Financial Polemics

Managing Your ADRs: The Case of the European Financials

2007-11-21T01:50:00.000-05:00

Taking a look at the yield curve in the UK, the yield on the 10-year gilt recently rose above that of the 2-year gilt for the first time since Q2 of 2006 as the yield curve shows signs of normalizing. The spread between the 2-year gilt and the 2-year swap has, over the past week, risen to its highest level since the early 1990’s as market participants move away from corporate debt and into sovereign debt. Similarly, 5-year credit default swaps on UK financial companies such as HBOS, HSBC, Lloyds, and Barclays are currently trading at lifetime highs, breaking above previous highs set in late August/early September. Set in an atmosphere of sharp volatility, these developments, along with investor’s ‘jittery’ behavior suggest that the general market consensus is that the long arms of the sub-prime crisis are still bent at the elbows.

Over in Germany the spread between 2-year swaps and the 2-year bobl has also reached its highest level since the 1990s. While credit default swaps are only above their August levels in some cases, namely Allianz, Bayerische Hypo, and Deutsche Bank, they are certainly on the rise. As one might expect, a flight to sovereign instruments away from corporate debt, as well as a rise in credit default swaps can be observed in most major European countries.

The data paints a simple picture. Over the coming weeks and months volatility is likely to continue, especially within the financial sector, as market uncertainty seems to be on the rise. While everyone has their own approach, it may be best to throw a cautious eye at the European financials. Better safe than sorry.

FX Intervention A Possibility This Week

2007-11-20T04:16:00.000-05:00

Has the last straw been drawn? Do current market conditions finally warrant FX intervention on the weak US Dollar? Could we see FX intervention during the thinned holiday week?

Answers to these questions may have come today in the form of an article published in the Al-Riyadh newspaper. According to the article, which cites a GCC official, Saudi Arabia may have started studying a revaluation of the Riyal. The official said that the Gulf States wish to move towards a currency basket, adding that the UAE and Qatar are amongst the states that are keen to revalue their currencies. The official noted however that there is also a strong possibility that Saudi Arabia will maintain its current exchange rate policy, but added that, if the Dollar continues to weaken, other Gulf States will not stand idle even if Saudi Arabia does. The comments quickly prompted the Dollar to decline to new post World War II lows against the Swiss Franc below the 1.1100-level, and push the Euro to fresh all-time highs against ardoun1.4760.

While the Dollar’s decline has been focus for the past couple of months there has been a slight change in rhetoric around the Dollar decline. While the French were quick to complain about the effects of the weaker Dollar on business, German companies and officials have recently started indicate that the Dollar is approaching levels that will impact German exports, and possibly the German economy. A slight shift in the rhetoric of central bankers on the topic has been observed as well. While over the past few months many central bankers reiterated the G-7 communiqué statement on currency, which states that volatile moves in FX are undesirable, there has been a shift away from the communiqué’s statement to the phrase “brutal FX moves”. While “brutal” is still undefined by central bank officials one might find the term “brutal” as a suitable description for the Dollar’s recent decline.

Thin market conditions prompted by the Thanksgiving holiday in the US this Thursday may provide the perfect market environment for FX intervention. Thin markets would enable the intervening party to maximize its impact on speculators, improving the chance of cementing a trading range. According to Don Wilcox at the Helia Resources Center, the price pattern in the Eur/Usd is similar to that of the Usd/Jpy in the late 1990s when central banks coordinated intervention when the pair breached the 147.00-level in June 1998.

Historically, central banks have been somewhat creative in such situations. With the recent aggressive rhetoric towards China regarding Yuan overvaluation intervention could be coordinated via the Eur/Jpy. The move would demonstrate a unified voice amongst central banks, hence killing two birds with one stone, namely intervening on the weak Dollar, and sending a message to China. While nothing is certain, the market current environment presents central banks with a grand opportunity to make a move. The question remains, does market activity warrant it?

