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Sun Setting on Greece and Eurozone?
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ekathimerini reports, Papandreou optimistic following EU summit:
Prime
Minister George Papandreou on Friday lauded his government’s efforts
to dig the debt-ridden country out of serious economic problems as a
meeting of European Union leaders failed to conclude with the agreement
of a comprehensive solution to the crisis in the eurozone.
Speaking
at the end of a two-day summit in Brussels, Papandreou said that this
week’s gathering and the emergency meeting of eurozone leaders earlier
this month both highlighted that Greece is on the right track in
tackling its mammoth deficit.
“We made big sacrifices,” he said.
“The efforts are today recognized by all European partners. The efforts
have delivered results. We need time, but we are committed to put
Greece on a new path, on a modern path.”
Papandreou said that EU
leaders recognized his government’s efforts by rubber-stamping a deal
to extend the repayment period for Greece’s 110-billion-euro emergency
loan package with the EU and the International Monetary Fund from three
to 7.5 and lower the interest rate to 4.2 from 5.2 percent.
“We
were not done any favors,” he told journalists. “The decision was
reached after solid bargaining. We took some very difficult decisions
so we could make our economy viable again… but now we can look to the
future with greater hope. Our strategy has been vindicated.”
Meanwhile,
European leaders failed to produce the much-anticipated anti-crisis
package and delayed until June a final decision on increasing the
27-member bloc’s temporary bailout facility, the European Financial
Stability Facility.
The Brussels summit was clouded by Portugal’s
financial troubles. Portuguese Prime Minister Jose Socrates quit on
Thursday after the country’s parliament rejected austerity measures
aimed at staving off a bailout.
There were also concerns about the
state of Irish banks, which prompted new Prime Minister Enda Kenny to
put off renegotiating the terms of his country’s 85-billion-euro
bailout.
Greece and Ireland were warned by German Chancellor
Angela Merkel that they both still had a lot of work ahead of them. “The
euro has survived a critical test but there is lots of homework to be
done,” she said.
“Member states face many years of work to atone for past sins,” she said.
I wish I can tell you that Greece is rising from the ashes but it's not.
The Greek economy is being put through the wringer and all these
austerity measures have caused a lot of pain. Austerity measures are
going to fail in Greece, they're going to fail in Ireland and they're
going to fail spectacularly in the UK. Ireland is probably looking at
Iceland and thinking about joining them.
What will additional austerity do? It will create more resentment in the
periphery and pretty much kill these economies. After they collapse,
growth will be easy. But don't worry, they won't collapse. Someone was
asking me if they should buy Greek bonds and the National Bank of
Greece. NBG just closed a difficult 2010 and is preparing for a perilous 2011. If you believe this is the bottom for the Greek economy and that Turkey will continue doing well, buy NBG and hold it.
As for Greek bonds, I read an interesting comment from Steve Schaefer of Forbes, Why Euro Debt Matters More Than Oil Prices Or Chinese Inflation:
Mike Mutti, Raymond James’ senior credit strategist, keeps a screen with five-year credit default swaps
for European sovereign debt open at all times. That’s because more
than any other current crisis facing the world – from the devastating
earthquake in Japan to the turmoil in Libya and the Middle East – a
severe escalation in Europe’s credit crisis has the capacity to cause a
repeat of the 2008 meltdown.
Since the Greek debt crisis erupted
nearly a year ago, new issues have cropped up in other peripheral
countries (commonly, if not politically correctly, referred to as the
PIIGS) every few months. You can almost set your watch to it. Though
the disaster in Japan and spike in oil prices put the European debt
issue on the backburner for a time, it flared up again this week after
Portugal’s Parliament rejected an austerity plan, swiftly followed by downgrades to the country’s sovereign debt ratings.
Mutti
acknowledges the challenges facing Portugal, Ireland and Greece, the
three PIIGS in the most precarious shape, but believes the bailouts of
those nations are essentially priced into the market. Fears crop up
every few months, “then the fire is put out when European leaders put
another hundred billion euros aside,” he says by way of explaining the
ebb and flow in credit markets.
