Extremely Pivotal And Critical Week For The Eurozone. Also Brief Market Comment.

[ 0 ] December 5, 2011 |

We believe, as per below. that this week is a critical week for the Eurozone. While we have had some promising news in the last week, and tonight in Italy, its important things keep moving in the right direction. Our markets here have rallied nicely last week as expected. We have always maintained the position that one needs to “buy weakness”. The market gave that opportunity the week beforehand and those that did so were rewarded last week. We hope that the leaders in the Eurozone really understand more deeply now the gravity of the situation and get their acts together, giving the investing world some positive news later this week. If this is the case, we believe it remains ” Risk On” into the end of 2011 through January 2012 with the DOW attaining the 13,000+ level.

As Lange Financial Services has predicted for several quarters beforehand, the U.S Economy is Not going into a recession, and the outlook has improved. There are many funds and institutions that have underperformed and remain VERY underinvested, and there remains a tremendous amount of cash available to be deployed. If the Eurozone Caveat could be overcome, at least in the short term, we believe our 13,000+ level on the DOW can be achieved.


Pivotal week for Europe’s leaders and fate of euro!


The Associated Press

Europe’s government-debt crisis, which has dragged on for more than
two years, is entering a pivotal week, as leaders across the continent
converge to prevent a collapse of the euro and a global financial
panic that could result.

Expectations are rising that Friday’s summit of leaders of the 27
countries in the European Union will yield a breakthrough. An
agreement on tighter integration of the 17 EU countries that use the
euro — especially on budget matters — would be seen as a crucial first
step. That could trigger further emergency aid from the European
Central Bank, the International Monetary Fund or some combination,
analysts say.

The coming days “will decide if the euro will survive or not,” Emma
Marcegaglia, the head of Italy’s industrial lobby, Confindustria, said

French President Nicolas Sarkozy, German Chancellor Angela Merkel,
European Central Bank Chief Mario Draghi and even U.S. Treasury
Secretary Timothy Geithner will star in a 5-day financial drama
leading up to the summit.

If the summit is a failure, Sarkozy warned last week, “the world will
not wait for Europe.”

Sarkozy and Merkel meet in Paris on Monday to unveil a proposal for
closer political and economic ties between the 17 euro countries.
While the leaders differ on some of the details, their cooperation has
been so tight they have come to be known by a single name — “Merkozy.”

The two agree overall on the need for tougher, enforceable rules that
would prevent governments from spending or borrowing too much — and on
certain penalties for persistent violators.

“Where we today have agreements, we need in the future to have legally
binding regulations,” Merkel said Friday.

Merkel wants to change the basic EU treaty to reflect the tougher
rules on euro countries and make them enforceable. Even if there is
general agreement on Friday, actually putting new rules in place
through treaty changes could take more than a year. And many
economists fear the new rules alone would not be enough to halt the
rise in Europe’s borrowing costs.

The hope is that a firm expression of intent, however, would reassure
the ECB, so that it can make stronger efforts in the short term. That
would give governments time to get their finances under better control
and make economic reforms that would improve growth.

The urgency has been heightened in recent weeks as Italy and Spain,
the continent’s third- and fourth-largest economies, face
unsustainable high costs to finance their debts. The yield on 10-year
Italian bonds is around 7 percent. Yields above that level forced
Ireland, Portugal and Greece to seek bailouts. By comparison, bond
yields in Germany, Europe’s largest and most stable economy, are
roughly 2 percent.

“The eurozone is threatened to face an existential situation if it
becomes clear over the next few weeks that several member states
cannot cover their refinancing needs, or can only do so at suicidal
conditions,” former German Finance Minister Peer Steinbrueck told the
Sunday edition of German tabloid Bild.

“Everything must be done to hinder the eurozone from breaking up,” he said.

Italy, whose government debt is equivalent to 120 percent of the
country’s annual economic output, needs to refinance euro200 billion
($270 billion) of its euro1.9 trillion ($2.6 trillion) of outstanding
debt by the end of April.

The size of the problems facing Italy and Spain are considered too
large for the existing funds available to the European Financial
Stability Facility ($590 billion) and the IMF ($389 billion.) To boost
the firepower of the IMF, several economists have proposed that the
ECB lend to it.

“We are now entering the critical period,” the EU’s financial chief,
Olli Rehn, said last Wednesday.

