United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated.Whose playbook is Hayes reading? There is simply no good reason for the Euro to rise against the dollar. Notice his out: "... barring a financial meltdown in Portugal, Ireland, Greece and Spain".
The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009.
�It�s one of those things that you can�t control,� Hayes said in an interview April 23. �In fact, I think our stock is actually down the last couple of days because of this Greece crisis.�
Terex Corp., DuPont Co., McDonald�s Corp. and Johnson & Johnson also said in the past two weeks that the euro�s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy.
�McDonald�s sells more hamburgers overseas than they do in the U.S.,� Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a April 27 phone interview. �That will have a notable impact, especially when you couple that with the fact that the euro has been falling for the better part of six months.�
�The dollar ought to weaken over time versus the euro just because of the deficit spending we have in the U.S.,� Hayes said in the interview, barring a financial meltdown in Portugal, Ireland, Greece and Spain. �So the view long-term is bearish on the dollar. The problem is, on a quarter-to-quarter basis, it gets bumped around a little.�
A meltdown in Greece is clearly underway, and it is likely to spread.
For more contagion details, please see Greek 2-year Yields Hit 18% on S&P Cut; Contagion Hits Portugal; Credit Swaps on Sovereign Debt at Record Highs; Blind Panic?
Also consider How Much is Needed to Bail Out Greece? $159 Billion? $794 Billion? Estimates Vary Wildly as Greece Turns Viral; S&P Downgrades Spain
Roubini Eyes Sovereign Debt Defaults, Inflation
Economist Nouriel Roubini says Rising Sovereign Debt Leads to Inflation, Defaults
�The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,� Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. �Unfortunately in the U.S., the bond-market vigilantes are not walking out.�If Greece left the EU (either voluntarily or involuntarily), then depending on what its government did to inflate, its new currency might easily have complete and total distrust by the public (i.e. be worthless). Yes that is hyperinflation.
�The thing I worry about is the buildup of sovereign debt,� said Roubini, a former adviser to the U.S. Treasury Department and IMF consultant, who in August 2006 predicted a �painful� U.S. recession that came to fruition in December 2007. If the problem isn�t addressed, he said, nations will either fail to meet obligations or experience higher inflation as officials �monetize� their debts, or print money to tackle the shortfalls.
�Tip of the Iceberg�
�While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,� Roubini, who teaches at NYU�s Stern School of Business, told attendees at the Beverly Hilton hotel. Increasing tax revenue won�t be enough to �save the day,� he said.
Greece �could eventually be forced to get out� of the 16- nation euro region, he said in a Bloomberg Television interview yesterday. That would lead to a decline in the euro and make it �less of a liquid currency,� he said. While a smaller euro zone �makes sense,� he said, �it could be very messy.�
�Eventually, the fiscal problems of the U.S. will also come to the fore,� he said during the panel discussion. �The risk of something serious happening in the U.S. in the next two or three years is going to be significant� because there�s �no willingness in Washington to do anything� unless forced by the bond markets.
The US, with debt it its own currency, is not remotely in the same situation.
Europe Shouldn�t Bail Out �Rich� Greece
Mark Mobius at Templeton suggests Europe Shouldn�t Bail Out �Rich� Greece.
A default by �rich� Greece on its debt would be the best way to ease the European fiscal crisis and help allay fears of a contagion, Templeton Asset Management Ltd.�s Mark Mobius said.Assuming the term "rich Greece" was meant as sarcasm, I am in agreement with Mobius.
Greece should consider restructuring its debt to pay 25 cents to 50 cents for every dollar, helping to cut its debt level to a more sustainable level, said Mobius, who oversees about $34 billion in emerging-market assets as executive chairman of Templeton Asset. Lending aid to Greece may drag down the European Union as other indebted nations seek a bailout in turn, he said.
�A default will help to plug the leak,� Mobius said in an interview with Bloomberg Television in Singapore today. �A bailout at this stage does not make sense to me.�
Indeed, I am not in favor of bailouts, and stated so long ago. Moreover, there is no reason for Germany to want to bailout Greece, as it will just lead to more bailouts of Portugal and Spain.
At some point the bailouts have to stop. I propose now. Greece can sink or swim on its own accord and that would be a mighty lesson for others.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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