We’ve seen this movie before, he
adds, pointing to previous surges in the price of insuring against
default on European sovereign debt. What’s notable though, is that
while previous spikes in credit default swap prices on Greek,
Portuguese and Irish debt were accompanied by similar increases in
corporate bond yields, thus far in 2011 increases in Greek CDS have not
interrupted tightening in spreads of yields on investment grade
corporate bonds to U.S. Treasuries. Of course, as Mutti is quick to
point out, that all changes in a hurry if the credit plight of Spain or
Italy worsens. (See “Europe’s Debt Crisis: Expect More Flare-Ups, But Breakup Unlikely.”)
(Source: Bloomberg, Citi Indexes, Raymond James)
Mutti
doesn’t put too much stock into the bond yields at European sovereign
debt auctions. For all the talk about this or that threshold that marks
the breaking point for a country like Portugal, the CDS market tells
the real story. “I’m a credit derivatives guy,” says the longtime Bear
Stearns veteran who joined Raymond James in 2009. “It’s a swift market
where people express their opinion on the likelihood of default.” Sure,
you could surmise how risky a sovereign default is by looking at bond
yields, “but CDS actually has ‘default’ right in the name of the
product,” Mutti says.
A chart showing
5-year CDS on European debt clearly shows that while the PIIGS are
grouped together, the investment community has delineated the fivesome
into three distinct leagues. Mutti shared the chart below, which shows
the difference in risk traders see in Greek, Irish and Portuguese debt,
when compared with that of Italy and Spain.
(Source: Bloomberg, Raymond James)
If
Italian or Spanish CDS rise into the 400 basis point neighborhood
currently occupied by Ireland and Portugal, it won’t be easily solved by
tossing another hundred billion euro at the problem.
To USAA
portfolio manager Arnold Espe, who also believes a European sovereign
default is the biggest risk facing the global market, government debt
is not an enticing place to be. Owning
Greek bonds at current yields is “ridiculous,” he says, particularly
when he can buy corporate credits with similar yields and less risk,
such as senior secured bonds of TXU (now called Energy Future Holdings)
at 82 cents on the dollar with a 12% yield. Though the energy
giant is struggling under its heavy debt burden, Espe figures he will
still get around 100 cents on the dollar in a bankruptcy filing.
Another
area he sees opportunity: subordinated debt in financial institutions.
Issued by a wide variety of U.S. banks and insurers, as well as other
finance-related firms like General Electric and American Express, some of the bonds offer junk-like yields of 6-7% in return for being a bit lower in the capital structure.
Of
course, Europe creates a risk there as well. Unlike other situations
unfolding around the world – the aforementioned issues in Japan and the
Middle East, but also inflation concerns in emerging markets –
Europe’s debt crisis could have a profound impact on the banking system
that holds the sovereign bonds.
Just like the crisis of 2008, a
major European default could result in a flight from stocks, bonds and
any other hint of risk , and lead firms to crack down on
counterparties. If things were to escalate to that point, Espe suggests
the only port in the storm could once again be U.S. Treasuries, a
trade that would get crowded awfully quickly.
Are
we heading towards a "major European default"? Are macro funds shorting
the euro? Is owning Greek debt "ridiculous"? Of course not. Europe
isn't going to collapse and if you think it is, you're going to be
waiting forever. Europeans drag their feet but they're not dumb enough
to let eurozone collapse. As for Greek bonds, some pretty big sovereign
wealth funds, like Norway, own Greek bonds and the FT recently reported on EU debt swaps stating that hedge funds have been buyers of Greek debt, rather than CDS, and the widening in spreads was instead attributed to panic protection buying by overexposed banks.
But
I know people prefer jumping on the "Eurozone is doomed" bandwagon
thinking that Greece and other periphery economies will implode. I'm
not buying this drama. Let me end by wishing my fellow Greeks everywhere
a Happy Greek Independence Day.
There's one thing you should know about us Greeks. We're warriors, it's
in our DNA. We simply never give up. So let the speculators bet against
Greece. I know that no matter what happens, Greeks will survive and
get passed it just like we have countless times in the past.
