Europe's Risks and the Euro

Portugal's request for bailout caused little disruption to financial markets. The euro gained following the expected announcement and speculators see Portugal as the final country in the region to require aid.

The European Commission Bank also signaled an easing of the region's risks this week. The bank's relaxed risk outlook for Spain and control over the fiscal situation in Portugal led to an increase in interest rates and an end to expansion of bailout mechanisms for the ESF and EFSF funds.

Spain and Italy, two periphery countries on the bailout watch list, have both shown positive improvements in recent weeks as their yield curves decoupled with 10-year bond yields falling to more normal rates nearing 5.0% and 3.25% respectively. 

Wall Street Journal, April 8, 2011
No Time for Euro Complacency

Portugal Third Country to Receive Eurozone Bailout

Portugal is the third, and hopefully final, country in the Eurozone to request aid for debt repayments coming due in June. Over the course of a year the Eurozone and its allies have structured funds to provide relief to Eurozone countries unable to make debt repayments.

Initial aid required by Greece was called upon in May 2010 and since then additional structured funding created by the European Central Bank and the IMF has relaxed the risk outlook for the region. Consent by the ECB and IMF to structure available funding for countries in need of a bailout has likely stopped a widespread contagion in the region as debt is highly interconnected within the seventeen member zone.

Wall Street Journal, April 7, 2011
Portugal Pleads for Rescue

Europe and the U.S.

Interest rate policy, open market operations or bond-buying, and bank reserve requirements are three weapons central banks can use when making strategic monetary policy decisions.

In Blackstone’s Wall Street Journal article he contrasts the use of these instruments by the ECB and the US Federal Reserve as well as other central banks such as China, Japan, and England.

The European Central Bank is likely to be the first central bank to raise interest rates since the 2008 Credit Crisis. Moving rates higher would signal that the country’s capital growth is expanding.

The US Federal Reserve currently remains in a period of quantitative easing which calls for government bond-buying through June 2011.

Wall Street Journal, April 6, 2011
Central Banks Grapple With Competing Forces

Housing's Toll on Inflation Measures

Housing or shelter costs make up a large part of the Consumer Price Index (CPI), accounting for 32% of headline CPI. The Federal Reserve's more favorable price index, the Personal Consumption Expenditures (PCE), weights housing at 15%.

Rising housing costs, including rent and mortgage payments, are expected to rise through 2011 adding pressure on the Federal Reserve to increase rates to manage rising inflation expectations.

Wall Street Journal, April 5, 2011
Housing Bubble Continues to Haunt Fed

Euro Gains

The euro appears to be gaining despite Eurozone debt woes over the last year. The ECB is expected to raise rates signifying a strengthened economic outlook in Europe.

Wall Street Journal, April 4, 2011
Euro Gives Back Gains on Dollar

China's Communist Government

China is happy with the status quo and the economy has seen tremendous gains over the last decade as a result. Entrepreneurs have prospered and living standards have improved. Under the current rule the country is expected to continue as a leader in the emerging markets.

New York Times, April 3, 2011
In China 'Jasmine' Means Tea, Not a Revolt

Portugal Scrambles to Avoid Bailout

Portugal sold 1.65 billion euros ($2.3 billion) of short-term government debt in hopes of raising funds to payoff debt repayments coming due in April and June. Rating agencies reacted negatively to the offering downgrading the country's debt rating shortly after the auction.

The offering is likely to be the last effort by Portugal to avoid a bailout request which would also require implementation of strict austerity measures.

New York Times, April 2, 2011
Portugal Stages Surprise Bond Auction; Ireland Is Hit With New Downgrade