Tag Archives: Wall Street

America’s Dance at the Edge of the Fiscal Cliff

Every once in a while each one of us sits down with pencil and paper to go over our budget. We are determined to make sure that our expenses can be covered by our income. If it is discovered that we might be operating in the red we panic mode sets in. We look for ways to close the budget gap. Businesses go through the same process but on a larger and more technical scale. The universal quest is to have a balanced budget. After the financial crisis of 2007-2008 no one wants to finance their budgets by taking on more and more credit. Money borrowed must be repaid with interest. Substantial interest payments can break any well thought out and controlled budget.

Unfortunately the Eurozone nations (EZ) and to a lesser degree the United States find themselves struggling with a sovereign debt issue. The European financial bloc has struggled for the past two years to bring its member nation’s national debt down to sustainable levels. The EZ has had to bail out the economies of Greece, Portugal and Iceland to prevent their economies from collapsing. Politicians, financial organizations, experts and an assortment of pundits have debated the appropriateness of stimulation packages versus austerity measures. Spending more money to stimulate an economy is politically popular but, in the end, might exacerbate the debt problem. Austerity measures are designed to cut back governmental spending and lessen its role in supporting the economy. Because austerity normally leads to drastic changes in the standard of living residents have taken the European streets to protest the hardships that go with drastic reductions in governmental spending. On November 8, 2012 the Greek parliament again approved a series of austerity measures which legislators hope will entitle the nation to continued bailout funds. The debate of the measures and their final approval was greeted by street protests and wild-cat strikes. Austerity measures have often provoked massive protests and civil unrest. For the time being it seems that Greece will continue as a member the EZ.

The contentious U.S. presidential election is finally over. Most Americans are happy that they will no longer be bombarded with campaign ads loaded with political rhetoric that the candidates have not intention of adhering to. President Obama won reelection and he deserves to be congratulated.

Before November 6, 2012 it was generally agreed that budget woes awaited the winner of the election.  An excellent piece appeared in the Atlanta Daily World about the problems the winner would face. Last year Congress passed the Budget Control Act of 2011 (Budget Act) which was signed by President Obama. The Budget Act was a response to the political debate surrounding the need to continuously raise the nation’s debt ceiling. Treasury Secretary Tim Geithner told CNN that a deal had to be reached. He argued that America’s faith and credit should not be held hostage to politics. Experts had predicted that if the debt ceiling was not raised there would be higher interests rates, home values would sink even lower, the stock markets would lose much of their value and a half of million jobs would be lost.

Last year it seemed like there was universal support for raising the nation’s debt limit. There was much disagreement on the terms and condition for raising it. Because Congress was not able to agree on a permanent solution to the U.S.’s growing sovereign debt problem the nation’s legislators agreed to sever cuts in various programs, impose spending caps, increasing debt ceilings and to allow certain tax exemptions to expire. These automatic measures are to take effect on January 1, 2013 if no further legislative compromise can be reached.

The legislation also established the “Super-Committee.” This is a 12 man committee with 3 members from each party and each chamber of Congress. This group was tasked with cutting the deficit by $1.2 trillion over the next ten years. If deficit cutting legislation is passed the President could again borrow more money. Importantly Congress cannot amend or filibuster any plan; it can only approve or reject it. The committee has met and considered the options. Unfortunately for the nation the members are evenly split on their proposals and thus no plan has been sent to Congress. This impasse and the impending cuts and caps have been termed the “fiscal cliff .”

It is fair to accuse both major political parties of playing politics when it comes to raising the debt limit. When Congress is in Republican hands they tend to pass legislation that raises America’s borrowing ceiling while the Democrats oppose it. When the Democrats control Congress they support legislation to raise the debt ceiling while the Republicans take a contrary position. The political debate surrounding the consideration of the Budget Act showed a shifting of political position of the parties, albeit some of their members had a clear understanding of the problem. Because the national debt is so large the interest payments are astronomical. The nation is continuing raising the debt ceiling to borrow more and more money to pay the interest due on the staggering debt. Some of the newer Republican members of the House of Representatives refused to follow the Party’s leadership and voted against the Budget Act. They did not believe that the debt ceiling should be raised without legislation that would greatly and permanently reduce

Greece Moves Closer to a Eurozone Exit

Once again Greece stands at the exit door of the Eurozone (EZ). In the past Greece’s possible exit had been discussed in hushed and guarded terms. The conversations behind the public displays of support for Greece indicated a growing impatience with the country’s failure get its finances in order. Quietly European leaders and financial institution have considered different scenarios that might result from a Greece exit from the EZ. United States banks and American financial companies have moved to limit their exposure  if Greece defaults. Hundreds of lawyers and financial advisers are reviewing legal documents and agreements in effort to protect their American clients’ interests. A Greek default would cause a wave of litigation which US companies hope would be heard under New York State or British law and the cases heard in friendly venues. More importantly; the banks do not want to be repaid in devalued currencies or worthless drachmas.