»
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And yet systems have collapsed time after time, and "powerful interests" have lost influence and power (not to mention, often their very lives) time after time as well.
Your implication that there is NOTHING that can be done to counteract the sociopathic power elites, and that the status-quo is unquestionable and unchallengeable, is refuted both by history, by logic and by moral imperative. Your lack of any smidgen of moral outrage, in particular, marks you as a willing and cowardly patsy for the corrupt and unsustainable status-quo power structure.
Everyone was wrong about Bear Stears, Lehman, Citi, and the financials - right? Don't think so. Crowded trades are not always wrong. Jim Cramer is almost always wrong but that's another story.
An aside to you personally, Leo--I'm very glad you had the procedure done for the MS and hope it helps. Do keep us updated on your status as I know many people that are sitting on the sidelines to see if it is really worth it (meaning they will have to go into debt to get it done).
Howard, you're right, crowded trades aren't ALWAYS wrong but this isn't Bear Stearns or Lehman we're talking about. These countries that are part of the Eurozone. There are enormous stakes here if they restructure their debt (a default). The ECB and Fed know this, so I'm not buying the one-sided mania to short the "PIIGS". As for my procedure, I feel a little better but it will take months before I can update people on my condition. I'm reluctant to advise patients with financial concerns to do it right away. It's probably best to wait for the results of the ongoing trials in Buffalo and Albany. As I stated, there are no guarantees with this procedure but some patients have experienced significant benefits. We need to find out why some experience benefits while others don't. MS is a difficult disease to pinpoint because it varies from one person to the next. I consider myself lucky to be able to work and enjoy life. All I do now is take high dose vitamin D (D-drops) and eat properly, following the Mediterranean diet as much as possible.
would you make that same argument for the US equities market? or is that pile on of sentiment "different"?
Leo, Greece averaged a default every two years for nearly a hundred years. The fact that they've not defaulted recently is just pure luck built on Greenspan's and Bernanke's endless bubblenomics. Greece will return to doing what Greece has historically done - welching on their debts. It's in their DNA.
Greece and other periphery economies don't have the luxury of printing their own currency to inflate their way out of debt. That's where Bubble Ben comes in the picture...
Leo
If Greece doesn't have the "luxury" of their own currency, then why not drop the Euro ?
Oh, yeah, then they would have zero purchasing power.
It cuts both ways; they partied hardy on other people's money, now their apologist (you) whines that they can't water down their own currency.
I'm not excusing Greeks for this mess. They absolutely took on more debt than they can handle. But who helped them along the way? American and European banks. Let's call a spade a spade. Nobody really wants to go back to the drachma but the eurozone policies are killing the periphery economies. It's simply insane to base ECB policy ONLY on what's going on in Germany.
He who has the gold makes the rules.
Leo has eaten too much Cheerios for breakfast. Come move to Greece if you really want to see how doomed this place is.
Perhaps he also had some Koolaid with his Cheerios...
My family lives in Greece and I'm in constant contact with them. I travel there every year. I've seen it all in the last 20 years. I saw the stock market bubble in 1999 and knew it was going to collapse. I then saw banks lending like crazy, Greeks spending like crazy, racking up huge personal debts. The party is over and reality sucks. Greeks are hurting a lot now but I seriously hope this is the worst of it and things stabilize. The problem with periphery economies is they're stuck with the ECB which focuses on the German economy. Also, economic development is lagging in Greece and so is productivity because most of the jobs are concentrated in low productivity sectors. Tourism and shipping remain the two major industries but Greece needs to develop other industries like renewable energy (solar). Finally, the size of the public sector is an abomination, a by-product of years of political pandering from both major parties.
It´s more than just what you have written. The rich have given the country the collective finger and have pulled their badly needed capital out of Greece. Even the not so rich have stashed what they can away from possible fiscal view. Many people do not pay their taxes. On top of that, corruption is totally out of control and the government is still not being totally open and transparent with the EU (who were totally suckered into letting Greece join the Euro in the first place). The public sector again striked last month, so it´s obvious the will to take the pain and save the country by itself is not there. Greece should ditch the €, go back to the Δρ, and inflate it´s way out of debt and start over.
