Tuesday, March 31, 2015

Sunday Globe Special: Euro-pean Vacation

RelatedEnd of the Euro?

It was of the coverage until now.

"For Mass., a weaker euro offers mixed blessing; The euro’s plunge is a boon for vacationers, but a bust for the state’s exporters" by Megan Woolhouse, Globe Staff  March 21, 2015

Sipping wine from a villa on the Mediterranean, or even buying that villa, just got easier. 

I won't be doing either.

Selling machinery, medical devices, and other Massachusetts products in Europe just got tougher.

The value of the euro has plunged toward its lowest level in a decade, approaching a one-to-one exchange rate with the dollar. So a Paris hotel room that went for the equivalent of $350 a night would now cost less than $280.

But the weakening euro, or, if you prefer, the strengthening dollar, comes with a painful trade-off: Companies that export to Europe must deal with their products costing more overseas, requiring some to cut prices and profit margins to compete with French, German, or Italian rivals.

The situation not only challenges individual companies, but also the state’s economy. Europe is the largest overseas market for Massachusetts, which last year exported more than $6 billion in merchandise to countries using the euro.

Massachusetts exports to the eurozone fell sharply in December and January, declining 15 and 13 percent, respectively, from a year earlier, according to the most recent data from WISERTrade, a nonprofit economic research group based in Leverett. 


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“This is an unwelcome event for exporters for sure,” said Paula Murphy, director of the Massachusetts Export Center, a nonprofit that works with local companies that want to sell internationally.

The euro, the common currency of 19 European nations, dropped more than 20 percent against the dollar over the past year.

Europe is an important market for many of the state’s leading industries, including technology, biotechnology, and medical devices, according to WISERTrade’s data. In January, sales of medical devices, such as surgical instruments, imaging machines, and blood pressure monitors, fell more than 7 percent in euro countries compared with a year earlier.

“The drop in the euro will have an impact on these companies,” said Tom Sommer, president of the Massachusetts Medical Device Industry Council, a trade group. “It may be too early to tell what the long-term impact will be.”

Other industries worry, too. Econocorp Inc., a Randolph company that manufactures machines that make boxes and packaging, said the buying climate in Europe has soured in recent weeks as distributors consider cutting back on US products.

The euro has faltered recently along with the region’s economy, which has led the European Central Bank to launch an aggressive stimulus plan that includes buying more than $1 trillion in bonds to pump money into the economy.

Economists equate the bond-buying program — similar to the “quantitative easing” ended by the Federal Reserve last year — to printing money, which devalues a currency.

Oh, that's just $ILLY!

At the same time the US economy has gained momentum, leading the Fed to unwind its stimulus programs and prepare to raise short-term interest rates. That, in turn, has led to a stronger dollar, economists said. US unemployment, at 5.5 percent, is half of Europe’s 11 percent jobless rate.

Related: Yellen a Warning About Interest Rates

When the euro was strong — it hit $1.60 in April 2008 — it was common to see busloads of European travelers at New England outlet malls....

Now it is “sticker shock” for them.


Think I'll buck up for the end of the month here:

"A gauge of the dollar headed for the steepest weekly slide since October 2011 on speculation the Federal Reserve isn’t in a hurry to raise interest rates. The Bloomberg Dollar Spot index, which tracks the greenback against 10 major currencies, is retreating just a week after reaching the highest level since Bloomberg began compiling the data in 2004. The dollar tumbled Wednesday after the Fed indicated it will raise rates more slowly than it previously predicted. HSBC Holdings PLC, one of Wall Street’s biggest proponents of the dollar, said the rally may be over. The Bloomberg Dollar Spot index declined 1,195.01 at 4 p.m. in New York. The gauge fell 2.2 percent this week, the first five-day decline since the week ended Feb. 13."

What changed so much in four days?

"Strong US dollar can be a real global troublemaker" by Neil Irwin, New York Times  March 17, 2015

That is why people are going around it (notice Europe getting wailed with false flag terror attacks after recognizing Palestine? And now that!). Little worrying, isn't it?

