The sovereign debt crisis in Greece, Ireland, Portugal, and maybe Spain depresses the euro every time it moves back into the headlines. The European currency has been on a bit of a tear lately against the U.S. dollar finishing last week at $1.4822, the highest level since December 2009, now that the European Central Bank has started to raise interest rates ahead of the U.S. Federal Reserve. But not so long ago, on January 11, the euro traded for just $1.2904. That’s almost 13% below price back in December 2009.

Yep, the European debt crisis has dealt the European currency its share of whacks.

But the troubles of the euro—because of the continuing budget crises in Greece, Portugal, Ireland, worries over restructuring or default in any of those countries, and fears that the crisis could spread to a bigger economy such as Spain or Italy—are only half of the story, the negative half.

The other side of the story is how the troubles of the euro have given a huge edge to the exports of the fiscally sounder euro economies of Northern Europe such as Germany, Finland, and the Netherlands. Because these countries use the euro instead of, say, the old Deutsche Mark, their exporting companies have escaped being savaged by a rapidly appreciating currency the way that, say, Brazil’s exporters have been.

The troubles of the euro, which have kept the export currency cheaper than the strength of these economies would otherwise require, has been a boon to German makers of automotive controls, network communications gear, and medical equipment, Dutch makers of semiconductor manufacturing equipment, and Finnish makers of elevators and escalators.

And this other side of the euro crisis means that your portfolio should have more exposure to these European export stocks than it would if all you did was pay attention to the problems of the euro. Read more

Climbing German inflation assures more interest rate increases for the Eurozone and a appreciating euro

If you were wondering if the European Central Bank was likely to go soft on inflation and put its interest rate increases on hold, wonder no more.

According to numbers released today, April 28, Germany’s annual inflation rate climbed to 2.6% in April. That’s up from 2.3% in March and marks the fastest pace for German inflation in more than two years.

The European Central Bank isn’t about to let inflation climb this fast in the core economy of the European Monetary Union and the one politically most sensitive to inflation. April inflation data for the Eurozone as a whole will be released tomorrow, April 29. It’s expected that the numbers will show inflation steady at last month’s 2.9% annual rate. That’s well above the central bank’s inflation target of close to but not above 2%.

Now the only question is when the bank next raises its benchmark interest rate. Read more

The debt markets are starting to separate Spain from Portugal, Greece, and Ireland

The debt markets are saying that Spain will make it through the euro crisis without a bailout or a default.

What even though Moody’s downgraded Spanish debt yesterday? Yep that was a non-event.  It’s not so much the markets disagree with Moody’s move  as that this downgrade has been in the works and baked into the market for weeks. The weakness in Eurozone debt yesterday and today is vote that nothing significant will emerge from the latest round of talks on solving the euro debt crisis.

At the same time the debt markets are also saying Portugal will need a rescue (34% chance) and that there’s a 60% chance of a Greek default. The markets give Ireland a 40% chance of a default.

These reads all come from the market for credit-default swaps. Credit-default swaps give the buyer protection (as long as the guy on the other end of the deal doesn’t go bust) against default of a country’s bonds for five years—for a price. The higher the price, the greater the odds, in the market’s opinion, that a country will default within five years. Working backward from the price of this “insurance” you can work out the market’s odds on a default taking place.

This week, for example, the average annual cost of protecting against Greek default signaled a 60% probability of default in five years.

On the other hand, the market increasingly believes that Spain has cut its budget enough, introduced enough labor market reforms, and is growing fast enough so that the country will avoid a default. Read more

A new Eurozone bank stress test–with even less stress?

Thank goodness they learned their lesson.

Last time bank regulators conducted a stress test of European banks, the tests were derided as too easy and meaningless. That criticism gained a certain credibility when Ireland was forced to bail out its two biggest banks, both of which had passed the summer of 2010 tests.

So what are regulators doing this time? They’re watering down the tests even more.

Hard to believe though it might be, the proposed test will model the effect of a 15% drop in stocks market on bank balance sheets this time—as opposed to a 20% drop in the 2010 model. Read more

The holiday is over for the euro–and it’s back to crisis time.

The euro crisis has got as many heads as the Hydra. This week bring another involving Portugal.

Last week the euro started falling again—it closed at $1.2907 on Friday but rallied slightly to $1.2951 today—and yields on Portuguese government debt moved up—the 10-year bond closed at a yield of 7.14%–on fears the Portugal is headed down the same road as Greece and Ireland and will need a formal rescue by the European Union soon.

“Soon” may be coming very quickly. The Portuguese government is scheduled to issue its first bonds of 2011 on Wednesday, January 12. The European Central Bank was buying Portuguese debt last week in an effort to push yields below 7% for the upcoming debt issue. That level is critical: Last week Portuguese officials said that the country could not afford to pay more than 7% on its debt over the long-term. (About $12 billion in Portuguese debt matures in April and June and will have to be refinanced.)

Portugal’s Prime Minister Jose Socrates continues to insist that the country will be able to meet its goal of reducing its budget deficit to 7.3% of GDP in 2010. (That would be a decrease from 9.3% of GDP in 2009.) But financial markets aren’t impressed. The Swiss National Bank said last week that it has stopped accepting Portuguese government bonds as collateral for repurchase agreements. Big Portuguese bank stocks dropped to 14 to 17 year lows on Friday.

If you’ve got stomach for the volatility and the risk, the euro debt crisis has created a buying opportunity for stocks of strong exporters with solid balance sheets. Read more