Greece - Is it saveable?

[explod]

It puzzles me why strikes in minnow country Greece should be seen as that important. Germany is enormous compared to Greece and its manufacturing side is powering along. Why Australia bothers so much about this baffles me.

.

Its all about noise noiura (and no pun intended either)

Whenever (if you go back and check) the US market is about to fall off a cliff or a tranche of treasury bills are coming up for Auction you can bet that S & P will come up with a rating of someone else.

And of course the debt level in the US is greater per capita than Greece but the former can print their way out and also tell tales that some people continue to swallow.

So when things are looking crook just look at the news on Bloomberg and ask yourself why?

For the last week the Dow has been on the cusp of last support in an uptrend that goes back to the lowest level during the last GFC. The downgrade of Greeze ought to stop that till they can dream up some other excreter to roll the ponzie a bit further down the track.

 

[davede]

Update:

20th June 2011 No Agreement on Greek Bailout

Looks like Greece will have to wait until next month to find out whether it will get the funding it clearly needs to keep from defaulting.

While Greenspan and other 'respected' economists have stated a Greek default inevitable I can't help but feel the other euro nations aren't going to want to admit defeat on their monetary experiment.

Why should oz care?
true Greece is a small part of the Euro and of the global economy. The problem really for the rest of the world is contagion. Fear. Someone out there has to be holding the existing greek bonds (French banks, German Banks) these banks are already drastically undercapitalised following the GFC. A big balance sheet hit like losing big bond holdings could tip the small players over the edge. Coupled with speculators moving to a fresh target like one of the other PIGS spells real trouble.

However I did find some humour in Michael Pascoe's comparison of Greece to the single US state of Florida this week.

I'll be watching developments very closely waiting for euro short to show some viability. As for buying Greek companies forget about it.

 

[Aussiejeff]

No wuckers.

Given that Mr Market immediately recovers with a blast of uber-positive media hype every time they "delay" a decision on Greece's debt, all the Europollies have to do is keep delaying indefinitely!

Their hot air costs nothing.

Party on, Europhiles.....

 

[Uncle Festivus]

Well at least 'the game' is getting easier to play? It used to be BTFD, but now it's STFR?

(BuyThe*Dip)(ShortThe*Rally)

<Contagion>

 

[davede]

Too risky for me to short any rallies at the moment.

p.s. vote of confidence takes place today for Greek parliament (EU time) - this will provide some indication of whether Papandreou can deliver on his required austerity measures.

 

[doctorj]

Why should oz care?
true Greece is a small part of the Euro and of the global economy. The problem really for the rest of the world is contagion. Fear. Someone out there has to be holding the existing greek bonds (French banks, German Banks) these banks are already drastically undercapitalised following the GFC. A big balance sheet hit like losing big bond holdings could tip the small players over the edge. Coupled with speculators moving to a fresh target like one of the other PIGS spells real trouble.

Unfortunately, the default of Greece would have a material impact on the global financial system for the same reason that Lehman did - the world's financial systems are heavily interconnected. In Greece, any sort of haircut on Greek debt would mean the Greek banking system would need to be recapitalised as they've all been forced to hold significant amounts of Greek sovereign debt on their balance sheets (which is fairly unfortunately given that they're otherwise quite healthy). This would have a severe flow on effect to the banking systems of the Western Balkans - there may not be a bank run in these countries, but at the very least the local subsidiaries of Greek banks (which hold significant market share) would be in severe distress and probably also need new capital.

Then you have the exposures of foreign banks - particularly the German and French banks but also the US banks that own several billion of Greek sovereign and corporate debt (not including the exposure they also probably have to the Western Balkan countries). Whilst it's no where near enough to take them down, the fear is that contagion will spread to other PIGS and drive up funding costs further - Greek CDS is 1938bps, Portugal is at 761bps and Spain is only 277bps - and if it did, sooner or later, unless it's stopped, there's a good chance other countries may find themselves in a similar situation and much of Europe's banking system would need to be recapitalised.

So what for Australia? Well, Australian banks rely on wholesale funding and would be competing for capital internationally, so funding costs would go up (along with it interest rates, which would affect growth etc). Also, Australia's economy is fairly captive to China, who would suffer should one of their major export markets experience such distress. Finally, whilst Australia and its banks survived the Global Financial Crisis largely unscathed and Australian sovereign CDS is virtually flat lining, its banks are heavily over exposed to retail mortgages and would suffer should house prices decline.

 

[Sdajii]

So, in the event that Greece does default, the flow on effects get nasty etc, presumably commodities will fall drastically due to lack of demand... what's good to be holding? Gold, tobacco stocks and suicide kits? What else?