FOMC October Minutes Primer

2007-11-20T04:15:00.000-05:00

The Federal Reserve is due to publish the minutes from its October 31 policy setting meeting this afternoon. Along with the FOMC minutes the Fed is due to publish its short-term economic forecasts. The general market consensus is that the Fed will indicate that the economy will tough its way through the current market turmoil and strengthen in 2008.

Looking back at the minutes from the FOMC’s September 18 policy-setting meeting, the Fed avoided a balance of risks statement, noting that such a statement could give the mistaken impression that the FOMC was more certain about the economic outlook than was in fact the case. The Fed said that the decision to cut interest rates was unanimous, adding that inflation risks could increase if the dollar continues to decline. The Fed indicated that it was confident that there would be a sustained decline in core inflation, adding that a further slowdown in growth was likely.

Between the September 18 meeting and the October 20 policy-setting meetings the US Dollar index declined by 2.25% from 79.204 to 77.415, falling to its lowest level in decades. Since the August reading of 2.2%, core CPI declined to 2.1% in September, and remained at 2.1% in October at its lowest level since March of 2006. ‘Sub-prime jitters’ continued to increase between the meetings, as US and European based financial firms slowly continued to disclose additional sub-prime related losses. The progression of market activity over the 31-day period seems to point to a near-term slowdown in growth, the possibility of higher inflation from a weakening dollar, and a slowdown in core inflation, all of which are much in line with the FOMC’s September statement, seeming to indicate that the Fed has a good grasp of the current situation.

The minutes from the October meeting will set the tone for future monetary policy. On Friday, November 16 the Fed’s Poole cast doubt on the need for further interest rate cuts, noting that credit troubles are winding down. Similarly, the Fed’s Kroszner said that further rate cuts would provide less of a shield against inflation, adding that further loosening would be more likely to cause inflation. Considering the continued decline in the Dollar [the Dollar index has declined 4.3% to date since the September meeting] along with the most recent rhetoric, the Fed is unlikely to indicate that further loosening is necessary at the moment. This is where the divide lies. Futures currently indicate that the market has priced in a 96% chance of a 25bps interest rate cut at the December 11 policy-setting meeting. The spread between the 2-year note and 2-year swaps has increased to its highest level in well over 5 years indicating that sub-prime jitters and market uncertainty have continued to rise. While the minutes from the October meeting will set the outlook for the near-term future of the Fed’s policy and will be the focus today, the main focus over the next few months will be the Fed’s actions. Will the Fed remain an independent central bank, or will the Fed cave into market pressure?

Chinese IPO Insight: China Railway Engineering Group

2007-11-19T04:33:00.000-05:00

Headquartered in Beijing, the China Railway Engineering Corporation [CREC] runs a wide range of businesses that cover surveying and designing, construction and installation, manufacturing, R&D, technical consulting, capital management as well as international economic and trade activities. CREC is the third largest civil construction enterprise in the world, and was recently ranked number 342 in Fortune Magazine’s survey of the world’s 500 largest enterprises in 2007. With nearly 300K employees, CREC's construction teams can be found in over 1,000 towns and cities throughout China.

In the company’s bio, listed on its website, CREC said that, beginning in 1997, it made nine major strides in its development over a period of nine years. During the nine year period both turnover and the total value of new contracts increased by nearly RMB 10 billion Yuan annually, reaching RMB126.4 billion Yuan and RMB 205.5 billion Yuan respectively in 2005. The value of its total assets stands at RMB 101.4 billion Yuan. CREC's construction machinery and equipment are worth RMB 10.61 billion Yuan in terms of their original value, or about RMB 5.91 billion Yuan in terms of their net value. As the “leading enterprise in the Construction Industry,” CREC has become a backbone enterprise in China in recent years and plays a roll of vital importance in the national economy.

