Posted February 19, 2009

The US President announces a mortgage relief plan and markets fail to respond. The euro recovers in response to Germany’s indications it will financially assist Euro-Zone neighbours.


US President Obama announced a mortgage relief plan that involves an amount much higher than expected.  This is one of the set of details the global markets have been waiting for in order to gain confidence.  If it works in the US, and assists with slowing the drop in housing prices while stemming the increase in foreclosures, it will be considered a success.

The markets were unimpressed to say the least.  The Dow Jones Industrial Average rose a mere 3 points and the US dollar weakened against the yen and the euro.  The euro rose to $1.2684 against the US dollar and to 118.79 yen per euro.  The US dollar also weakened against Japan’s yen to 93.96 yen per US dollar. 

So why are the markets responding this way?  Apparently the devil really is in the details as the old saying goes.  The markets begged for details, and now that they have some, the response is tepid.  The US mortgage relief plan worth $75 billion was supposed to provide some assurances to the markets while providing assistance to homeowners close to foreclosure.  Instead the response was one of doubt the plan will be effective and concerns it could even make the situation worse.

So how can a relief plan make the situation worse?  The mortgage relief plan is intended to prevent up to 9 million foreclosures for houses worth more than the mortgage balances.  These are the house mortgages that make up some of the bank toxic assets.  In effect the government is promising to back refinanced mortgages owned by Fannie Mae or Freddie Mac. 

Here’s the problem.  US homeowners are wondering why people who bought houses they could not afford will get taxpayer help to keep their homes while those who have managed to stay current on their mortgages are left to tread murky financial waters.  The markets responded to this plan the way it did because investors did not see anything in it to help stabilize privately owned banks and considered the program too small to be economically stimulating. 

In the Euro-Zone, Germany has finally decided to join the collective fight against the recession.  Up to this point, Germany has been concentrating on its own economy but now realizes that as a euro participant the country must assist with financial stabilization in the region.  Germany is the largest economy in Europe.

The euro strengthened against most major global currencies including the US dollar and yen as mentioned earlier.  The yen is in danger of losing its safe haven status as credit-default swaps increased and the Japanese GDP shrank significantly.  The price of the yen fluctuated all day against the US dollar as investors reacted to the growing economic crisis in the Japanese economy and the US mortgage relief plan.  The yen has declined 1.8% this week against the US dollar. 

There is still so much uncertainty in the financial systems around the world even after months of injecting billions in currency into the markets.  Investor talk is turning to the fears of inflation looming by the end of the year even as deflation continues at this moment.  The enormous amounts of money being spent by governments are barely keeping the banking systems propped up.

It may seem at this point as if nothing is going to work. The conclusion some are reaching is that select weak banks will need to be allowed to fail in order to begin an economic turnaround.  The same is true of the US auto industry.  Companies that are not financially sound will fail to survive this crisis without government takeovers and even government only has so much money.   The most recent auto bailout occurred in France but France required the companies to agree they will not lay off workers or close plants.

The unimpressed financial markets are still waiting for those details that let them know there is finally a plan in the works which will have a positive economic impact.  It appears they might be waiting for some time yet.