Or if all the PIIGS fall and drag down Uncle Sam... tins of food, radiation suit, a couple of trusty boom sticks and a lot of ammo.

 

[davede]

So what for Australia? Well, Australian banks rely on wholesale funding and would be competing for capital internationally, so funding costs would go up (along with it interest rates, which would affect growth etc). Also, Australia's economy is fairly captive to China, who would suffer should one of their major export markets experience such distress. Finally, whilst Australia and its banks survived the Global Financial Crisis largely unscathed and Australian sovereign CDS is virtually flat lining, its banks are heavily over exposed to retail mortgages and would suffer should house prices decline.

Thanks for elaborating on that Doctorj.

Well said.

As for 'what's good to hold?' that is another question entirely!

 

[Aussiejeff]

So, in the event that Greece does default, the flow on effects get nasty etc, presumably commodities will fall drastically due to lack of demand... what's good to be holding? Gold, tobacco stocks and suicide kits? What else?

Or if all the PIIGS fall and drag down Uncle Sam... tins of food, radiation suit, a couple of trusty boom sticks and a lot of ammo.

Greece sharemarket UP a whopping +3.74% overnight on pollies' promises.

See? No cause for concern at all, at all....

 

[doctorj]

As for 'what's good to hold?' that is another question entirely!

Who knows? The play book went out the window a long time ago. Sitting in the UK, everything is relative, so I'd be happy enough being long AUD (from a considerably lower entry...), despite what I said about Australia's issues. I don't think gold is the right asset, as I think QE, which won't continue forever, has driven it up. Maybe soft commodities? Another commodity currency with a bigger domestic market like Rubles? Or a currency that has already been to the wall like Hyrvina?

Having said that, if its time to sell when cab drivers start giving stock tips, what do you do when the same cab drivers start saying that the world is ending???

 

[davede]

Who knows? The play book went out the window a long time ago. Sitting in the UK, everything is relative, so I'd be happy enough being long AUD (from a considerably lower entry...), despite what I said about Australia's issues. I don't think gold is the right asset, as I think QE, which won't continue forever, has driven it up. Maybe soft commodities? Another commodity currency with a bigger domestic market like Rubles? Or a currency that has already been to the wall like Hyrvina?

Having said that, if its time to sell when cab drivers start giving stock tips, what do you do when the same cab drivers start saying that the world is ending???

Very true. I was considering a EUR short, but also wanting to get out of AUD as the upward trend has now starting to reverse. Also don't want to go near the USD with Bernanke's talks of debt ceiling raising. A good currency that has taken a bit of a battering lately but i think is due for a rebound is the Norwegian Kroner.

I'm all talk at the moment though. Will wait at least till the end of the week before placing my bets.

 

[davede]

update:

More on the risk of contagion:

ECB President Says Risk Signals Are Flashing Red as Debt Crisis Threatens Banks

The top U.S. prime money-market funds have about half their assets in securities issued by European banks, Fitch Ratings said in a report on June 21. The Bank for International Settlements estimated European lenders held $136.2 billion in loans to Greece at the end of 2010 and almost $2 trillion in Portugal, Ireland, Spain and Italy. Greece, Ireland and Portugal all received external support.

BNP Paribas (BNP) SA, France’s biggest bank, and rivals Societe Generale (GLE) SA and Credit Agricole SA (ACA) may have their credit ratings cut by Moody’s Investors Service because of their Greek investments, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch said last month.

“The most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system,” Trichet said. There are “potential contagion effects across the union and beyond.”

source: http://www.bloomberg.com/news/2011-...gnals-red-as-debt-crisis-threatens-banks.html

 

[doctorj]

Fitch also put out quite an extensive note on the exposure of European banks to the Greek situation. They also conclude that Greek itself is not enough to cause a serious problem, but second order risks could.

Contagion Fears and Extreme Market Risk Aversion Represent Main Risks
to European Banks From Greek Default​

For most major European banks, the direct solvency impact of a Greek sovereign
debt restructuring or rollover would generally be limited. The secondary risks,
however, could create the most risk.​

Contagion​

​

​

​

​

: A Greek restructuring or rollover has the potential to create immediate
incremental pressure on Irish and Portuguese sovereign and bank risks, exacerbating
already high investor risk aversion to these counterparties.
While European bank exposures to these risks are not material enough to represent
a significant direct source of credit loss risk, the contagion effect would be likely to
trigger broader risk aversion and cause liquidity to contract sharply in the critical
money and capital markets. After Ireland and Portugal, countries like Spain and
Italy would see most pressure. This would be of particular concern for the mediumsized
and smaller Spanish banks that have been weakened by the domestic realestate
crisis and that are struggling to de‐risk, deleverage and refinance. Fitch
believes that the recent increase in utilisation of ECB funding by Spanish banking
sector (up to EUR57bn at end‐May 2011 from a EUR42bn low in March, albeit still
well down on the EUR139bn peak reported in July 2010) is largely due to higher​

utilisation by medium‐sized Spanish banks.