NEW YORK — In India, it is a leading electric utility, Jaiprakash Power Ventures, that having increased its debts thirtyfold in six years is now selling off facilities and negotiating with lenders to avoid a default.

In China, it is one of the country’s largest real estate developers, Kaisa Group, threatening to pay only 2.4 cents on the dollar to creditors in the face of corruption investigations and a mass resignation of executives, leaving countless would-be Chinese home buyers stuck in the middle of a multibillion-dollar standoff.

I was told corruption is good for a market.

And in Brazil, a wave of bankruptcies among sugar producers has been driven not just by falling sugar prices, but by debts they owe in US dollars, which are becoming more expensive practically by the day, compared with the Brazilian currency.

These are all parts of the same story: The soaring value of the US dollar is rippling across the globe. As it rises, it is threatening emerging economies where companies have taken on trillions worth of dollar-based debt in recent years. The dollar rally has been driven by decisions by the Federal Reserve, which begins a two-day policy meeting Tuesday. In fact, anticipation of the Fed meeting, where officials are expected to signal interest rate increases could be near, has driven the dollar even higher in the last couple of weeks.

In effect, as Fed policy makers sit around a mahogany table in Washington to try to guide the US economy toward prosperity, their actions are having outsize, often unpredictable effects across the globe, owing to the dollar’s central role in the global financial system.

Years of low-interest-rate policies from the Fed have encouraged companies in these fast-growing economies to borrow dollars because they could do it more cheaply than if they took out loans in their local currencies, like the Indian rupee or Brazilian real. So they did: By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to the Bank for International Settlements.

As Raghuram Rajan, the Reserve Bank of India’s governor, put it earlier this year in an interview with Bloomberg Television, “Borrowing in dollars is like playing Russian roulette, especially if you’re borrowing relatively short term.” Much of the time it will work out fine, but when the value of the dollar rises, suddenly companies find that they need more of their local currency to pay back the dollars that have since gained in value. 

Don't drag them into this.

“Now that the dollar has strengthened and rates are on the rise, it presents a risk and a challenge to many emerging markets in that their debts have become more onerous, more burdensome,” said Hung Tran, an executive managing director at the Institute of International Finance, an association of global banks.

Companies in emerging markets that are primarily exporters might be OK. After all, their revenue is in dollars, and so it should keep pace with rising debt service obligations. But for those focused domestically, like real estate developers or electric utilities, a more expensive dollar can make it much more costly to service debts. Interesting.

They were just grabbing the loot before the crash then, 'eh?

Money coming in is in a local currency like the Indian rupee or the Malaysian ringgit, and it suddenly takes a lot more of them to pay debts owed in dollars.

The biggest difference this time around is that private companies, not governments, have incurred debt in a currency not their own. What is likely to follow are bankruptcies, layoffs, and cost-cutting for individual companies that borrowed too aggressively. A vicious cycle of economic collapse and government austerity measures is harder to imagine.

They never saw 2007-2008 coming.

And indeed, the rising dollar and falling emerging market currencies cut both ways for the economies in question. Even as companies that gorged on dollar debt run into trouble, falling currency values make exporters more competitive on global markets. The International Monetary Fund projects that emerging economies worldwide will grow 4.3 percent this year, compared with 2.4 percent for the advanced economies.

In a wide-ranging speech last fall, Stanley Fischer, vice chairman of the Fed, discussed the risks emerging markets faced as rising interest rates in the United States drove up the dollar.

“It does not seem that the overall risks to global financial stability are unusually elevated at this time, and they are very likely substantially less than they were going into the financial crisis,” he argued. “Nevertheless, it could be that some more vulnerable economies, including those that pursue overly rigid exchange rate policies, may find the road to normalization somewhat bumpier.”

This, he said, makes clear communication about the Fed’s intentions important. With the central bank’s meeting this week and the day of tighter money in the United States inching ever closer, the multitrillion-dollar question for the global economy is: Just how many of these companies will ride out the bumps, and how many more will crash?