Notes From Underground: Lib/Dems and the Labors of a HUNG Parliament lasting more than 24 hours

First things as usual are European.The Eurozone financial package was greeted with enthusiasm but the effects of the Champagne wore off and all the market was left with was bubbles in the air. We are not certain how large the “bailout” is, but it seems to consist of €440 billion of loan guarantees for governments that run into severe difficulties. There’s a €60 billion balance of payments facility and the IMF has agreed to add an additional €250 billion.

However, the IMF insists that its funds will not be distributed unless the recipients pursue strict IMF structural reforms–good luck to that stipulation. Added to this mix was the ECB buying EUROZONE sovereign bonds, which Trichet denied was a quantitative ease. U.S. Treasury Secretary Tim Geithner was cheerleading this action, as he reportedly urged greater action during a G7 conference call over the weekend. As a result, day one of the financial intervention saw the German Bund sell off as the safe havens were dumped. The Italian Bond futures had a 300-point rally, which signified some thawing in the European debt markets.

The first round went to the Eurocrats as they prevailed in their efforts to effect genuine pain on the markets, but defeating the “wolfpack” will not cure the ills of a financially sick Europe. And, the Angela Merkel political travails are further complicating the future European growth story. The former Iron Frau made moves to drop planned tax cuts as the CDU/FDP lost control of the Bundesrat. Instead she will push for greater fiscal austerity to shrink the bloated German budget. The peripheries were hoping for stimulus in Germany to help aid the overall deflationary pressures building in Euroland. So there we have it: Merkels loses an election; the profligates get bailed out; and the German electorate is rewarded with an austere budget to bring the deficit down to under 3%. And they ask why 2+2=5 is also a beautiful thing?!?

The British pound tried to rally today when word came that Prime Minister Gordon Brown would abdicate his leadership of the Labor Party to enable a coalition of the Libs and Labor. The market deems this combination to be the worst of all outcomes. The name of David Miliband, the present foreign minister, has been forwarded as the head of Labor and thus paving the way for a LIB/LAB + others, coalition. The markets have given this proposal some credibilty and the POUND has headed lower again tonight. We believe that this bears careful watching for if a LIB/LAB coalition attains the keys to Downing Street, our view about the British currency will change. Where we have been optimistic about the POUND on a cross-rate basis, we would be neutral at best. We warn though that as the uncertainty continues, the volatility will increase. The floating currency has been a plus for softening the effects of recession but the markets will not tolerate Britain being hung for too long. The financial ineptitude of the Brown government cannot be allowed to fester for the present concern for the PIIGS will soon get old and the financial vigilantes will turn their gaze upon merry old England.

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2 Responses to “Notes From Underground: Lib/Dems and the Labors of a HUNG Parliament lasting more than 24 hours”

  1. Fred E. Says:

    “U.S. Treasury Secretary Tim Geithner was cheerleading this action, as he reportedly urged greater action during a G7 conference call over the weekend. ”
    The man who oversaw the NY Fed during the period of the trashing of our financial system, and who cheered on Tarp, AIG and GM bailouts, etc. just doesn’t get it.
    A problem created by debt cannot be solved with additional trillion dollar new debt creation. The can is being kicked down the road that is soon coming to a dead end.

  2. yra Says:

    No disagreemnet here Fred.Geithner and Summers have been awfully quiet on Europe and we must remember that Summers who one of the previously anointed as one who saved the world in 1998—see cover of TIME magazine

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