Euro Hits Near 2-Year Low on Spain Troubles

The euro fell today to it lowest level in 23 months against the U.S. Dollar.

Spain's banking sector and soaring borrowing costs are the topic of the day, and after Italy was forced to pay dearly to sell debt.

"The euro was seen highly vulnerable to further falls, with many analysts looking for a drop towards $1.20.
Concerns are growing that Spain may have to tap debt markets at a time when bond yields are near unsustainable levels. Market players fretted that it may be forced to seek an international bailout.
Adding to the euro's woes, Italy sold bonds at a very high cost, with 10-year yields topping 6 percent for the first time this year as sentiment on the indebted economy looked vulnerable to contagion from Spain's worsening problems". (Reuters)

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Fitch Donwgrades Japan

Fitch lowered its assessment of Japan’s sovereign credit to A+, still investment grade but just above countries like Spain and Italy.

The agency criticized Japan for not doing more to pare down its burgeoning debt.

According to the agency, Japan’s public debt will hit almost 240% of its gross domestic product by the end of the year.

 "The new rating also heightens the pressure on Prime Minister Yoshihiko Noda to rein in spending and raise taxes at a delicate time, when the Japanese economy is still recovering from natural and nuclear disasters last year.

Mr. Noda has warned that Japan could eventually face a debt crisis akin to that afflicting Europe and is staking his job on a plan to double the consumption tax rate to 10 percent by late 2015. That increase, he has argued, is necessary to pay for soaring welfare costs and pension payments".  {New York Times)

Der Spiegel: Bundesbank Has No Clue What is Happenning To Spanish Banks

German magazine Der Spiegel  has an article emphasizing the need for financial reform not only in Spain but throughout Europe.


The publication emphasizes that at this time, the Spanish banking system is built on unstable loans worth approximately one billion euros and encrypts the Spanish banking rescue between 50,000 and 200,000 million.


"Since that amount of money would be an overload for both banks to the government budget, experts believe that the Spanish government should seek urgent assistance to European Financial Stability Fund (EFSF).


However, Der Spiegel notes that Mariano Rajoy "resists this movement," because it would give members of the euro "a voice in governing the country." Also displayed are the magazine, also hang the disgrace to Spain as a country of high risk and, probably, "this will cause isolation of the international financial markets for a long time."


Under the circumstances, says Der Spiegel, direct payments to the banks of the euro countries become "a sensitive issue." The German Government completely rejects the idea "for fear that their money disappear into a bottomless pit." In fact sources said that the German central bank, the Bundesbank, say they have no clue what is happening in Spanish banks.


To Der Spiegel, this lack of knowledge is a consequence of nationalism in Europe has allowed the flourishing of its financial industry. The European banking industry is more connected internationally than any other, however, "each country controls its national bank and, if necessary, rescue their banks on their own."


Therefore, the journal recognizes citing Clemens Fuest, a German economist, professor at Oxford University and adviser to the German government, "without a fundamental reform of the European banking sector, the euro is in danger."

Spain Bonds Plunge

There is no relief in Europe. Spanish 10 year bonds hit a new cycle high today, with the yield moving up to 6.08% - 23 basis points in one day.

The previous cycle high was 6.07% reached April 16th.  (Chart)

Europe Burns, Buffet Comments on U.S.

While Europe burns today after the defeat of the "austerity" governance, Warren Buffett commented on the bad jobs reports last week. He states the obvious: no construction, no jobs. He says he is not surprised there were no more jobs created without a more meaningful pickup in residential construction.

"When we see a million residential units constructed annually," (CNBC's Squawk Box), "only then will we see more decent numbers on jobs growth."  

He says GDP growth of 4 to 5% "would be unsustainable in the long term," He believes that a 2.2% GDP print is not as abysmal is is being made currently. 

"If you have a 2.2% growth in annual GDP and have a 1% growth in population, that would be 1.2% increase in real per-capita growth."  

That, according to him is equivalent  a generational growth of ~20%. "That means that every succeeding generation has a 20% better standard of living than the preceeding one,"

"If we were guaranteed 2.2% for the next 100 years, that would be Nirvana!"  

Is the population growth only 1%?