Along with India, China is one of the world’s leading emerging markets. A Chinese Government Think Tank recently forecasted fourth-quarter GDP growth of 11.2%, and 2007 y/y GDP growth of 11.4%. As the emerging market continues to grow, both organically and through increased foreign investment, the demand for industrial services on both a small and large-scale level are set to rise at a significant pace. As one of the largest companies in the world, the state-owned CREC stands to boost its market share significantly in China and beyond, and is sure to follow a path of increasing growth over the coming years. Due to list in December CREC will become one of China’s last screaming buys of 2007.

CREC plans to sell a maximum of 4.68B in class A shares in Shanghai and a maximum of 3.82B in H shares in Hong Kong, its preliminary share sale document said on the China Securities Regulatory Commission website. As the IPO approaches, recent estimates, as published in a Bloomberg summary story, indicate that CREC may raise as much as $4.0B in its dual share sale by December.

The Shanghai listing is scheduled for December 3, 2007 and is being managed by BOC International Holdings Ltd. and UBS. The Hong Kong listing is scheduled for December 7, 2007, and is being managed by ABN Amro Rothschild LLC, BOCI, JP Morgan
According to Reuters citing an unknown source CREC set its IPO price range a 4.00 – 4.80 Yuan/share for its Shanghai listing.

Andy Warhol’s Post-Mortem Economic Commentary

2007-11-15T14:13:00.000-05:00

According to Artprice’s 2006 Art Market Insight report, Artprice’s Global Price Index grew 25.4% y/y, seeming to indicate that the global economy was healthy in 2006. Often viewed as a reflection of the economy, auction results have been followed with increasing interest over the past decade now. The November 7 “Impressionist and Modern Art” auction at Sotherby’s pulled in just under $270 million, well below the $355-$494 million that the art world had estimated. Following the poor results Sotheby’s shares posted their biggest one-day loss dropping by an astounding 28%. Considering that a majority of the works auctioned could only be afforded by the world’s wealthiest investors, the results sparked a sense of concern. Perhaps the poor auction results were an indication that, amid increasing sub-prime woes, record high energy prices, and general economic uncertainty, fears of an economic recession in the US are growing.

Artprice’s Global Price Index, which is updated quarterly, posted continued gains in the first and second quarters of 2007, breaking its all time high/base level set in 1990. The index rose from 99.5 in the first quarter to a staggering 116.7 in the second quarter. It was around the beginning of August that the first signs of the US sub-prime crisis emerged, marking a financial epoch characterized by global uncertainty led by the world’s largest economy. Since August the global market place has been marked by increased volatility, economic uncertainty in the US, and a general uncertainty around the global implications of a looming economic recession in the US. As one might expect, this was reflected in the art world, as indicated by the Global Price Index, which declined from its all-time high of 116.7 in the second quarter, to 105.2 in the third quarter. Although the q/q decline was smaller than the q/q gain from the first quarter to the second quarter, the results reflect what could turn out to be the beginning of a sustained correction in the worldwide marketplace. Unsurprisingly, the third quarter decline in the Global Price Index seems to mirror US market sentiment. The Fed’s MPC members have recently downgraded their fourth quarter GDP growth forecasts. Following 75bps in rate cuts, the Fed finds itself in an increasingly difficult place as record high oil prices accompanied by the weak US Dollar make policy decisions increasingly difficult. Uncertainty still exists around the exact extent of the sub-prime situation, clouding the global economic outlook well beyond the coasts of the North American continent. The Euro-zone faces increasing inflationary pressures, amplified by the sharp rise in inflation measured in October, yet the ECB has opted to maintain a “wait-and-see” approach as UBS, and Barclays amongst many other European financials, are thought to have significant unannounced sub-prime losses. Trends in the art market paint a perfect (and prettier) picture of the current economic environment.