So is the party actually over, or is the size of the public sector still an abomination? Were the "austerity" cuts deep enough, or does the country have too much of a socialist bent to ever truly do what needs to be done?
Hoping that this is the worst of it and that things stabilize is a pretty shitty basis for investment decisions.
Riiiight, Greece will dig its way out of this by buying solar equipment made somewhere else.
Oh, and the voters of Germany will put up with the money printing, and carry the greeks, spaniards, italians, portuguese, irish, and nearby endetted countries, and core countries' big banks, on their backs.
What? Like people in the US won't put up with more printing of Benny Bucks? What on earth makes anyone here believe we have a choice or a voice in any of this? Just cuz we figured out the game doesn't mean we can do anything to alter the course.
The Euro will survive only by cutting out the cancer. Most of the PIIGS will have to go.
Austerity ? Isn't that "living within your means" ?
Every nation in history that debased their currency to solve hard problems, just made the hard problems worse.
Sorry Virginia, there is no Santa Claus.
Well I guess this says it all, doesn't it?
Gene, I suspect everyone is thinking like you except for the top global macro hedge funds. Go ahead, short Greek debt, buy CDS, have fun...we'll see how this all plays out in the next three years.
Hahahhahaahaha
Greeks think they are glorious cos of alexander thousands of years ago
i guess the french will do the same with napoleon.
do us a favour leo, i like u - u have ur place on zh and thats why i read this thread
BUT, the greeks are fat and lazy, anyone with get up and go has got and gone - like the uk in many ways.
Dont come the raw prawn with me cobber
Leo, I hope your right levendi. But ?????
from one greek to another nase panta kala.
Time, time, time.....and more time, will heal everything.
It will even let debt disappear.
I hope the PIIGS gang up and reassert their sovereignty and default together, crushing the EU and the entire transnational globalist movement.
That would be nice.
But seeing as the PIIGS elected 'representatives' are all in the pocket of our banksters, how likely is it to happen... unless the populace rip aside the veil, see what's really going on, and revolt.
I would love to see that happen.
Haircuts! Haircuts! Haircuts! Haircuts!
Damn, straight!
Where your theory goes haywire is when the Germans give up.
The bill will be inserted and they are gonna love it. Suck it up people. There's no going back now. It is the false premise that gets me going.
Reminds me of 1913 and 1938; when the Europeans, according to the press and commentators, were never going to be crazy enough to have another big war.
Thanx Leo. For the absence of cynicism and paranoia despite the difficulties, thank you.
Thanx Leo. For the absence of cynicism and paranoia despite the difficulties, thank you.
Sock puppet alert!
The Eurozone is essentially the DM renamed. Germany has a lot to lose if Europe goes back to a balkanized currency. The Euro essentially allows Germany to export to a market that includes all of Europe without currency risk. Are they going to give that up? Supporting the crazy Greeks is a small price to pay.
In time Germany will realize that producing and exporting sought-after products by the shipload isn't so beneficial overall if your own government and banks are lending your customers (e.g. Greeks) the money to pay for them... and most of those loans will never get paid back.
Euh, no it isn't. The DM used to float against the other (variously shittier) european currencies.
So, FAIL, on that whole "The Eurozone is essentially the DM renamed" assertion.
As far as how long a mercantilist exporting country can go on exporting more value than they get back in return, well, something that can't go on forever, won't.
It's all going down, so better start shopping for a loincloth, or else just get with the program and learn to love CDS and EUO and the like.
You are right. But we may be heading to a two tier currency. One for real DM-EU zone and the other pegged at discount for southern EU zone. This will allow the two industrial models to coexist. I think they are working overtime on this, this week end, under market pressure. Merkel will have last call on this. But France and Italy are now caught up in the potential spiral when it hits Spain, as it surely will. Rough times for EU. They will have to do so smart foot work and swallow a lot of national pride in some countries...No other choice.