That same day, the U.S. Federal Reserve, in coordination with the ECB
and four other central banks, sought to give stressed-out European
banks some relief. The Fed announced a plan to make it cheaper for
banks to borrow American dollars, which is the dominant currency of
trade. It was the most extraordinary coordinated effort since October
2008, and it prompted a nearly 500-point rally in the Dow Jones
industrial average.

Still, that help did not address the fundamental problem in Europe:
unsustainable levels of government debt.

In Italy, Premier Mario Monti had that on his mind as he unveiled his
new austerity and gowth measures he said his government of technocrats
approved Sunday. They include what he called immediate cuts to the
costs of maintaining Italy’s bulky political class as well as
significant measures to fight tax evasion. As part of the political
cost cuts, Monti said he would forego his salary as premiere.

The package also includes measures to spur growth and competition,
while aiming to stamp out rampant nepotism. Monti will outline the
measures on Monday to Parliament, which must approve them.

In a sign of how all 17 eurozone nations see their fates as
intricately linked, Dutch Premier Mark Rutte on Monday will be
visiting Monti in Rome.

“It is really important that the markets see that Europe is prepared
to help the countries in trouble, so long as those countries commit to
very tough reforms and austerity programs,” Rutte said.

Indeed, the debt loads of countries like Italy and Greece are everyone
else’s problem.

Germany’s economy depends heavily on exports. If economic output in
the rest of Europe collapsed, demand for German goods would fall
sharply. Across the Atlantic Ocean, the United States depends on
Europe for 20 percent of its own exports. And investors in American
banks have worried about their holdings of European debt.

The bigger threat to the U.S. and the global financial system is that
Europe’s debt crisis could spiral out of control.

If governments default on their bonds, banks that own them could take
a significant hit. It could become very difficult for these banks to
borrow and nervous depositors could flee with their cash. In the worst
case, a global financial panic could be triggered, in which banks all
over are too skittish to lend to each other. That would cause a credit
crunch that deprives businesses of the short-term financing they
depend on for day-to-day operations.

With such fears in the air, the United States is ratcheting up its involvement.

Geithner will meet Tuesday in Germany with Draghi and German Finance
Minister Wolfgang Schauble. On Wednesday, he travels to France for
talks with Sarkozy and the prime minister-elect of Spain, Mariano
Rajoy Brey. And Geithner will meet Monti in Milan just before the new
Italian leader heads for the EU summit in Brussels.

On Wednesday, many of Europe’s most important leaders will be in
Marseille, France, for a meeting of the conservative-leaning European
People’s Party. Merkel, Sarkozy and Spain’s new conservative prime
minister, Mariano Rajoy, will all be there.

On Thursday, the ECB holds its monthly policy meeting. Many analysts
expect one or more actions by the bank aimed at boosting growth and
steadying the financial system.

One step would be to cut its key short-term interest rate from the
current 1.25 percent. It made a surprise quarter-point cut at
November’s meeting. Another would be to extend loans to banks for up
to two or three years, instead of the current limit of 13 months.

Even more significantly, Draghi hinted last week that the bank could
be willing to take a more direct and aggressive role in solving
Europe’s government-debt crisis, if EU leaders agree to the
coordinated belt-tightening being pushed by Merkel, Sarkozy and

“Other elements might follow, but the sequencing matters,” he said in
a speech Thursday.

The ECB extends unlimited short-term loans to banks. It cannot lend
directly to governments, including buying their national bonds. It
can, however, buy national bonds on the secondary market and has been
doing that each week in modest amounts.

Many economists have urged the bank to sharply increase these
purchases because that would stabilize or lower the yields on them.
That would reduce borrowing costs of the heavily indebted countries
that issue them and keep the countries from defaulting.

The ECB has so far resisted expanding its support because it believes
that would take the pressure off politicians to cut spending and
reform government finances, a concern known as moral hazard. The ECB
has also worried that injecting too much money into the European
economy could trigger inflation.

EU leaders gather in Brussels for Friday’s summit the night before.
Sarkozy and others say the stakes couldn’t be higher.

“What will remain of Europe if the euro disappears?” Sarkozy asked. He
then provided an answer: “Nothing.”


Don Melvin from Brussels, Dave McHugh from Frankfurt, Sara DiLorenzo
from Paris, Frances D’Emilio from Rome and Mike Corder from Amsterdam


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