News: Bailout Deal in Cyprus

If you have been watching the news, no doubt you've heard about the bailout crisis in Cyprus. Today it was reported that a solution to this problem may be possible. The European Union has set some guidelines for the bailout to which Cyprus must adhere. It is expected that they will reach an agreement today so that parliament can approve of specific measures that will fall within these guidelines.

This news came a couple hours after the Cypriot finance minister left Moscow empty-handed due to Russia turning down their appeals for aid. This left the island without any other option than to make a bailout deal with the EU. An agreement must be reached before Tuesday or Cyprus will face the collapse of its financial system.

Now Cyprus is left with a short deadline to find 5.8 billion euros which were demanded by the EU in return for a 10 billion euro ($12.93 billion) bailout. Without it, Cyprus's emergency funds would be cut off by the European Central Bank and the result could quite possibly push Cyprus out of Europe's single currency.

One of the proposed plans involved luring Russian investors to cut-price Cypriot banks and gas reserves since wealthy Russians have billions of euros at stake in Cyprus's crippled banking sector. However, after intense talks regarding the crisis, Russia has officially ended the talks without any results. It turns out Russian investors are not interested in Cypriot gas.

Lawmakers are still debating measures proposed by the government to raise the 5.8 billion euros in order to receive the bailout. They considered a "solidarity fund" that bundled state assets, including future gas revenues and nationalized pension funds, as the basis for an emergency bond issue.

Another idea involved a restructuring bill that would split Cyprus Popular Bank into good and bad assets. The government would also call for the power to impose capital controls to stem a flood of funds leaving Cyprus when the banks reopen on Tuesday after being shutdown for a week.

Unfortunately, Cyprus's partners in the 17-nation currency bloc are becoming increasingly unimpressed. Even the citizens are growing angry. On Thursday, there were long lines at ATMS full of Cypriots who were outraged that the deal would involve a levy on bank deposits.  Hundreds of demonstrators also gathered outside of parliament after hearing rumors that Popular Bank would be closed down and its staff laid off.

Right now, the only hope Cyprus seems to have is to receive that bailout. We will know more regarding the situation later in the day.

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Vote in Greece buys Eurozone More Time

The Greek vote has been cast. However, the most that it has done is buy more time for the eurozone to figure out what to do next in their 2-year long financial struggle. The Greeks also agreed to remain under Berlin's harsh terms in order to continue collecting bailout money. For now, Greece will stay attached to the eurozone in hopes of sparking economic growth. There is hope that Athens will form a government that will negotiate with Berlin over the financial situation. Berlin and its allies are what is keeping Greece from hitting rock bottom into economic chaos and leaving the euro behind. Many agree that leaving the euro would only bring financial collapse at an accelerated rate. As part of the deal, Berlin has forced austerity measures upon the Greek citizens that has lowered their standard of living and require harsh sacrifices.

Right now, Germany has the largest and most prosperous economy. They are having to deal with the financial burden of their weaker neighbors. The Greek vote was important because, while it helps their weak economy, it also has an affect on Germany by involving them more into this crisis.

This vote has only provided temporary relief. The banks in the weak economies of Greece, Italy and Spain took a beating last week when investors pulled out due to worries about a government default. Spain is currently in the midst of recovering from a painful housing bust, forcing them to monitor their home mortgage policies.

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Spain's Aid Package Impacts Market

The stock market was impacted this morning in light of Spain's aid package and Greece's upcoming election. Spain has received 100 billion euros ($125 billion) in an aid deal to help their struggling banks. Since this aid package was larger than expected, it gives the financial markets a bit of breathing room for now. The size of this aid package points to a big commitment from the euro zone to stabilize the economy. However, this also suggests that the EU is nervous about the Greek election since the vote could potentially lead to Greece leaving the euro zone. All of this uncertainty in Europe is causing U.S. companies more difficulties in growing their revenue. Overall, there remain worries concerning the global growth outlook in light of the European debt crisis, but things have taken a step in the right direction.

