Sure glad that’s over.
Suddenly Monday’s downgrade by Standard & Poor’s of Greece’s sovereign debt to junk doesn’t matter anymore.
European stock markets have hauled out the rally monkey today on news that—well, on news that discussions on an aid package for Greece will conclude in the next few days. Details on the package will be available “soon,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters today.
Speculators (since there aren’t any investors playing this trade) looking for a quick profit as the schizophrenic market swung back to hope from despair bid up Greece’s benchmark ASE Index 7.1% today. Shares of National Bank of Greece, the country’s biggest lender, rose 18%.
Greece faces a May 19 deadline to refinance $11.3 billion in government debt. To meet that deadline, bankers say, a deal must be in place by May 6.
Frankly, it’s inconceivable to me that Greece and the European Union will miss that target. The amount of money that it will take to avert this immediate crisis is relatively small.
But solving the immediate crisis leaves the big problem still on the table.
The deal that is still under discussion would put up $60 billion from European Union governments and the International Monetary Fund. That would be enough to get Greece through 2010. But estimates put the bill for a long-term bailout of Greece at $120 billion to $200 billion.
Any deal that gets put together in the next few days merely buys time.
Stock markets around the world will rejoice on the announcement of any deal at all, of course.
But I don’t think the news will stop the maddening swing from optimism to despair and back again that we’ve suffered in the last few weeks.
Sold EUO (2X short the Euro) today with a nice short-term profit that was beginning to slip away. I’ll give a few days for whatever the current idiocy is to run its course and probably be back in sometime next week. Just trying to roll with the punches, keeping my focus on the Euro jaw, and waiting to land the knock-out. I don’t see it as a matter of “if”, but rather one of “when”.
Stock market has its reasons that stock market
doesn’t know 🙂
Ed, I don’t see what would be so bad with a devalued euro. As this, bringing back inflation, is probably the only alternative we have to solve our debt/pensions problems as no political leader in Europe, with the possible exception of Mrs Merkel, has the will, not to say the cojones, to pull through the structural changes needed in our old countries.
faroos,
The problem for the euro is this: If the EU bails out Greece (and/or the other PIIGS), how does it pay for it? There are two bad possibilities.
First, they can inflate the euro, which de facto decreases the value of the euro on international currency markets.
Second, they can just take money from productive economies like Germany and give it to unproductive economies like Greece. You run the risk of putting Germany in the same situation Greece is in. If Europe’s productive economies end up in the same debt mess as Greece, then their only choice will be to inflate the euro (see first choice).
For those of you who think Spain may not be in trouble, consider this: Unemployment there JUST hit 20%.
http://www.cnbc.com/id/36867221
It’s harder to climb out of debt when your economy is a mess. Keep in mind that raising taxes does NOT equate to raising revenues from taxes. Laffer lives…
ok one more question, if Greece defaults; it is bad but why would it effect the Euro. i mean whoever holds the Greece debt is in bad situation, and it is bad for the monitory union for Europe but why is it a problem to the Euro
For all the $$$ that it sounds like Germany/France will have to pony-up, what I wonder is…isn’t it just better for them to “succeed from the union”, as it were??
Jim,
according to the French paper, La Tribune, French banks carry a lot of Greek government bonds. Credit Agricole by ex would carry around 6 billion € GGB. Out of which 5.15 would be covered by CDS, purchased from Hedge Funds mostly. Situation would be similar with Credit Suisse, Deutsche Bank or UBS. How can we be sure these hedge funds will not go belly under should Greece default (remember AIG)
Thanks Jim and everyone for their thoughts
I think the way this PIGS problem will be handled will be a inlation game changer. Like it has been said here the g6 nations are in trouble of enacting inflationary responses to their deficit. US seems to be planning a high deficit for the rest of this decade, UK is pointing towards austerity (all 3 candidates quietly agree that 40-70bil should be cut from the budget each year for for the next 4 years). However whether these measures are actually implemented is yet to be seen
Then the problem of europe, if greece is bailed out then the underlying problems of southern europe wont be solved the hard way. If Germany calls greece’s bluff and only gives them money when they are acutally reducing their deficit then I think the Euro will be seen as a safer currency. If then Greece cant manage the cuts, a crisis could ensure (this seems to be happening) and they could be ejected from the euro. Then the other pigs will have their chance to work out their problems
Ultimately the Euro could emerge as a safer currency which will be seen to hold its value better over the long term. possibly the only reserve currency to do so.
Or it may join the other majors towards what looks to be pretty serious inflation
We must assume defaults on some of these countries will occur. The Markets will “freak out” and pull back which will create lots of buying oppurtunities. The world however, will not end and the sky will not fall. And their will be stocks to buy.
Ed:
Another brilliant comment. By time EU finishing popping up the PIIGS, the entire EU would be on life support. Also add US to that list.
It reminds me of a European soccer match. The out manned team tries to kick the ball as best they can to the opponents end of the field…postponing, well, the obvious…they get their clocks cleaned. Well, Greece just kicked the ball hard (with the help of the EU & IMF). Plenty of time in the game…Jim’s right; 2010’s going to end only to have the ball jammed down their throats. Not enough time to come up with a winning game plan. Ed’s right too…a lot of Europe is in the same shape. Talk about 2nd & 3rd & 4th marriages…hope springs but experience gotcha!!
faroos,
The problem with Spain is the sheer amount of their debt, which is more than Portugal and Greece combined. Also, keep in mind the simple rule of supply and demand. The supply of sovereign debt right now is incredible (If anyone has a link to a chart showing historical amounts of total world sovereign debt, I’d love to see it!). The supply of sovereign debt is getting near the tipping point of overwhelming the demand for it, which will inevitably lead to yield increases for the buyers of less-than-stellar rated bonds.
Translation: Spain’s refinancing in July will cost them more.
Ed is correct. And unfortunately the French and German banks are the ones holding a large share of the debt. So they have them by the Cojones. Merkel campaigns while trying to ignore the elephant in the room.
what i find interesting is that it looks like Greece has either all of its public loans on short terms and they are all international loans. why is it that Greece will need all the 60 Billion in this year.
on the other hand why is Spain is included in this list. what i heard and learned is that although it has a big deficit but public loans is 60% of GDP (unlike Greece and UK for that matter) so they still have much of time to think what to do.
this situation is like many others, Bad but not so unusual. either investors just woke up or they are hipping the issue to increase fluctuation in the market.
I hope there’s enough money left to prop up the US…
Anyone who thinks we’re done with Greece reminds me of the old joke about second marriages: The triumph of hope over experience…
And that doesn’t even touch on Portugal…or Spain…or Italy…or Ireland…or the U.K….
By the time Germany and France get finished propping up all those countries, we can add both of them to the list also.