped to $1.3272, down from $1.3357 in North American trade late Monday. The dollar index DXY 81.72, which measures the U.S. unit against a trade-weighted basket of six other currencies, rose to 81.847, compared to 81.388 late Monday. The euro was under pressure earlier and investors dumped the debt of Greece, Portugal, and other European nations seen as facing similar financial problems as Greece.

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Financials Leads Market Down

Monday, April 26th, 2010

The Dow erased nearly all of its gains Monday, dragged down by the financial sector amid worries about financial reform. The DJIA  had been higher for much of the day amid a flurry of new M&A activity and an earnings beat from Caterpillar, but wound up finishing up less than one point.

Financials were the day’s biggest decliner, down 1.7 percent, amid worries about financial regulation as the Senate moved closer to launching a debate on financial reform. Meanwhile, Sen. Richard Shelby, a Republican from Alabama, said he believes all 41 Republican senators would vote against launching a floor debate on the bill, focusing instead on making changes to the bill, crafted by Sen. Chris Dodd, a Democrat from Connecticut.

Citigroup C 4.61 shares fell more than 5 percent after the government said it is selling 1.5 billion shares of the 7.7 billion it owns in the bailed-out bank. The sale should net a tidy profit for the government, which took its stake in Citi at $3.25 a share — the stock is currently trading at nearly $4.65.

Goldman Sachs shares GS  152.03 dropped 5% as traders continued to watch the fraud case against the Wall Street titan unfold to determine the severity of the charges — and implications for the firm’s future. One of the latest details on the case is that the trader at the center of the case, Fabrice “Fabulous Fab” Tourre apparently talked about the sub-prime mortgage market in love letters to his girlfriend.

Banking analyst Meredith Whitney said Goldman has lost much of its competitive edge and investors should avoid the stock  she doesn’t have a “buy” rating on Goldman or any of the big banks.  Goldman Sachs executives including CEO Lloyd Blankfein and Tourre are scheduled to appear in front of a congressional committee Tuesday. Prepared testimony suggests Blankfein will tell the panel that Goldman “certainly did not bet against our clients.”

This Week
TUESDAY: 3G iPads to ship; Goldman execs. testify before Senate; two-day Fed meeting begins; Earnings from DuPont, Ford, 3M, US Steel, Broadcom
WEDNESDAY: GE and BofA shareholder meetings; Weekly mortgage applications; Weekly crude inventories; Fed announcement (2:15 PM ET); Earnings from Comcast, ConocoPhillips, Corning, Sprint, Visa
THURSDAY: Weekly jobless claims; Earnings from ExxonMobil, P&G, Aetna, Bristol-Myers Squibb, Burger King, Kellogg, Motorola, Time Warner Cable, Viacom
FRIDAY: Berkshire Hathaway annual meeting; AT&T shareholder meetings; GDP; consumer sentiment; Earnings from Chevron

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Markets Aim Sovereign Debt Woes At Portugal

Monday, April 26th, 2010

The next crisis that will eventually bring the market down the passing of the bu-ton (as done for the 800 meter relay in the Olympics) from Greece to Portugal and the remaining so called PIIGS of Europe is Sovereign Debt. But the largest of the economies are not the 5 mentioned above but here in the States - California. Just we had predicted Portugal would be the next to fall prey to the debt markets. Spain is not to far behind.

The cost of insuring Portuguese government debt against default jumped to a record high on Monday on concern that Portugal could be next to suffer a Greek- style debt crisis if no lasting solution was found for Athens. Of course this is the beginning stages of speculation. The price of insuring against a Greek debt default also rose, to 619,000 euros per 10 million euros of exposure from 614,600 euros at the New York close on Friday.

Portuguese 5-year CDS rose to a record 318 basis points from from 278.8 bps at the New York close on Friday. They were last seen at 305.5. The Greek crisis has started to spread to the rest of the periphery and Portugal seems to be next in line. The situation there is less urgent than in Greece, but the medium-term outlook is challenging.

Portuguese Foreign Minister Luis Amado said on Monday his country was doing all it could to avoid a similar situation to that of Greece but said he was concerned about the growing financial market (hence the derivatives market) pressure. Obviously, we are worried about the situation on the financial markets but as we have underlined many times, the Portuguese situation is not quite comparable with the Greek situation,” Amado told Reuters.

To avoid the pressure’s, as threatened earlier by the EU, is to halt derivatives against debt held by European countries. If that’s done free markets are non existent. I still believe Portugal will fall prey to the debt markets before the government intervenes. Timing- within 1-2year. Spain and Italy is to follow suit.

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Finally: Greece Formally Requests Bailout

Friday, April 23rd, 2010

The Greek government surrendered to the credit markets Friday, formally requesting the activation of a joint European Union-International Monetary Fund rescue plan after soaring borrowing costs were seen making it virtually impossible for the debt-strapped nation to meet its funding needs on the open market. I still say the roller-coaster ride for investors is not over. Markets have been whipsawed every time Greece is mentioned. It may be the excuse to take profits.

Prime Minister George Papandreou requested the 45 billion euro ($60.5 billion) package after investors fearing a possible default pushed borrowing costs to record levels, undermining Athens’ efforts to cut its 300 billion euro debt pile.

On Thursday, the yield on 2-year Greek bonds jumped to 10 percent as investors continued to fret about the country’s chances to pay back its debt, notably 8 billion euros ($10 billion) in 10-year bonds that become due on May 19. The move provided limited relief to financial markets and should ensure Greece can meet near-term funding needs, but won’t be enough to dispel fears of an eventual default or restructuring by Greece over the longer run, economists said.

The euro, which had fallen to a 1 year low as Greek bonds came under pressure, rebounded in anticipation of the request. Greek bond yields fell and the cost of insuring Greek government debt against default also declined. The euro backed off from an earlier session high to change hands at $1.3285 versus the CUR_EURUSD 1.3361, and gained 1.2% versus the Japanese currency CUR_EURYEN 125.7700, to trade at 125.10 yen.  How far the euro can rally on the news  the country is suffering the indignity of having to go cap in hand for aid in order to avoid defaulting on its debt is highly questionable.  This is not a good outcome for Greece or for the EMU.

Greece’s hand was forced by a sharp jump in borrowing costs this week, culminating in a bond market rout that pushed two-year Greek government bond yields above 10% and forced 10-year yields near 9% on Thursday, the same day the European Union revised upward its estimate of Greece’s 2009 deficit to 13.6% of gross domestic product and ratings agency Moody’s downgraded Greece’s credit rating a notch to A3 from A2. Greece has pledged to cut its deficit by four percentage points of gross domestic product this year. For which I still believe would be almost impossible unless further cuts are made.

The government has implemented a range of austerity measures, prompting strikes and protests from public sector unions. Economists have raised doubts about the government’s ability to press ahead with reforms in coming years amid expectations the moves will contribute to a deep and potentially prolonged recession. Greece’s capitulation is the latest round in a high-stakes standoff between investors, Athens and euro-zone leaders. Fears of a default by Greece mounted late last year after Papandreou’s newly-elected government sharply revised up its estimate of Greece’s 2009 deficit to 12.7% of gross domestic product, more than four times the E.U. limit. Euro-zone leaders in February pledged to support Greece but offered few details, providing only fleeting relief to the markets. That pattern was repeated in March, with market participants demonstrating impatience with a lack of details on a rescue plan amid signs of in-fighting between euro-zone nations over how to structure aid. Germany initially resisted calls for a bail-out against a background of fierce public opposition to a rescue effort.

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