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ISDA: Greece Escapes Default For Now

The International Swaps & Derivatives Association (ISDA) has met in the last hour to decide whether or not Greece will default on their debt. Greece has used what is known as "collective action clauses" (CACs) in order to force investors and private creditors to take a loss. Their debt restructuring has caused payouts on $3 billion of default insurance. Using these CACs makes the restructuring considered a "credit event". This credit event indicates that a maximum of $3.16 billion of net outstanding Greek credit default swap contracts can be paid out.

Greece averted the immediate threat of an uncontrolled default, winning strong acceptance from its private creditors for a bond swap deal which will eat into its mountainous public debt and clear the way for a new bailout.

The Greek finance ministry said creditors had tendered 85.8 percent of the 177 billion euros in bonds regulated by Greek law. This would reach 95.7 percent of all privately-held Greek debt with the use of "collective action clauses" to enforce the deal on creditors who refused to take part voluntarily.

Despite the success, the deal may at best buy time for a country facing its biggest economic crisis since World War Two. The event means Greece is now set to repay debt due soon and has a second chance to rebuild its shattered economy, while the eurozone has dodged default chaos that could have destabilized global financial markets. A full-blown default would be catastrophic for Greece, and could cost the eurozone up to one trillion euros according to one estimation while sending shockwaves through global markets.

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Fannie Mae Requests More Bailout Money

We have discussed Fannie Mae several times. You know that it is a GSE that is under the conservatorship of the FHFA. You know that it is constantly in the news for various reasons. Today, Fannie Mae is in the news because it has requested a large sum of money. Reportedly, Fannie has lost $2.4 billion during the fourth quarter of 2011. Its revenue is sitting at $4.5 billion. Because of its deficit, Fannie Mae is seeking aid from the government in the form of $4.6 billion.

We also reported that there are many efforts underway regarding shutting down Fannie Mae and Freddie Mac. The government no longer wants to support them, but rather have them be a more privately-owned enterprise. As of now, taxpayers have spent $150 billion trying to maintain the GSEs. A new estimate is saying that figure could be upwards of $260 billion by the end of 2014 just to keep the companies afloat. You can see why the government wants to bail on them: Fannie alone is proving to be one of the most expensive single-company bailouts in history. So far Fannie has taken a whopping $116 billion from the U.S. Department of Treasury.

Fannie isn't the only one, though. Freddie Mac has requested its fair share of bailout money. In November, a request was made for $6 billion in financial assistance after it reportedly lost that much during the third quarter of 2011.

What do you think is the best solution? Is the government doing the right thing by bailing them out so often despite it coming straight from the taxpayers' pocket? Should the government just tell them to take their losses?  Leave your thoughts below!

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Greece Stable For Now; Impact on U.S.?

Europe's Finance ministers have officially given Greece 130 billion euros. As we reported last, Greece was given enough debt relief to help them not default on their bond repayment due in March. Greece is holding steady for the moment, but this in no way fixes their long-term problems. Additionally, the bailout has certainly had an impact on the overall European market. The euro has fluctuated since a whopping 386 billion euros have been spent to rescue not only Greece, but also Ireland and Portugal.

Greece is now forced to abide to these strict austerity measures and economic reforms that come with the deal. Adhering to these rules, however, might prove to be too rigorous for the Greek citizens which could ultimately lead to social unrest and more rioting, something that the Greek politicians do not want to deal with, especially with elections around the corner.

While Greece is currently not defaulting on its debt in March, officials find it unlikely that they can avoid default in the near future. Greece has implemented numerous spending cuts, and adding the austerity measures and the unhappy citizens, the conditions of the bailout may cause more problems to arise in the coming years. Greece will find it hard to stick to the rules, which could be a problem for the market down the road.

The reason we focus so much on Europe's debt crisis is that the US equity market is based everyday on how Europe's market is doing. If their market falters, it will have an affect on our economy. In fact, on the back of Greece's news, the US interest rates slightly rose today. 30-year fixed-rate mortgages (FRM) were averaging at 3.87 percent but are now at 3.95 percent. However, this is not a bad increase. The mortgage markets have held strong despite the weak markets overseas.

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Greece Bailout Update

For months, citizens of Greece have been protesting against the possibility of very strict austerity measures being placed upon them. There have been riots that have occurred because of these measures as well as the potential bailout that Greece had requested.