I have always argued that the EZ should not become involved in expensive and futile rescue attempts of the Greek economy.

Greek Prime Minister Antonis Samaras recently traveled to Germany and France for consultations with his counterparts over Greece’s implementation of the agreed upon austerity measures. The Greek leader’s coalition government was only formed upon the agreement that the country would renegotiate the terms of the bailout agreement(s).  Most Greeks are weary of the imposed austerity measures that were agreed to in exchange for having their economy rescued from default. The recent Greek presidential election was a protest vote against the austerity measures. Though the leaders of the more economically stable EZ countries have voiced support for Greece’s plight, there has never been much hope that the bloc would renegotiate  the bailout agreement. PM Samaras’ was tasked with requesting from his counterparts a two-year extension for Greece to carry out the required cost cutting. The measures are needed to qualify for the next 33.5bn-euro installment of its second 130bn-euro bailout. With the EZ teetering on the brink of another recession and other EZ members requesting bailouts, it might not have been the best time for Greece to ask for its money without having complied with the terms of the agreements.

The first high level meeting on PM Samaras’ schedule was with German Chancellor Merkel. The Greek leader had to appreciate the difficulty of his task in convincing the Germans to give his country more time to comply with the terms of the bailout agreement(s). Chancellor Merkel is credited with having successfully argued for the EZ’s austerity measures strategy of resolving the Europe’s debt crisis. After the meeting the two leaders held a joint new conference. PM Samaras stated the following in front of a gathering the international press:

“Greece will stick to its commitments and fulfil its obligations. In fact, this is already happening…We’re not asking for more money…(Greece) needed time to breathe”.

The German response did not surprise anyone; no decision would be made on Greece’s request nor would additionally funds be released until the Trioka’s September report has been received and reviewed. Chancellor Merkel reiterated her emotionally empty support for Greece’s continued membership in the EZ.  She expressed Germany’s position in clear and concise terms:

“For me, it’s important that we all stand by our commitments, and in particular await the [publication of] the troika report, to then see what the result is…But I will encourage Greece to follow the path of reform, which demands a lot of the Greek people.”

Some experts suggest that Ms. Merkel spoke in conciliatory terms  to prepare Germans for continued financial support for Greece. I disagree with this interpretation of her comments. Volker Kauder who is the leader of Chancellor Merkel’s political party stated that he had not problem with Greece exiting the EZ. The comments from leaders and financial experts, taken together, indicate that the Germans have grown resentful of mortgaging their future to rescue the economies of other member nations.

PM Samaras next arrived in France for face to face consultations with French President Hollande. The Greek leader again requested a two-year extension for Greece to implement the necessary cost cutting measures. I am sure that PM Samaras believed that President Hollande would be more understanding of Greece’s plight. President Hollande was recently elected to his office based on a platform of promoting growth versus cost cutting and austerity measures. The French leader expressed understanding for Greece’s difficulties but indicated that the country must carry out the austerity measures. President Hollande also said that any decision on Greece’s request would have to await until the September report of the Troika. It is a given that the Troika’s report will conclude that Greece has not made any real progress on implementing the requested measures. The Greeks must realize that they, likely, will not receive any more bailout funds.  

During his trip to Germany and France PM Samara’s failed to get any meaningful concessions for his tired and angry countrymen. It is inconceivable to me that he would have expected to receive more time to put Greece’s finances in order and, at the same  time, received additional bailout funding. His mission was doomed to fail from the start. It must be remembered that his coalition government is built upon Greek resistance and anger to the austerity measures.  The massive street protests cannot be explained away as isolated incidents of discontent. The Greek PM had to go to Germany and France on his hands and knees to ask for some breathing room. It is possible that Samara’s government will not withstand the failure to get concessions from the EZ. On the other hand Greece’s exit from the EZ is now a done deal.