Monday, September 21st, 2020

Euro Zone Austerity or Growth


Will Euro Zone austerity or growth be the key to getting the various European Union economies back on track? The issue of Euro Zone austerity or growth came to the fore the other day when the Spanish Prime Minister, Mariano Rajoy, announced that Spain will exceed its austerity limits in the coming year. Spain has the dubious distinction of being one of the PIIGS economies (Portugal, Ireland, Italy, Greece, and Spain). All of these nations have been in danger of defaulting on their national debts and have had, to varying degrees, to rely on support from the greater European Union for help in making payments on their bonds. An offshoot of the greater Euro Zone debt dilemma has been a broad agreement to set clear budget goals and to maintain fiscal discipline. The belief of the more solvent members of the Euro Zone is that the debtor states have simply been profligate spenders. The belief of the Italians, Greeks, Spanish, Portuguese, and Irish has been that if they had more significant economic growth none of these would be an issue. With this background Spain agreed to austerity measures. However, Spain has the highest unemployment rate in the Euro Zone and its Prime Minister, Mr. Rajoy, believes that he needs to temper austerity measures and promote jobs and growth. If your options trading has a Euro Zone recovery in mind, the Spanish experiment may be instructive.

The various members of the European Union, including Spain, have just signed the treaty changes that obligate each EU member to maintain tight fiscal discipline. This treaty change is the price that more solvent northern EU members exacted for coming to the rescue of their southern brothers. For northern EU member the Euro Zone austerity or growth issue has been decided on the side of austerity. However, Spain had a budget deficit of over eight percent of its GNP last year and was initially aiming for just over four percent this year. However, Mr. Rajoy now says that Spain will likely come in with a 2012 deficit of slightly less than six percent of its GNP. The obvious issue with the math for the Euro Zone austerity or growth issue is that a nation can have exactly the same monetary figure of deficit for the year but come in with various percentages depending on just how high their GNP rises or how low it sinks. Spain is opting for faster growth in hopes that growth this year will result in a lower proportional debt next year. Now, what does any of this have to do with profitable options trading ?

The European Union as a whole is an economy on par with the United States. Many Euro Zone stocks trade as American Depository Receipts in the USA. Bank stock options have been strongly affected by events in the EU as bank investment in national debt bonds has threatened to provide substantial losses. Options traders of bank stocks stand to make large profits if they are able to correctly anticipate the result of the Euro Zone austerity or growth issue. A higher debt load in Spain, Italy, or other nations will likely lead to high bond yields. However, with Greece as an example, if the situation becomes dire, investors will end up taking a loss on their capital investment in order to avoid losing all of their investments. Although this issue is largely one for European banks there appears to be some degree of US bank exposure as well.

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