The poor auction results on November 7 were concerning as the events are highly anticipated in one of the world’s art capitals. Ensuing the November 7 “Impressionist and Modern Art” auctions all eyes were focused on the “Contemporary and Postwar Art” auctions the following week. Sotheby’s pulled in just under $316 million, marking the auction the most lucrative “Contemporary and Postwar Art” auction in the company’s history. Similarly, Christie’s November 13 “Contemporary Art” auction generated $325 million, during which 12 new auction records were set for individual artists. Among the pieces sold at the auctions was a piece from Andy Warhol’s “Campbell’s Soup Can” collection that sold for $8.4M, not all that uncommon for the second highest grossing artist of 2004, 2005, and 2006. The strong auctions results suggest that perhaps the poor results at the “Impressionist and Modern Art” auctions were as much of a fluke as many believe the negative reading on non-farm payrolls was in August, while others seem to believe that the poor auctions are still a sign of things to come.

Billionaire collector Eli Broad predicted that “troubles in the sub-prime mortgage market will rein in recent astounding levels of spending” according to the Robin Pogrebin’s late-August NY Times article on the Art World. Commenting about the outlook for the art world Broad said that [sic] “We’ve seen an unprecedented appreciation of contemporary art over the past 35 years, and we’re bound to have a correction. I don’t know if it will happen at the November auctions, or if it will happen next May”. While spectators saw the good, the bad, and the ugly in the beginning of November, focus will now fall upon the auctions in May. While the shaky auction results in November seem to mirror the global economic volatility since August one thing is certain, looking ahead, the probability of a recession and/or correction seem to be on the rise, and will paint a gloomy future for the economy if market risks continue to materialize.

Why Now is the Time to Take a Position on the Norwegian Krone

2007-11-15T10:24:00.000-05:00

With much of the recent focus in the currency world centered around the weak US Dollar, the strong Euro, and their implications for global market place, many investors are overlooking other currencies, including the Norwegian Krone. The Norwegian Krone, which was introduced when Norway joined the short-lived Scandinavian Monetary Union in 1875, is currently trading at multi-decade highs against the US Dollar (but what isn’t these days?). In its recent bout of strength the Krone also reached its highest level against the Euro in well over four years during the early part of October. With the seemingly endless rise in the Euro over the past few months becoming more and more of a hot topic, the possibility of central bank intervention on the Euro seems to be growing. The Eur/Nok cross, which is at a key level, deserves some consideration as the turn of events in the coming weeks and months is likely to spark some significant momentum.

Now, lets go back to the beginning of 2003. In mid-January of 2003 the Eur/Nok was at its lowest level since the Euro’s inception in 1999. On January 22 Norges Bank cut both the overnight rate and the deposit rate by 50 basis points each, bringing rates down to 6.00% and 8.00% respectively. The January rate cut began the Krone’s one-year decline against the Euro. Throughout the one-year period further Norges Bank interest rate cuts lent upside momentum to the Euro. Norges bank cut interest rates 8 more times following the January rate cut, finally ending the loosening of its monetary policy in March of 2004 with its key interest rate at 1.75%. During the bank’s loosening cycle the Eur/Nok reached its highest level since the Euro’s inception at around 8.9015, which remains the all time high in the Eur/Nok.

After Norwegian rates stabilized at 1.75% in 2003, where they stayed until mid-2005, the Euro began to lose ground against the Krone. Oil prices are the main factor here. Oil prices, which were in the high $20/barrel range in March of 2003, rose to the $70/barrel range by mid-2005. According to the EIA, Norway was the tenth largest oil producing, and the third largest oil exporting country in world in 2006. As history has shown, oil price trends tend to impact the appreciation and depreciation of the Krone. Interesting side note, Norway’s oil profit based sovereign wealth fund, known was the Government Pension Fund of Norway, is the second largest in the world according to Pension Fund Online’s June 2007 valuation, second only to the UAE. Rising oil prices guided the Krone’s appreciation against the Euro, where is peaked around 7.69 in November of 2005, its highest level since early March of 2003.