One property of justice is that it makes the struggle over power less compulsory: no matter who is in charge, justice is served and no one is protected from it.
With stories like austerity measures being the capacity to go deeper into debt, and the burden of the debt eased down along the way, the West has once again signaled its natural aversion to justice as other countries remember what austerity means, truly means.
"I know that no matter what happens, Greeks will survive and get passed it just like we have countless times in the past." By defaulting on debt held by foreigners, just like we have countless times in the past.
"By defaulting on debt held by foreigners, just like we have countless times in the past."
John,
Germans and French won't let Greece default on its debt. They need Greece to keep up its military spending and won't let their banks take any massive losses. And unlike countries which can print their own currency, inflating their way out of debt, Greece and other periphery economies are stuck with harsh austerity measures. So I take your cynical remark with a grain of salt.
interesting article today on Portugal at National Review. Only 25% of Portuguese workers have a high school education. Still think they will be able to pay off their massive debt through austerity? 0.00% chance
Leo, the Germans and French will not allow the Greeks to default as long as they can help it. The situation will deteriorate to the point where the Greeks will be forced into default when the real economy implodes which is not far away. Default is inevitable.
The Germans and French will not allow the Greeks to default as long as they can help it."---And when they can't help it, they will default. What is difficult to understand here? Did you think twinkling unicorns were going to pay off their state obligations? Not llikely.
If Greece defaults, French banks are toast. Greece is the epitome of divide and conquer. The people have been divided by demagogues exactly in half and polarized to the nth degree. Over-promise and under-deliver.
The advice that I have for Greeks is first to vote for third young oriented parties. At least that way they can somewhat control the oligarchs.
Second anytime you have savings buy gold and silver.
Third and most important. Default, default, default. Brake your chains to slavery. Bring back the Drachma and start over. But.. Watch out for Turkey as it may be financed to punish you for daring to default.
Please let allow me to do a small and healthy bias check.
Do you have any relatives in Greece or in any of the Peripheral European Countries Leo?
Of course not, Kolivakis is Chineese
Keep up the good work, Leo
When has Leo and "good work" ever been synonomous? Never.
Leo has been nothing but a dyed-in-the-wool, amoral, cowardly defender of the massively corrupt status-quo here on ZeroHedge, a Quisling who has repeatedly and shamelessly advocated submission and surrender to the sociopathic powers-that-be. Why his statist, thinly veiled (when not overt) pro-Establishment drivel is even posted on this website when it contradicts EVERYTHING that ZeroHedge otherwise stands for is a complete mystery to me. The fact that he has had numerous vile comments junked into oblivion by 50+ posters here time after time speaks for itself.
freedom of speech, perhaps? freedom to take the other side of ZH one-sided point of view, perhaps? freedom to express and support his own personal opinion, perhaps? etc. etc.
Yes, I agree --- I think this website needs nothing so much as more articles written by Paul Krugman, Robert Reich, Timmy Geithner, and the Great Bernank himself.
"Difference of Opinion" and "freedom of speech" my ass! I am sick to death of the modern-day toleration of apologists for, and enablers of, criminality and evil masquerading under the rubric of "diversity of opinion". That is just an intellectual and moral cop-out.
the cretins you mentioned are hofjuden stooges and shills. However, "we" need them to counter-balance our own strategy. Leo might be in the grey area playing both sides; which would be smart, if that were the case. Unless he is a very, very sophisticated troll for the establishment. Leo being from Canada, I doubt that would be the case. I certainly enjoy his essays to reinfoce and confirm my taking the other side..
edit: furthermore, let's not forget that Leo is making money off the dumb sheep that still believe hofjuden fiat and confetti is wealth. Leo is a salesman; and to be a good salesman, he/she needs to believe in the product he/she is selling. Otherwise - poor house.
Indeed.
Beholden to the system = defender of the system
Alternately, Leo, like so many Americans and Canadians, could just be suffering from a terminal case of Stockholm Syndrome. Remember, Patty Hearst was half Greek as well.