I’ve assess the significance of the Greek elections in an earlier article.
However, there is one final element to Greece’s current predicament that is even more important than any of the above items. That element is the following:
The Second Greek Bailout has proven to be based on a total and complete lie on the part of the ECB and EU politicians.
If you’ll recall, during the Second Greek bailout, private Greek bondholders were told that they HAD to accept the terms of the bailout (a 70% haircut, and new bonds with lower interest rates and longer repayment periods). The alternative to this, as promoted by the ECB and EU politicians, was the total loss of money.
As you may or may not know, only 97% of private bondholders went for the deal. The remaining 3% (representing roughly €6.5 billion in Greek debt) decided they would maintain their bond holdings as they were and see if they got their money back.
Last Tuesday, Greece was scheduled to make €436 million in principle payments on this €6.5 billion. And it did. Every single penny.
And they didn’t even have to! Indeed, under normal conditions if Greece missed this payment deadline, it would have seven days to make the payment. However, this time around, Greece had 30 days to make the payment before it would be considered to be in default.
And Greece chose to pay bondholders every penny right on time.
Put another way, those Greek bondholders who DIDN’T go for the Second Bailout, just got their money back at 100 cents on the Dollar (compared to those who DID go for the Second Bailout and lost 70% of their money).
This has shown the ECB and EU bureaucrats to be complete and total liars. It also shows the entire bailout/ austerity measures process to be garbage. Private bondholders got screwed. Greece got more debt and an even weaker economy. In fact, the only group that has so far gotten through the Greek mess relatively well has been the ECB, which swapped out ALL of its Greek exposure for bonds that DIDN’T take a haircut.
The significance of this cannot be overstated. The Second Greek bailout has shown the whole of Europe the following:
- Bailouts don’t work (Greece actually now has more debt than before).
- Austerity measures worsen the economy.
- Private bondholders get screwed.
- The only one who comes out clean is the ECB.
All of this ties in with the rise in Nationalism I noted earlier. THIS is why voters in Greece, France, very likely Ireland (whose referendum is on May 31st), and other EU states are voting incumbent Governments out (especially those that have supported the ECB’s moves) and showing increased support for Nationalist parties. The people have read the writing on the wall and the writing makes it clear that they are going to get screwed while the EU bureaucrats stay in power.
This is why yields on Spanish and Italian bonds are rising (as I write Italy’s ten year is close to 6% and Spain’s ten year is at 6.2%): bond investors know that if they continue to maintain their exposure to the PIIGS, that at some point they’re going to have to negotiate with the ECB. And that means losing a lot of money.
On that note I fully believe that the EU will collapse before the end of the summer. So if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), you NEED TO DO SO NOW!
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Good Investing!
Graham Summers
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