It was in December of 2005 that the ECB commenced its rate tightening cycle, which took the Eur/Nok off of its 32-month lows against the Krone. Although Norges bank had already commenced its rate tightening cycle before the ECB, the Norges Bank’s monetary policy decisions didn’t hold much weight against the ECB’s policy decisions. The Eur/Nok quickly rose to around 8.50, where it peaked at its highest level since early August of 2004. It was around the late October/early November period where the Eur/Nok peaked that a three-month decline in oil prices began to show signs of bottoming out. Coupled with a renewed rise in oil prices in the beginning of 2007, a few surprise rate hikes in Norway sparked momentum in the Krone again. The Krone peaked around 7.62 in October of 2007, at its highest level since March of 2003.

The Eur/Nok is currently in the middle of its 15-year monthly trading range, and, as previously mentioned, on October 9, 2007 fell to 7.6178, its lowest level since early March of 2003. The Eur/Nok has since rebounded off of its early October low, but still remains below its 200-day moving average. Drawing a an acceleration line from the early 2007 Eur/Nok high and following the trend down to October lows, 7.6 stands out as a key level. The pair failed to maintain its downside momentum below the acceleration line, and, since rebounding, seems to have gained sustainable upside momentum. If the pair is able to maintain it’s upside momentum it is likely to climb past its early 2007 highs of 8.50.

With a relatively benign inflation outlook, it does not look like Noeges Bank will have to raise interest rates from their current level of 5.00%. Inflation remains a problem in the Euro-Zone, as indicated by ECB members in their recent rhetoric, and seen in the October inflation figures (most recently the y/y reading in the Euro-Zone was above the key 2.0% level). The ECB has indicated that, if the general marketplace was not clouded by the uncertainty that has resulted from sub-prime woes, they would have already taken action on interest rates. For the time being the ECB is likely to remain on hold until the future of the financial market place becomes more certain. In the event that the ECB raises interest rates, the Eur/Nok will gain further upside momentum, however, higher rates will lead the Euro higher in general, which may become a catalyst for central bank intervention on the Euro. Central bank intervention on the Euro will reverse the recent upside momentum on the Eur/Nok. If the Eur/Nok can manage a weekly close below the 7.6 handle downside momentum is likely to bring the cross below the 6.0 handle.

Finally, while oil prices do tend to impact the Nok exchange rate, other factors do tend to overpower the relationship. The future of crude oil prices is somewhat uncertain. In the long-term prices are likely to rise, which supports Krone appreciation, however, after failing to break $100 oil prices seem to have lost their recent upside drive.

Bottom line: With no Norges Bank interest rates on the horizon, as inflation is below its 2.5% target, the Eur/Nok is likely to take the elevator up to, and beyond 8.50. An ECB rate hike will add further upside momentum, while higher oil prices will only hinder the rate at which the Krone depreciates. If there is central bank intervention on the Euro, and the Eur/Nok can manage a weekly close below the 7.60 handle, the cross is likely to take the elevator down to and beyond 6.00.

Belgian Bonds and the Russian Financial Crisis of 1998

2007-11-15T10:21:00.000-05:00

On June 10 Belgian voters went to the polls to elect new members for bicameral Federal Parliament of Belgium. The 150 members of the Chamber of Representatives were elected from 11 electoral districts and the 40 Senate members were elected from the Dutch and Francophone electoral colleges, with 25 and 15 elected from each respectively.