Now, a deal has finally been reached. The eurozone and the International Monetary Fund (IMF) have agreed to supply Greece with €130 billion ($170 billion) in additional bailout loans. The fear was that Greece would default in March without these additional funds. According to the terms of this new program, private bondholders have agreed to take greater losses on their end, while Athens is forced to commit to these very severe but ambitious austerity measures that the citizens have long been against.

These austerity measures including cutting wages, pensions and jobs. Officials are hoping that this new program will get the country started on its long road to recovery. At the very worst, the new program could push the country into even deeper debts and prolong the recession since wages are indeed being cut. Nobody ever said the program would be an easy fix. But the general outlook is optimistic that between the bailout and these cuts, Greece will be able to slowly return its economy to one that can grow again.

In addition to the bailout, Athens is also seeking debt forgiveness from banks and other investors in the sum of €107 billion. This would cause the European Central Bank and other similar banks to lose profits on their holdings. However, this would help Greece to reduce its massive debt. The goal is to cut their debt to 120.5% of gross domestic product by 2020.

It will take significant effort from the Greek citizens as well as the government to get the economy back on a path of growth and recovery.

Now that this bailout deal has been made and the austerity measures have been put into place, the U.S. market is expecting the stocks to rise. The market has been strong lately in anticipation of Greece's deal and the hope is that the market will continue in this way.

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FHA Saved from Needing a Bailout

Several months ago, the Federal Housing Administration (FHA) asked for a bailout. The White House Office of Management and Budget (OMB) crunched the numbers and found that the FHA needed $688 million. This would mark the first time in the FHA's 78-year history that a bailout was ever needed.

However, some good news has surfaced for the FHA.

We previously reported about the $25 billion settlement between attorneys general and the nation's five largest banks over fraudulent foreclosure agreements. We also mentioned the problem with Bank of America and Countrywide handing out mortgages to unqualified homeowners which brought about a $1 billion settlement. Because of these, and increased insurance premiums, the estimate that the OMB gave to the FHA regarding their bailout request is no longer necessary.

FHA premiums were recently raised ten basis points to pay for the extension of the payroll tax cut. The FHA says the premiums will be raised even beyond the budget proposal in an attempt to strengthen their fund and to insure that private capital continues returning to the housing market. Their budget was calling for increasing these premiums by 25 basis points for loans priced over $625,000. However, the FHA says that if the afore settlements had not happened, they no doubt would have implemented even larger premium increases to try to pull themselves out of the financial hole they were in.

While the FHA is saved from needing a bailout, they are still implementing premium increases in the near future.

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Economy Impacting News from Around the World

Here on our own turf, President Obama is proposing a new "Seven Step" budget plan to Congress in hopes of cutting the country's deficit by $4 trillion over the next 10 years. He will do this by raising taxes and cutting expenditures. However, this plan is likely to cause a larger deficit first before it reduces it. The expectation is $1.33 trillion in 2012 and $1 trillion in 2013. This is mostly due to the government trying to pull the struggling economy out of the gutter, such as helping homeowners to refinance at lower rates across the board to clear up much of the underwater housing market. Here's to hoping this plan really will help the citizens and in turn reduce the deficit which is currently at a staggering $15 trillion.

Moving on to Greece. As you may know, its outraged citizens have been rioting and burning down buildings in protest to Greece's "Austerity Plans". The Greek Parliament is currently in the process of trying to receive a fresh bailout from these austerity measures. This move means that mortgage bonds will be trading lower. These plans are not yet set in stone, however. The Finance Ministers of the Eurozone will meet on Wednesday to discuss the approval of Greece's austerity plan. Greece is hoping to receive these bailout funds by the March 20th deadline, but it will not be a quick fix for all of their problems.

Lastly, we look at the Middle East. Iran is building up their nuclear capabilities against Israel. The countries are feuding and it is expected that Israel may make a pre-emptive strike on Iran because they do not appreciate Iran pointing their weapons in their direction. This affects oil prices. Now at $100 a barrel, this feud is partially to blame for that. If they go to war, who knows what may happen to the prices and how it will effect the rest of the world. It may even bring about some safe haven buying of US bonds.

The current of the Federal National Mortgage Association (FNMA) 3.5% Bonds are $103.41, + 3bp. Because of this, we do want to encourage that you exercise caution while floating.

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