The ECB and the Potential Failure of Quantitative
Easing, Euro Edition – In the Spotlight!
A Comparison of Our Greek Bond Restructuring
Analysis to that of Argentina
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The Efficacy of the EU/IMF Bailout is Waning Significantly, As Greek Yields Rise and Portuguese Ratings are Dropped
The EU and the IMF have promised a combined $1 trillion dollar bailout to
assist Greece and potentially other debt laden companies in financing their
opertations. The goal was to produce American-style shock and awe. The problem
is they failed to attach American-style propaganda to it, hence reality is
showing through the crachs. CNBC reports Moody’s Cuts Portugal
Rating, and as a result ECB’s Trichet Wants End of Rating Agencies Oligopoly.
Moody’s slashed Portugal’s credit
rating by two notches to A1, citing a deterioration of the country’s
debt ratios and weak growth prospects.
Portugal’s debt-to-GDP and debt-to-revenue ratios
have risen rapidly in the past two years, Anthony Thomas, vice president and
senior analyst in Moody’s Sovereign Risk Group, said in a statement.
The euro [EUR=X 1.2573 
-0.0012 (-0.1%)] fell after the announcement and the spread between Portuguese
and German 10-year government bonds widened by 4 basis points to 290 points.
“The bond markets response hasn’t been dramatic,” Martin van Vliet, euro-zone
economist at ING Bank, told CNBC.com. The downgrade came a little before a Greek
auction to sell 6-month T-bills, the first since a bailout package
agreed by the European Union and the International Monetary Fund in
May.
Most likely because everyone knows Portugal is messed up…
Greece sold 1.625 billion euros ($2.03
billion) of 6-month instruments at a yield of 4.65 percent, up from
4.55 percent in a similar auction on April 13, according to Reuters.
So, after a $1 trillion dollar bailout announcement to drive down
the costs of Greece’s funding, they have to pay 10 basis points MORE than they
did before the bailout! With friends like that, who needs enemies???
“The markets will probably reason that the risk of
default in six months is small,” van Vliet said.
Growth Is
Key
Economic growth in Europe’s peripheral countries
will be crucial to bring back investor confidence but more and more analysts
fear a slowdown in the second quarter everywhere in the world.
“The outlook for Portugal is not particularly
optimistic,” David Tinsley, economist at National Bank of Australia, said. “It
is in a very slow growth trajectory and therefore all its fiscal retrenchment
has got to come from public spending cuts.”
Over the longer term, investors are still afraid
of the risk of default and European Central Bank President Jean-Claude Trichet
hinted that the need to intervene by buying bonds is not that strong any longer,
according to van Vliet.
“My guess is that they will have to continue
buying bonds,” he said. “It all depends on whether the economy will start
growing in Greece.”
The risk of default by one of the southern
European countries was the main fear in the markets earlier this year, when
ratings downgrades sparked massive selloffs in stocks as well as bonds and
investors were taking refuge in US Treasurys, gold and cash.
“The process of credit downgrades reinforcing
confidence erosion, I think that’s a bit over,” van Vliet said.
Why is that, when funding costs are still going higher?
Default Risk Is
Gone
Investors will slowly realize that the risk of
default by European nations on their debt is gone, and they will push up stock
prices and the euro, according to economist Warren Mosler,
founder and principal of broker/dealer AVM. In June, Mosler told CNBC.com the
euro was likely to rise to between $1.50 and $1.60 because of
the austerity measures in Europe.
Hence the accuracy of this man’s predctions…
He reaffirmed his stance, saying that there had
been a “mad rush for the exits” by Europeans, who bought dollars and gold,
pushing the euro down, when the default risk was high. But the ECB’s decision to
buy Greek bonds showed the bank was ready to spend money to defend countries in
the euro zone and “there is no limit to what the ECB can spend,” Mosler told
CNBC.com. The ECB has put itself in a top position by doing this, as it can
impose terms and conditions on any country that sells it its bonds, he
explained. “What that did is it shifted power from fiscal policy to the ECB,”
Mosler said. “I would say they will not buy these bonds unless they can impose
their terms and conditions.” “It allows them to cut out one member selectively,
without the whole system collapsing,” he said.