The overall outcome of the elections was as follows. The liberal fraction, represented by the Mouvement Réformateur, and the Open VLD, became the largest group in parliament. Following the liberal fraction was the Christian Democrats, represented by the Christen Democratisch & Vlaams, the Centre Démocrate Humaniste, and the Nieuw-Vlaamse Alliantie. The liberal fraction won a total of 41 seats in the Chamber of Representatives, and 11 seats in the Senate. The Mouvement Réformateur won 29 seats overall, with 23 in the Chamber of Representatives and 6 in the Senate, while the Open VLD won 23 seats in total, with 18 in the Chamber of Representatives and 5 in the Senate. The Christen Democratisch & Vlaams along with the Nieuw-Vlaamse Alliantie won a total of 39 seats, with 30 seats in the Chamber of Representatives and 9 seats in the Senate. The electoral alliance between the Flemish the Christen Democratisch & Vlaams and Nieuw-Vlaamse Alliantie parties became the biggest single parliamentary grouping as there is no electoral alliance between the Mouvement Réformateur, and the Open VLD. Putting the results a little further into context, the liberal fraction lost 8 seats in the Chamber of Representatives, and lost 1 seat in the Senate. The Christian Democrats gained 8 seats in the Chamber of Representatives, and 3 seats in the Senate.

Along with the general elections came the re-emergence of the issue of the Brussels-Halle-Vilvoorde. The Brussels-Halle-Vilvoorde, BHV for short, is a Belgian electoral arrondissement in the center of the country. The BHV encompasses the officially bilingual Brussels-Capital Region, which coincides with the administrative arrondissment of Brussels-Capital, as well as the officially Dutch-speaking area around it, the Halle-Vilvoore, which forms a separate administrative arrondissement.

In European and national elections voters in the Brussels-Halle-Vilvoorde district can vote for candidates from both the French and Flemish communities although the Halle-Vilvoorde area belongs solely to the Flemish community. Voters can vote for candidates and parties who belong to another constitutionally established Community and Region. There in lies the problem. Since the BHV district is a mixture of French and Flemish speaking residents, French-speaking parties are opposed to dividing the BHV electoral district, while the Flemish parties are equally in favor of a split.

It was around 2000 that the Flemish parties saw the need to split the electoral district. In 2002 the Court of Arbitration condemned the situation as unconstitutional, however, no solution was proposed, and the matter was left largely unattended and unchanged. There has been a debate between cabinet ministers and parties over the future of the district brewing since 2005. A deadline date of May 11, 2005 was set for a decision to be reached, but quickly expired after the debating parties fell short of making any definitive decision. The issue emerged once again ahead of the 2007 elections as the Federal Government failed to uphold with the Court of Arbitration’s 2002 ruling. The Court of Arbitration gave the government the time to fix the problem until the next elections should been scheduled, after that election results could be declared void. On November 7, 2007 the Flemish-speaking parties voted to split up the Brussels Halle Vilvoorde electoral region the French-speaking parties refused to vote. The Flemish vote effectively stripped voting rights from 120 000 francophone voters. On November 9, 2007 King Albert II intervened removing the state reform from agenda for the negotiations, and instructing the chairmen of the both the Senate and the Chamber of Representatives to begin a dialogue on the matter. In a joint statement, the Christen Democratisch & Vlaams along with the Nieuw-Vlaamse Alliantie electoral alliance rejected the decision, leaving the future of the country in limbo.

During the recent weeks of unrest Belgian government bond yields have been on an upward trend. The yield spread between the 2 and 10-year OLOs widened to its greatest margin in about 5 years. The spread between the 10-year OLO and the 10-year bund rose to its highest point since the third-quarter of 2002. The Yield on the 10-year OLO surpassed that of the 10-year note for the first time since late 2004. As political uncertainty persists in Belgium, government bond yields continue to follow an upward trend as investors sell bonds in an attempt to protect themselves from risk. While government backed investments are usually considered amongst the safer investments, the prolonged period of political unrest has led some spectators to believe that the Belgian government may split as both sides seem unlikely to compromise. In the event that the government disbands, debt holders run the risk of losing some or all of their investment. It is possible that the government will put a moratorium on outstanding debt for an unspecified period of time, during which the newly divided states of the former country settle. After settling the two sides will debate over who is responsible for the repayment of the outstanding debt. Debt holders run the risk of losing all of their investments if the government defaults. The Belgian Treasury currently has approximately €223.3B outstanding held in OLOs, that is medium-term, long-term, and very long-term securities, just over 50% of which is held by investors outside of Belgium.