 

[Julia]

Thanks for the Fitch info, doctorj. You're over in that part of the world. What's the overall sentiment about Greece et al? Is there any expectation that they will ever actually pay back the debt or is it intended to be 'restructured' indefinitely?

 

[davede]

update:

European Union leaders vowed to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week, pledging to do whatever it takes to stabilize the euro economy.

“We have agreed that there will be a new program for Greece,” German Chancellor Angela Merkel told reporters before the final session of an EU summit in Brussels today. “This is an important decision that says once again we will do everything to stabilize the euro overall.

Glad they have at least reached an agreement although the details and implementation is very sketchy. What I especially do not like is the 'bailout' hinges on 'voluntary' commitments from the private sector. Without some serious incentives what kind of financial institutions are just going to just roll over their bonds - effectively re-investing in an asset that is very risky?

‘Informal and Voluntary’

Leaders of the euro area’s six AAA rated countries have said the key ingredient of a second package must be a pledge by banks, insurance companies and asset managers to maintain their holdings of Greek bonds.

An EU statement spoke of the need for “informal and voluntary rollovers of existing Greek debt at maturity,” avoiding a coercive exchange that would lead credit-rating companies to declare Greece in default.

source: http://www.bloomberg.com/news/2011-06-23/eu-vows-to-rescue-greece-in-exchange-for-cuts.html

As for the sentiment. I'm currently in Norway (which while is not part of the Euro, is very dependent on the area obviously). Greece is dominating the economic news and there is certainly a lot of fear about default. While I can't find anything explicitly stating the debt is to be repaid one must assume that for Greece to be a functioning member of the euro it must plan to repay it's loans. After all the Maastrict criteria (criteria for allowing countries to be a part of the euro) states that member countries must have debt to gdp less than 60%.

Britain is not taking part in the rescue:

Britain is to be spared from taking part in the rescue after leaders accepted David Cameron's argument that the bailout should be borne by the eurozone. Without the final tranche of last year's rescue – €12bn from the eurozone and the IMF – Greece would be broke by mid-July.

source: http://www.guardian.co.uk/business/2011/jun/24/world-stock-markets-greece-bailout

 

[Aussiejeff]

Athens Stock Exchange up a whopping +2.7% overnight as the peasantry riot at the prospect of having to bear the brunt of continuing massive debt interest payments for at least the next 30 years under the "revised" no-default plan.

See? It's all goooooood......

Pop the champers!

 

[doctorj]

Thanks for the Fitch info, doctorj. You're over in that part of the world. What's the overall sentiment about Greece et al? Is there any expectation that they will ever actually pay back the debt or is it intended to be 'restructured' indefinitely?

Last week, in a survey of bankers based in London, something like 75% of those surveyed expected Greece to default in the next 2 years. In reality, what will probably happen is debt holders will receive some incentives to 'voluntarily' restructure debt and the Germans will keep throwing cash at Greece (they seem to view the money paid to hold the EU together as pennants for past wrongs).

The only question is whether or not that will be enough. Greece has very little industry and even less worth exporting. They're really being hurt by the lack of flexibility in the currency, which is a lot higher than the drachma would be. EU and IMF support is contingent on the government passing key economic reforms, but the incumbent government has a slim majority and people on the street are really suffering - high unemployment, wage cuts and cost of fuel up 60%+. They're protesting at the moment, but with 3-4 years until the next election and the government making life harder, there's a chance it could get worse.

 

[davede]

The only question is whether or not that will be enough. Greece has very little industry and even less worth exporting. They're really being hurt by the lack of flexibility in the currency, which is a lot higher than the drachma would be.

Seems a lot of analysts are saying that it is more a question of when than if. While the reforms were passed today Greece still has to meet every bond payment hurdle for as long as the bonds exist in the market. Yes the Greek economy certainly suffers from a high currency value as its largest industry is tourism I believe.

Read an interesting piece on the risk for ozzie banks and the oz economy today here:
http://www.bloomberg.com/news/2011-...at-2011-highs-on-greece-australia-credit.html

 

[choofer]

I guess Adolf gets his Third Reich afterall.

 

[Uncle Festivus]

You can only kick a can down the road for so long......I give it 6 weeks at most till they are finally consigned to an 'orderly' default?

The real problem is oil - they simply won't have funds to buy fuel, and nobody will extend them any more credit to buy any. The country will literally come to a physical stop as well as a financial freeze. Classic negative contagion.......Italy is next........so the market is saying....?