In response to Europe's Financial Troubles, Part 2

The EFSF will be fully operational June 2010, however they are awaiting each country to finish their respective parliamentary procedures. The EFSF will be a limited liability company, operating under Luxembourg law, that will be run by a board of directors appointed by euro zone members, the same people who prepare euro zone finance ministers' meetings. The EFSF will work hand in hand with the IMF, however the company will not need to ask for permission from euro zone national parliaments each time it wants to operate so they will maintain control over the funding alongside of the finance ministers. Once the EFSF raises money through the bond issue, it would lend money to the euro zone country in trouble charging higher interest. They are anticipating Triple A credit rating of the EFSF bonds as the euro zone countries have agreed to guarantee 120 percent of the value of the bonds on top of a cash reserve for the operation of the EFSF.

How is it possible that countries in financial trouble can put a 120 percent guarantee on bonds and make them triple A? It is also stated that it will not cost the euro zone countries anything, how is that possible. The countries are incurring more debt, and debt always costs! Notice that when someone wants to produce currency out of thin air, typically a Special Purpose Vehicle is set up. Most people don’t even understand the concept of a Special Purpose Vehicle. We do teach on this in the Financial Boot Camp. It seems that each time we get in more debt, the way to get out of the financial predicament is to incur more debt! The elastic band can only stretch so far, and similarly you can only put so much air into a balloon before it bursts!

In response to Europe's Financial Troubles, Part 1

Very interesting responses have come from the current financial troubles in Europe. In the news, it states that Germany is leading the way by revising their budget to include Billions in savings each year. Is this from budget cuts, or the raising of taxes? From what we can see, it is both, more though on the side of raising taxes and creating new taxes. As mentioned in a previous blog, one of the main ways countries are dealing with the financial troubles is to raise taxes and create new taxes. We are even seeing this here in Canada where we are supposedly better than many other nations!

After much negotiating, the European Union has now approved a Financial Safety Net as part of the response to the European Financial troubles that began mostly with Greece’s debt woes. The Financial Safety Net is worth $440 Billion Euros, which is currently over $525 Billion Dollars. Although this is the amount of the Financial Safety Net, the actual amount including amounts pledged by the IMF totals over $750 Billion Euros, or over $1 Trillion dollars. The program is set up for 3 years and will allow Euro Zone countries to borrow from the EU in the case that the borrowing costs of that EU or euro zone country rise so high that borrowing on the market is unsustainable for reasons beyond its control. Currently, the EU laws forbid any Euro member to assume the debt of another Euro member. The European Union will use the revenues of their budget to guarantee the debt.

How it works is that the Euro Zone country that wants to borrow would tell the EU's executive arm, and the European Central Bank how much it needs, submitting a draft economic and financial adjustment program to the Economic and Financial Committee which prepares monthly meetings of ministers. The ministers would then say "yes" or "no" in a qualified majority vote. The ministers would then set the policy conditions of the financial support, including the maximum amount of the loans, their price and duration, and the number of installments to be disbursed. Once the details of assistance are settled, the Commission will issue bonds to raise cash within the first 60 billion euro limit. If more cash for a euro zone country is needed, a Special Purpose Vehicle (SPV) called the European Financial Stability Facility (EFSF), will issue bonds to raise money on the market.

Rate hike: a good sign for Canadian economy

Last Tuesday, the Bank of Canada has hiked its key interest rate by 25 basis points to 0.50%. This rate hike comes right after Statistics Canada reported a robust 6.1% GDP, the strongest quarterly performance in over a decade. The strong consumer spending and the rebuilding of businesses has benefited the economy and has thus produced a stellar GDP expansion.

But what does the rate hike mean? For a lot of experts, the BoC rate hike is a good sign for the Canadian economy. Experts believe that the rate hike means that the BoC is confident that the Canadian economy is well on its way to a full recovery from the latest recession. Moreover, the rate hike, experts say, somewhat reassures investors and the public that Canada is in a far better position than other G-7 countries. According to an article on www.advisor.ca, “a shallow recession and a speedy recovery from it are factors attributed to Canada being the only country in the G-7 to announce a rate hike.”

There is, however, some concern over the uncertainty in the economy given the financial crisis in Europe. With this concern looming over our heads, the BoC has stated that further rate hikes will be weighed carefully against global and domestic developments.

EUROPE’S FINANCIAL TROUBLE

The global financial crisis, which had been stirring for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets had fallen, large financial institutions had collapsed or been bought out, and governments in even the wealthiest nations had to come up with rescue packages to bail out their financial systems. Now comes recovery, a time where the economy is supposed to rebound…but is it rebounding? Look at where Europe is at currently. January 1^st, 1999 the Euro made its debut, and now just over 10 years later the continent is in its own major financial crisis while the world is supposed to be rebounding from the global financial crisis. Europe has many countries, each with distinct financial and cultural histories, that have made this transition and are caught up together in this European Financial Crisis. Maybe if each country didn’t abolish their own currency to turn to the Euro each country could have stood stronger to help the ones that were failing, however they are now all in the same pot and it is taking other continents and countries around the world to look at bailing them out. The issue in Europe is already affecting the world wide economy and the rebound tougher for many countries especially the U.S. Recently the European Union has been working on limiting Europeans from investing in world markets to keep most European investing to Europe only. The issue has also caused the E.U. and G20 to look at developing another world wide tax, and other measures that would hinder the progress of recovering economies. Many are accrediting this financial crisis to Portugal, Italy and Greece not collecting their taxes. Why is it that taxing seems to be the solution. If taxation is increased more than it has already over the last 50 years most people will not be able to adequately manage a household budget without continuously going into further debt. Where will the taxing stop? There are two ways to increase cash flow, increase incoming and decrease outgoing. It seems like governments always to look at more coming in as more important than cutting back on what is going out!