Euro crisis spreads to Eastern Europe

The Euro has been pulled-down further as Hungary has drawn attention to the scale of its own debt, raising alarm-bells that the Eurozone crisis is spreading to Eastern Europe. This week both Germany and the UK are preparing their nations for heavyweight budget cuts that will be unprecedented in both their scale and effects.

Pound Sterling – UK Markets

The Pound is still in a very strong position against the Euro and was trading at 1.2090 at 10.20am today. David Cameron is to deliver a hard-hitting speech this morning that warns of the painful budget cutting decisions that lie just round the corner and will affect the day to day life of all UK citizens. He is expected to spell out that the UK’s deficit problems are much worse than anticipated but that early intervention will be crucial in order to protect the economy and maintain the confidence of investors. Both Nick Clegg and Vince Cable from the Liberal Democrat side of the coalition have fallen into line with the Conservative view of swift and weighty budget cuts. Labour is still criticising this approach by claiming that budget cuts rather than increased spending to boost the economy is the wrong way forward. Vince Cable, however, has promised that spending cuts would be balanced by pressure on banks to increase lending to small businesses and new apprenticeship schemes. The emergency budget is due on the 22nd June.

US Dollar – US Markets

The Dollar has clawed-back ground against the Pound and Euro over the weekend. However, speculation is circulating that the US economic recovery may be heading for a slowdown similar to its experience in 2002. Although employment figures released on Friday revealed increases, these did not meet expectations. For example: payrolls only increased by 431, 000 compared to an anticipated 536, 000. US retail sales are expected to have slowed to 0.2 percent in May following a gain of 0.4 percent in April. Whilst the unemployment rate in May fell from 9.9 percent to 9.7 percent, it has remained above 9 percent for one year now. Economists are suggesting that potential weakening Government support and persistent high joblessness could be the key factors that prevent the US economic recovery from shaking off its fragile state and could cause a slump.

Euro – European Markets

The single currency has hit an eight-year low against the Yen and once again hits a four-year low against the Dollar. At the end of last week Hungarian Government officials compared their own nation’s debt woes to Greece’s, causing immediate panic that the Eurozone crisis has spread to Eastern Europe. This caused both the Euro and the Hungarian Forint to slide; since Friday Hungary has tried to retract their claims. However, the information that was revealed suggested that the previous administration in Hungary manipulated figures about public finances and that, in reality, their debt levels are comparable to that of Greece. In Germany, Chancellor Angela Merkel is preparing Germany for a decisive round of budget cuts to save 10 billion Euros a year, following two days of Cabinet talks. Merkel has stated that budget tightening by all nations will be the only way to ensure the Euro stabilises and this will also protect Germany’s AAA rating.

Other Currencies – Highlights

Following the G20 meeting on Friday and Saturday, it has emerged that Europe is demanding lower budget deficits whilst the US warns against pushing exports instead of domestic demand. The G20 nations have pledged to ‘safeguard recovery’. November deadlines were set for creating new rules to improve capital held by banks, although a European and US proposal to tax banks to cover the cost of bailouts was thwarted. The Japanese Yen has gained as investors have sold higher yielding assets. The new Prime Minister Kan will be announcing in a few weeks plans to reduce public debt and sustain a 3 percent growth rate.