Convergence – Divergence and Insurgents

Christine Lagarde, President of the IMF, indicated yesterday that the G-20 countries we willing to come to the aid of the EU to increase the funding to the IMF. Currently, the IMF has 390 billion euros available in their emergency fund, which would most likely not be enough to assist the ailing economies of EU regardless of the leveraging power of the EFSF. Lagarde, indicated that the BRIC nations, which are made up of Brazil, Russia, India and China were willing to increase their funding to the IMF. The BRIC nations have been updated to become BRICS, which now includes South Africa. Lagarde, also noted that Latin America, specifically Mexico were also willing to increase funds. Lagarde, did not indicate the amounts promised or discussed. She is currently in meeting throughout South America. This is the first mention during the turmoil of aid from Russia.

While Lagarde, is pushing the G20 and the IMF to develop plans to assist Europe. The Europe leaders met with their counterpart from England yesterday, where David Cameron told the EU leaders that it was time for some direct action and final commitment and plans.

At the same time that Cameron was meeting with Sarkozy and Merkel, BoE director King, was admonishing UK bankers, to increase capital and to reduce their bonuses. King is trying to keep a tight rein on the bankers.

Recently, economists and financial experts as well as investors have been reviewing the tentative plans for the EFSF, and many have drawn the conclusion that although these European Bonds will help raise the funds necessary to assist the ailing economies of the EU, that the final effect will be an increase in borrowing costs for countries such as Germany and France who have low bond rates and will reduce the interest paid by countries such as Italy, Spain, and Greece. It will end up being a weighted average bond. This will help those with high borrowing rates but cause a damaging effect to those with strong economies. Investors have been playing the game, buying up high yield bonds in the hopes that they will not have to take a haircut and will have the bonds backed by the EU or the economies saved by the EU and therefore make huge profits.

The markets have adjusted to the reality that they were reacting to news and not improvements in business and economics. News can only sustain markets for a short period of time, between the Ups and Downs, but news alone cannot drive the markets without the achieving real economic improvement. This past week has demonstrated just how much rumor and news can move markets. The week started off with Black Friday, moved to Cyber Monday, moved to rumor Tuesday (IMF assistance to Italy) and continued on to Central Banks Coordinated Effort Wednesday. By Thursday, investors were exhausted and stressed from chasing markets and news. Markets retracted slightly, while they took the time to digest the week’s news.

Friday is still to play out.