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Goldman: Markets Ignore Grexit Threat Due To ECB QE, But If There Is A Grexit Then All Bets Are Off
Earlier this week, the largest Swiss bank UBS, not only suggested to anyone following the latest Greek crisis that "now may be a time to panic" (not in so many words) when it laid out its latest asset reallocation, slashing its equity exposure...
... and explaining that the stock market is far too nonchalant about the risk of a Greek contagion, which as it also showed, would spread like wildfire if push comes to shoving Greece right out of the Eurozone.
And just to be extra useful, UBS also summarized the process of the Grexit in the following handy flowchart:
But why are markets so nonchalant about the risk of a Grexit? Here is Goldman wiuth its explanation for why there has been none of the typical drama that accompanied either the first Greek crisis-bailout in 2010, or the second one, from 2012. The basis of Goldman's thesis: Q€ of course.
From Goldman, first, the good news:
EMU Peripheral Yields Have Decoupled from Greece in Levels ...
Greek sovereign bond yields have been going up since last September and, since January, the term structure has become inverted. Explaining the divergence with the rest of EMU have been a number of factors including: the approaching end of the ‘troika’ funding program; increasing popular protests against austerity measures; and growing political pressure on the centre-right coalition government, culminating in the election of more radical parties.
Meanwhile, sovereign yields in Italy and Portugal – the two Euro area countries with the highest public debt-to-GDP ratio after Greece – have continued to decline in the wake of their German counterparts, responding to the ECB’s increasing monetary expansion and, progressively, the anticipation of sovereign QE. The spreads of Italian and Portuguese bonds to Germany are now at levels seen in 2010, and overall funding levels are substantially lower.
... But Their Correlation to Shifts in Greek Risk Remain Positive
A closer empirical analysis (using a dynamic conditional correlation approach) based on data spanning the beginning of 2012 to today reveals that:
- In Greece, the daily volatility of intermediate maturity bonds is now back at levels seen in the first half of 2012 (even though yields are lower), while that of intermediate Italian and Portuguese yields is around half of where it was in the first half of 2012.
- The correlation between Greek and German yields has been negative on average throughout the past two years, as Greek credit risk has remained elevated while risk-free rates have rallied. By contrast, the co-movement of daily changes in Italian and German yields has moved from negative (-40%) in 2012 to slightly positive currently (+20%). The same holds for Portuguese yields.
- The daily correlation between government bond yields in Greece and those of Italy/Portugal has been stable at positive levels over the entire period in question (40% for Italy and around 50% for Portugal) since 2012.
Summarizing this evidence, the credit risk embedded in Italian and Portuguese government bonds has gradually diminished, a development reinforced by the inclusion of these countries in the ECB’s purchase program. Returns on these securities are now mostly influenced by shifts in risk-free rates. Both sovereigns, however, remain exposed to fluctuations in Greek credit risk.
Then some more good news:
Why Is Contagion from Greece Contained?
So far we have described through statistics the behaviour of asset prices. As to the economic rationale behind a departure between Greece and the rest of the EMU periphery, we would note that:
- The new Greek government has been elected on a policy agenda set to relax the fiscal stance and further restructure public debt, but not to take the country out of EMU. The central scenario of most of our clients (and ours) is one in which a compromise with Greece’s official sector creditors will ultimately be found.
- Since the overwhelming majority of Greece’s public debt is either in the form of loans from the EFSF, the IMF or other EMU countries, the international private sector exposure to Greece is limited. The EUR40bn worth (at face value) of Greek government bonds traded in the secondary markets is generally marked-to-market. The activation of the ECB’s emergency liquidity facility has channeled more funding to the Greek banks from the official sector, reducing direct private exposures further.
- The ECB’s sovereign QE, to start next month, is estimated to remove as much as 50% of the gross issuance of sovereign bonds in the likes of Italy, Spain and Portugal. This will reduce debt roll-over risk, which should translate into an even lower probability of default in coming years.
Based on these considerations, it looks reasonable that investors would not ask for an additional compensation for a source of risk that has limited direct economic bearing for other asset classes.
And now the bad news, and when the above idyllic scenario would promptly collapse:
Such a conclusion would cease to hold, in our view, if Greece were to leave the common currency. Indeed, ‘Grexit’ would constitute a non-diversifiable event, affecting all financial assets. This is because, upon the departure of one of its members, EMU would likely be seen as a fixed exchange rate arrangement between countries which can elect to adhere or leave. Convertibility risk would resurface, exposing the possibility of a collapse of the entire project.
To be sure, the ECB would not stand idle in the face of such a course of events. But the severity and persistence of the ‘shock’ from Grexit would depend on several factors, which include:
- What has led to the departure of Greece (metaphorically, was the country pushed or did it jump?).
- What institutional arrangements the remaining countries put in place to signal their commitment to stay together (presumably in the form of greater sovereignty sharing).
- How does Greece perform outside of the single currency?