In a recently e-mail interview with Jean Deboutte, the Director of Strategy and Risk Management at the Belgian Debt Agency, Deboutte acknowledged that the scenario of a spilt is purely hypothetical, but admitted that the issue of what should happen to government debt in such a situation has not yet been addressed. Deboutte assured however that, whatever decisions were made, investors would not lose their money as, afterward it would be impossible for Belgium or for its remaining parts to obtain financing of any kind again.

While Deboutte’s comments are reassuring, investors may still find themselves in a precarious position. Recall the Russian financial crisis of 1998, which occurred during the global recession of 1998. In a recessionary environment, a decline in productivity, along with an artificially high fixed exchange rate between the ruble and foreign currencies set the background for the crisis. Additionally, Russia’s foreign reserves were impacted by the East Asian Currency Crisis that had begun in 1997 and the following declines in both the price and demand for crude oil and nonferrous metals. At the same time Russia was in the midst of a political crisis, which came to a head in when President Yeltsin dismissed Prime Minister Chernomyrdin along with his entire cabinet. After a $22.6 billion financial package from the IMF and the World Bank to aid in reforms and the stabilization of the Russian market place failed, there was an unprecedented flight of foreign capital from Russia. On August 17, 1998 an escalating payment crisis forced Russia to significantly devalue the ruble, declare its intention to restructure all official domestic currency debt obligations by 2000 and impose a 90-day moratorium on the repayment of private external debt. Russia’s quick recovery was the result of a bounce back in oil prices, an increase in consumer demand, and a drop in unemployment amongst other factors. Before bouncing back, Russia also received the aid of The London Club, a group of private creditors that signed a deal on October 6, 1998 to restructure Soviet-era debts totaling $32 billion. The deal allowed Russia to pay off $32 billion in debt over 25 years. The deal with the London Club followed shortly after the country joined the Paris Club of official creditors, after signing an agreement that would allow Russia to reschedule $40 billion in Soviet debt over 25 years.

The similarities between the global market place during the Russian financial crisis of 1998 and the current market environment are intriguing. Political unrest leaves the future of Belgium in limbo, as Yeltsin’s decision to dismiss Prime Minister Chernomyrdin along with his entire cabinet left the future of Russia in limbo. The Euro exchange-rate, which, in recent weeks has breached its all time synthetic highs against the weak US Dollar, is beginning to impede European economic growth. In many ways the recent decline in the US Dollar mirrors the decline in East Asian currencies during the East Asian Currency Crisis. The United States is currently in the midst of an Economic slowdown, which stands to have a huge effect on the global market place. Although many believe that the stage isn’t set for a recession, with billions in unclaimed faulty sub-prime loans floating around the future does not look bright for the world’s largest economy. Crude oil and food prices are spiraling to all time highs, creating a global inflationary environment. While low oil prices hurt the Russian economy, high oil prices, amongst other things, have kept the European Central Bank on fiscal tightening track as average inflation is seen dangerously close to the 2.0% target level in 2008. With no sign of FX intervention in sight, another ECB interest rate hike could take the Euro exchange rate to levels that really start to hinder European economic growth.

The implications of a downfall in Belgium on the Euro-Zone economy could be significant. The Belgian economy is the17th-largest in the world according to statistics compiled in 2006 and ranks as the 10th-largest market for the export of U.S. goods. With France, the largest economy in the Euro-Zone next to Germany, already voicing concern over the Euro FX level, and with German companies slowly admitting that the exchange rate could have negative effects on business, political unrest in Belgium could push the Euro-Zone to face one of its first major tests since its inception. Whether the effects of a Belgian break-up could reach further than its borders remains to be seen. What is certain is that a break-up could have far-reaching economic consequences within the country, and would leave debt holders in a rather precarious position.