Wednesday, September 8, 2010

More bad news from the euro zone

After a relief rally occurred in North American markets in late August and the beginning of September, it appears trouble is once again emerging from the euro zone. Today, Greece's second quarter GDP growth, which was previously announced at -3.5%, has been revised down to -3.7%. It also fell quarter-on-quarter by 1.8%, which was the biggest decline since the fourth quarter of 2008. This GDP revision means that the EU/IMF's forecast of a 4% GDP decline this year for Greece is most likely.
As for Germany, a German banks' association stated yesterday that following new global banking regulations, the 10 biggest German banks require an additional $105 billion euros to meet the Tier 1 capital requirement. The new rules raises Tier 1 capital requirements from a previous 4% to 12% (9% plus a 3% buffer). 

In addition, the Wall Street Journal reported that the stress test for euro zone banks may have underestimated risk to the banking sector. As a result, the German stock market fell 1.5%. CDS for the euro zone financial sector rose 7 basis points to 136 bp, while the euro fell from US$1.2873 to US$1.27, a fall of 1.2%.

While bad news from the euro zone has only been periodic in recent months, it is likely that the region will be a main focus for markets in the coming weeks if bad news continues to emerge from the region.

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