So what Goldman is saying is that with its intervention in all markets, the ECB has made discounting of risk virtually impossible. In fact, unlike on previous occasions when the market at least swooned ahead of the Grexit D-Day (and flash crashed in May 2010 when scenes of rioting in Athens led to a cascading HFT sell program) it may have prevented the Grexit itself by giving a glimpse of the devastation that would ensue if the Eurozone were to fall apart - which by now is clear to all is merely a political entity, preserving "political capital" - this time it is the central banks' pervasive domination of all risk levels across the board, that has made negotiation a non-starter, since Europe is essentially convinced it can let Greece go. After all, just look at the DAX at all time highs - surely the ECB has everything under control.
Everything, that is, unless Greece exits, when as even the former employer of the ECB's Mario Draghi admits, it would be time to panic.
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Heres to hoping the Banksters get screwed on this. But I doubt they will. When the Shareholders of the Fed Reserve need a abilout they will get it. They do make the corporate rules you know.
Lehman -- $6 Billion
Greece -- 420€ Billion aka $500 Billion
Meh, nothing to see here. Its "contained."
"if...then..would" Goldman Idiots.
Its already happenned. Remember Switzerland? Bueller?...bueller...?
"If There Is A Grexit Then All Bets Are Off"
Correction:
WHEN There Is A Grexit Then All Bets Are Off
Please, when you have the printing press and coin the fucking monetary units, you never need a bailout. Yes, you always write the rules though direct purchase of bankrupt governments.
Awesome! The world is a vampire......
greece pls go
I don't think the EU let's Greece go. We banter much about "debt" but that's just the government and bond holders. But "on the street" there are real consequences. made up example. What if the City of Athens owes Siemens or CAF $50 million Euro's for delivered light rail vehicles? If Greece abandon's the Euro and returns to a Drachma, there's no way Siemens or CAF will ever receive their $50 million Euro's. The City of Athens won't have Euro's...they'll have Drachma...a Drachma that will be immediately devalued against the Euro. So the Fascist in Europe will pressure the EU to force Greece to hold on regardless...thousands of EU based companies (not bond holders) will face huge asset (receivable) risks. Risks that are current carried at face value...the consequences will be considerable for numerous publically traded companies.
Greece can set an exchange rate of one drachma = two euros, then pay, buy, sell and trade according to that value. Greece sets the value of it virtually debt free currency, not the bankrupt euro trash fascists who value their currency by debt owed. Greece could be the next European safe-heaven place to be, bring your capital, no taxes.....IF the socialist don't fuck it up.
Yaps on CNBC trying desperately to downplay this, comparing it to Rhode Island seceding from the US.
I call one gigantic bullshit on that. Forget about the hazard of other countries following suit for a second. The Greek debt implosion will cause knock-on effects that will ONLY be known when they are just that.... known.
"Rhode Island seceding from the US."
Excellent. Some state has to be the first
Pretty sure that was South Carolina
power, I was referring to next week, not 150 years ago.
In that case we should be more concerned about the Chinese arming those Hawaiian seperaatists than this season's cotton crop
And for the Record you are correct. It was South Carolina in December 1860.
I think we'd all be better off splitting into the obvious regions we are, and ending the fiction of "united states". We are not, haven't been "united states" for a long time now. (That brief little fart of 'togetherness' after 9-11 doesn't count...and besides, that was unity AGAINST something, not unity FOR something.)
We KNOW that forced homogenization is failing in Europe among the nations trying it. It also fails on the regional and local levels too. At some point, people with different notions start getting in each other's faces, with numerous squabbling groups, and the mess becomes ungovernable.
People NEED their own corners, a place that's THEIRS, as individuals AND on the "clan level"...the identifying group. Thus, even those with views we find noxious will need their corner, unless you propose to just kill them all, which is a lot harder than one would think.
It's much better to allow them the corner, and agree to leave them alone in exchange for their agreement to respect the rules of 'the commons' in the publicly-shared places. Then they can 'blend' as tolerated, and have an escape-hatch if their retinas get seared by the sight of 2 guys kissing, or if all the uppity blacks start getting on their last nerve. Or if someone's cigarette-smoke/perfume from 75 yards away gives them an "asthma attack", or they are offended by the sight of a religious display. Every special interest group should be encouraged to group-up and be promised a safe haven where they can make their own rules (within reason, of course..)as long as they shut the fuck up and behave in the commons.
But to insist they 'integrate', while a decent goal, ignores human nature. We are ALL clannish in our own ways. We like being with like-minded folks, and stake our little 'claim' somewhere. We CAN get together for things of mutual benefit, and to conquer an outside threat, but when it's over, we all need to go back home to somewhere and get away from each other.
It's like a job...you do your 8 hours gladly and like working, but at the end of the day you want to get the hell out of there and be with your friends and family. You'd HATE that job if you weren't allowed to leave, if you had to LIVE there with all your coworkers instead. And you'd start to really hate those coworkers after awhile too.