There are still too many who are overly bullish on the EU situation. There is
a significant captial hole that needs to be filled… Period! Until it is filled,
and not filled with more debt, there will be an ongoing problem. Why isn’t the
media harping on continuing increases in funding costs and debt downgrades AFTER
the trillion dollar bailout?
BoomBustBloggers, think before you act! Reference Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar,
Liar, Pants on Fire! then go on to read:
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Reality/Panic will set in when the selling kicks in. The last one out will be the bag holder.
They are enjoing a circle jrk session right now. Euro is one big love fest , you know.
wtf I'm suppose to be in china.
Theres more than one great wall,a few trade tariffs would fix their big red wagon.Just in time for Obama to create a hope for jobs and maybe even give the masses a glimmer of a pay check.They didn't just lay of census workers and cut extended benefits unless they have something in the works.Especially before elections and you can bet its some kind of Q2 B.S. for the people or maybe an attack on Iran.Hes going to have to do more than send his pit bull after the tea baggers.
China never says anything public so why now,whats in it for them.It really moved the markets,I would be more worried about the B.I.S...
Much of the gold run up was Eurozone default risk. Take that away and all we have is a deflating commodity, waiting for the traditional fall gold boost.
Unfortunately, crisis drives speculation in gold. So be on the look out and buy into crisis momentum. The most likely for me was a US municiple default.
Position; Physical only, no ETFs.
Mark Beck
Hey Reggie,
Side comment and looking for your expert thought. What in the hell is going on with IYR in the last 5 days...seriously, I can take a ruler, set it at a 45 degree angle, and draw a line to the $50 mark.
Man, am I nuts or is that insanely manipulated upward?
Sorry for the sidebar...but, I consider you an expert in the field of CRE. Can this continue past earnings? What the hell is going on?
Reggie, I think you have some of the best posts on ZH. You are pointing out the flaws in the MSM.
The media ain't talkin but gold said sumptin today.
I have a question re Greece, say, leaving the EMU. Which euros turn into drachma? If you are a depositor in a Greek bank then it's obvious. But if you buy euros in the FX market, how do you know?
Does anyone here have familiarity with this?
It just depends on how that discussion goes with the ECB and the Greek government. It's more or less black box at this point. Once that rate of exchange is decided, a few frontrunning assholes with private access to this information will trade appropriately, and we then trade based on which direction said frontrunning assholes are going.
This seems to be a decent summary of how the entire FX market works in general.
I have a question re Greece, say, leaving the EMU. Which euros turn into drachma? If you are a depositor in a Greek bank then it's obvious. But if you buy euros in the FX market, how do you know?
Does anyone here have familiarity with this?
Let's just say you wouldn't want to be holding Y serial number euros in your pocket.
Excellent observations, as always, Reggie. Thanks.
A guaranteed antidote to an overdose of Hopium.
My question is, will the euro go up or down if Greece is kicked out? Followed perhaps by the other PIIGS. I want to short the euro, but perhaps that would actually be seen as a positive move.
As John Taylor pointed out on June 28: "We are scary, scary owners of euros,” , “We are keeping our fingers crossed that maybe the euro’s appreciation lasts through July and into August. But then the euro is just going to get crushed as it’s an impossible situation in Europe.”
“The period we are in now is the euro’s swan song,” said FX’s Taylor. The EU’s bailout package is making “people think things are OK and maybe all will be alright. When the reality hits us in September it will be miserable. I expect the euro to go to $1 by the end of the year,” he said.
If you don't know who is John Taylor google John Taylor + fx concepts
Reggie...
I don't work in macro economics - and TBH - coming in 'cold' to this debate 2 months ago - I think it safe to say i'll be a while 'getting it' yet!
But this comment did tickle me
So, after a $1 trillion dollar bailout announcement to drive down the costs of Greece’s funding, they have to pay 10 basis points MORE than they did before the bailout! With friends like that, who needs enemies???
Who indeed?
Maybe those with retirement plans that look like this?
http://www.guardian.co.uk/world/2010/jun/24/greece-islands-sale-save-eco...
Sweet!!!