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 IHA Monthly   
June, 2012  
In This Issue
Market Commentary
June 2012 Asset Class Returns
Chart of the Month
Financial Tips - Video Edition
Quick Links
History Speaks
Austro-Hungarian Krone
Sunday's election in Greece could result in that nation leaving the Euro. For a look at what that might mean in Greece, it is instructive to see what happened in Austria after the demise of the Austro-Hungarian bi-nation following World War I. Austria and Hungary had combined their currency and central bank in 1878. Both governments maintained many other aspects of sovereignty, similar to the current EMU setup. The new central bank eventually succeeded in establishing a de facto gold standard for the Austro-Hungarian krone. This stabilized the value of the currency and limited the governments ability to inflate its way out of debt. The krone was a success for 40 years but the outbreak of the first World War spelled its doom. The link to gold was severed and the government gave itself the right to print new money, which was needed to fund the war effort. This resulted in inflation as the amount of currency in circulation exploded. The Axis loss in the war also meant the breakup of the Austro-Hungary bi-nation into several smaller countries including Austria, Hungary, Czechoslovakia and the South Slav federation. Each nation continued to use the old currency
A stamped krone
but they affixed stamps to the bills to indicate in which area they were valid.  The different currencies soon began to trade at different values. In particular, Austrians found it attractive to smuggle the old krones into Hungary where they retained more value than the newly stamped, and rapidly deflating Austrian currency. Austria began to suffer hyperinflation and only a bailout from the League of Nations and an introduction of a new currency, the schilling (in use until Austria joined the Euro), stabilized the situation there.
Market Commentary

InnerHarbor Advisors is a Manhattan based financial advisory firm specializing in: Financial Planning - Wealth Management - Insurance 
If you would like a fresh perspective on your finances, please contact John O'Meara or Michael Keating at 212.949.0494 ...or simply 'reply' to this email.


The Euro crisis finally reached the big fish last week as a $125 billion dollar bailout fund for Spain was announced. It was widely expected that Spanish banks would need aid for some time because of the poor loans they issued during the Spanish property boom. However, the timing of this bailout was accelerated by fears of adverse results from the Greek election. This is a big step because it acknowledges that there is no way to limit the Euro crisis to its periphery nations. It has taken over two years to get to this point (and if you are feeling a little Euro-crisis fatigue, the timeline below gives you a recap of its lowpoints).

As we have noted several times over the last couple of years, at some point Germany and the other northern European nations are going to have to pay in order to keep the Euro alive. The Germans have pushed the Southern nations to instill the fiscal discipline and structural reform  needed in those economies but it will take actual cash injections, or large scale money printing, to get the Euro through the short to mid term. At the same time, Germany must realize that while they some reforms have been initiated, the fiscal condition of most of Europe has gotten worse. The chart below shows the deficit and debt (both as a percentage of GDP) of Germany, Spain and Italy over the time of the crisis. The financial condition of Spain and Italy has not improved over the last couple years, despite the reforms they have implemented. It is likely they cannot get out of this crisis without direct aid from Germany at some point.  

The lack of improvement in the fiscal condition of these Southern countries puts them at greater risk of being forced out of the Euro. That would be calamitous for all involved, including Germany, as it would almost certainly lead to a severe recession or depression in Europe. Germany has rightly recognized that their ability to force change in the rest of Europe remains greatest up to the time when they acquiesce to a large scale bailout. We think last week's Spanish rescue marks the point where Germany realizes that it has hit the point where it must put real money on the table. Even as things stand today, Germany is already starting to feel the blowback from the crisis as rising yields on Italian and Spanish debt put extreme strain on the European banking system. There are further imbalances occurring within the European finance system such as the balance of payments within Target2, the European inter-bank payment system for cross-border transfers (chart from Credit Writedowns). This is a result of people moving their Euros from Italian and Spanish banks to German financial institutions.


While the Spanish bailout and thus the expansion of bailouts to the core countries has been precipitated by the Greek elections we doubt that Greece will remain in the Euro. We think that Germany, in many ways, wants Greece to be forced out. We feel this is evidenced by the more harsh manner they have dealt with Greece, particularly relative to the treatment just given to Spain. Perhaps the Germans feel that a Greek exit would serve as a sharp lesson for any of the other Euro nations that might be tempted to backtrack on reform measures, especially now as the Germans have started giving aid to the core Euro countries. The election victory of the pro-bailout New Democracy party this past weekend allows the Greeks to pretend they will continue implementing reforms and the Germans to pretend they want Greece to remain in the Euro. The best case scenario is that this gives time for the parties to orchestrate a more organized, graceful separation. The uglier scenario would see the new Greek government falling in a few months and the anti-austerity SYRIZA gaining control of parliament. The pretense on both sides would stop immediately then.

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Asset Class Returns

Through May 31st, 2012 - Performance information is for total return assuming reinvestment of interest and dividends. It excludes management fees, transaction costs and expenses. 


Chart of the Month
 Real-time estimate of Q2 Euro area GDP growth from Now-Casting.
IHA Financial Planning Corner
Managing Partner Michael Keating films a regular segment with New York Financial Press that highlights relevant financial planning techniques. Below are two interviews.
Refinancing a Mortgage: Pros & Cons
Refinancing a Mortgage: Pros & Cons




The $5 Million Gift Tax Exemption
The $5 Million Gift Tax Exemption



John O'Meara, CFP, MS
Michael Keating, CFP



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212-949-0494 and