Work together when mutually beneficial, then retreat to our corners to handle local matters where we can bond with a community sharing our idiosyncrasies, and not tread on others doing same? You just described federalism - how our Constitution originally organized the US.
I knew there was something about that document I liked...:-)
well thought out----nicely presented====+ 1000
Thank you! :-)
When was the last time the "market" worried about something that might happen? Five or six years ago? It sure as hell isn't going to worry about Greece until something happens. Which will be nothing and then the market will soar.
What Goldman is really saying is this:
If the GREXIT occurs and the Banksters don't get paid off, we Banksters will consider it a very important act. An act of war against the Banksters....
FUCK THE BANKSTERS ALL OF THEM.
"Squeak! Squeak! Squeak!" goes Goldman Sachs...
Who CARES what GS, or any of the rest of them, thinks? Time is on the side of those who wait for global banking's fall. There is no escaping the fact of a deflating global economy, and big banks simply can't skim enough to be able to afford their size. DO expect them to be very noisy on the way down though...
You can bet all your gold at the bottom of the lake the 3 page letter is already written for the treasury secretary to run to the President when GS might lose some money.....they will demand a bailout again...or the end of the world as we know...same story...and they will get it...they donate more to Politicians than we do...
so this is a digital event but the dax is at the all time highs. sounds like an incorrect analysis of the situation.
Y'all need to get a clue.
There is NO crisis in the EU$.
Bailing out Greece would be like bailing out Chicago for the FEDs.
Essentially a write off they would barely notice.
And while DC, and possibly some Greek politicians
might like a GREXIT, the populus does NOT!
Greece isn't going anywhere.
The only thing the ECB is doing is not appearing
to completely write off the loan so as not to give
everybody the idea its just that simple.
Greece will have to make some kind of "payments"
to keep up appearances. but the EU has pretty
much written off that loan already.
Yes, the details of the bullshit "loan" and payments are irrelevant. Like you say, that's not the problem. the issue will come when all the other debtor nations renegotiate the terms of their debt or simply stop paying as well...
and that is the crux--
Goldman is scaremongering. They probably hope to load up on peripheral debt just after the Grexit and then resell it at a profit when the commotion dies down.
Let's just take it as read that mainstream bankers don't see what is happening in Europe as a problem and some of us do. Let's face it, if we took what the mainstream says as gospel, then we wouldn't be reading Zero Hedge nor would we be investing in precious metals.
Personally, I think the mainstream are in hyper-manipulation mode. Downplaying the situation in Europe and gold & silver prices going down. Something isn't right.
Nowt to see here, people. just the sound of aluminium on foot...
Greece:
"Baby please don't go, down to New Orleans"
"Cause I love you so, baby please don't go"
https://www.youtube.com/watch?v=6BDoV6hBNMY
Looks like S.S.D.D. in the casino today.
C'mon Greece, let's get this party started!
Exit the Euro and poke Italy and Spain!
Onwards, and the devil take the hindmost.
Everything is great in Euroland. Who in their right mind would be buying Spanish and Italian 10 years bonds below 2%? So let me get this right. You'll pay me 1.6% and THE best outcome I can hope for is that the ECB doesn't debase the currency. The worst outcome is the Euro disappears and I'm stuck with the new Lira/pesata. Gold and silver have never looked so good.
its very strange that Gold and Silver are not even playing in this game this time as a safe haven.....if I was in the Euro..I would be buying the hell out of it...strange indeed
Well, at KWN, Andrew Maguire is offering an explanation of today's bloodbath.
http://kingworldnews.com/andrew-maguire-sovereigns-buying-massive-tonnag...
I've never seen this level of complacency in the equity markets in my life.
This is truly epic, the divergence between real tangible risk, and manipulation from loads of fiat being used to prop up the global financial "house of cards".
The 0.01% doesn't know what else to do.
German capitulation on QE makes GREXIT a non-event.
WHY?
-Because Greece is a money-pit, and a net drain on everyone else's resources.
-Sovereign and banking industry losses on Greece and Greek assets can be sold to the ECB in return for QE-Euros.
The thing to understand about Greece is that absolutely everyone would be better off without them in the Euro. The GREXIT has only here-to-fore been unacceptable is due to Greek bond and asset-holders expectation of loss with that route.
With QE they can expect par...which is better than they'll get under any other scenario. And Europe gets to put the whole Greek issue behind them for a time...until or unless it returns by way of Portugal, Spain, Italy, etc.... If that happens then all bets are off.
I'm just wondering what the value of the new Goldmark, I mean Papiermark, I mean Rentenmark, I mean Reichsmark, I mean Deutchsemark will be worth, in US dollars?
This from the group that cooked Greece's books to get them into the Euro in the first place.
Next thing you'll know they'll be telling us that now is the time to get into grilled cheese trucks.
Red Hot Chili Peppers - Love Rollercoaster (High Quality)
http://www.youtube.com/watch?v=N1cbsLKXasQ (3:39)