|
In an eerie sense
of déjà vu, German finance minister Wolfgang Schauble pleaded
with his country’s citizens on April 20th, to back a joint
EU-IMF bail out for Greece worth up to €45-billion, warning that
failure to act would risk another global financial meltdown. “We cannot
allow the bankruptcy of a Euro member state like Greece
to turn into a second Lehman Brothers,” he told Der Spiegel. “Greece’s
debts are all in Euros, and it isn’t clear who holds how much of those
debts. The consequences of a national bankruptcy would be incalculable. Greece
is just as systemically important as a major bank,” Schauble warned.
The
next phase of the global debt crisis could be on the horizon, if Euro-zone
politicians fail to take swift action, and prevent Athens
from defaulting on its debts. German banks have $330-billion of loan exposure
to Greece, Portugal,
and Spain, while French banks had $307-billion of claims, and British
lenders have $156-billion. However, the European banking
Oligarchs, such as Credit Suisse, UBS, Société
Générale, BNP Paribas, and Deutsche Bank have a stranglehold on
the public purse, and Euro-zone politicians readily submit to the interests
of the powerful bankers.
Yet official
German backing for a bailout of Athens,
failed to stop spreads on Greece’s
10-year bonds from surging 300-basis points over the past two-weeks to
660-basis points over German Bunds, the highest since the launch of the Euro.
Two-years ago, Greece’s
cost of borrowing for 10-years was only a half-percent above Germany’s.
Until recently, Greece’s
membership to the Euro club had relieved investors’ fears about
currency devaluations and inflation. Trust in Greece’s
budgetary statistics was always shaky, but overlooked. The under-pricing of
default risk gave Athens
easy access to longer-term loans at low interest rates, - until now.
However, Greece
needs to raise €50-billion ($68-billion) for each of the next
five-years, in order to roll over existing debt and pay interest. The rescue
package that’s on the table right now, crafted by the IMF and Euro-zone
governments, would only buy a year’s worth of time for Athens
to get its financial house in order. But bond investors are looking longer-term,
and questioning the resolve of wealthier Euro-zone states to cover Greece’s
debts beyond April 2011.
Yields on
Greece’s 2-year note soared to as high as 17% week, from as low as 2%
at the start of December, after Greece admitted that it auditors missed a few
line items on the income statement, resulting in an even bigger budget
deficit of 13.6% of GDP in 2009, up significantly from the previous estimate
of 12.9%, and nearly double the 7.7% deficit recorded in 2008. That’s
far above the average Euro-zone government budget deficit-to-GDP ratio of
6.3% last year.
Germany’s
PM Angela Merkel wants Athens
to agree to tough austerity measures for the next several years, before
handing-out German taxpayer money. But Athens
has already slashed public sector wages, and raised taxes, - setting off
violent protests and strikes across the country, where unions control half of
the nation’s workforce. Greece’s
jobless rate rose to 11.3% in January, with 69,000 jobs lost in December. The
bitter medicine of fiscal austerity is unpalatable for Athens,
and with its membership in the Euro, it lacks the ability to monetize its
debts away.
Will Greece
become the Lehman Brothers of sovereign credit? Greece’s
outstanding debt is roughly equal in size to that of Lehman’s when it
collapsed in Sept 2008. If it’s forced into debt rescheduling and
restructuring, it could trigger a domino selling effect in other vulnerable
European bond markets in Portugal and Ireland, - both wrestling with
exploding levels of sovereign debt, and lacking the ability to engage in
“Quantitative Easing,” or printing vast quantities of money. Even
if the Euro-zone politicians and the IMF can cobble together a bailout of Greece,
they simply lack the financial resources to bailout the next wave of European
sovereigns.
With
G-7 central bank interest rates pegged near-zero percent, global finance
houses are able to borrow money at next to nothing and deal in of all types
of speculation. Trade is soaring in one of the most speculative forms of
derivatives - credit default swaps (CDS), which played a key role in driving
Lehman Brothers, Bear Stearns, and American International Group (AIG) into
bankruptcy.
The
activities of CDS speculators are not restricted to Greece.
In the past few weeks, they have increasingly turned their firepower on Portugal’s
bond market.
The odds of default for Portuguese debt over the next two
years, has shot-up 135-basis points in the month of April to 335-points
today. At the same time, the yield on Portugal’s
10-year note has risen 150-basis points from four-weeks ago to 5.75% today.
The
bond markets of Greece
and Portugal
are tiny, with trading volume of less than one billion Euros /day, making
them easy and tempting targets for heavy hitters. Greece’s
outstanding debt equals 300-billion Euros, and Portugal’s
debt is about 126-billion Euros. Still, the nature
of CDS trading, which is unregulated, gives speculators a big incentive to
push companies or countries toward bankruptcy. There’s an incentive to
burn the house down, in order to hit pay-dirt.
Attracted to the
highly indebted Greek bond market like vultures to a decaying corpse, CDS
traders have moved in for the kill. By
attacking Greek and Portuguese bonds, traders have injected greater
volatility in the Euro currency, thereby leveraging little nations’ problems
into gigantic trading-floor profits. The surge in Portugal’s CDS and
bond yields is very uncharacteristic for a country, which enjoys a AA- rating
from Fitch and Moody’s, and A- rating from S&P. Could the rating
agencies be lagging far behind the eight ball again, getting it right long
after the fact?
The
CDS market is a hotbed of speculation, where banks and hedge funds, can bet
on contracts without holding the underlying bonds. The threat of sovereign
default, most immediately by Greece,
has provided an opportunity for speculators to drive up the price of insuring
the countries’ bonds, thereby further undermining confidence in the
countries’ debt, and increasing the prospects of contagions sales.
If other Club-Med
countries would require a bail-out, the final price tag could be so large,
that it could backfire, by forcing French and German bond yields higher,
especially if accompanied by a plunging Euro. Despite the specter of a Greek
moratorium on its debt payments, - and a replay of the Sept 2008 meltdown of
the global stock markets, triggered by the bankruptcy of Lehman Brothers, -
in a strange twist of logic, the German DAX-30 Index has been thriving on Greece’s
woes, benefitting from a weaker Euro and ultra-low German bund yields.
Even
Spain’s IBEX index was climbing higher in tandem with the German DAX,
since early February, tracking the Dow Jones Industrials and Transports,
figuring the Greek tragedy is strictly an isolated affair, with little risk
of contagion fallout to the rest of Club-Med. In any event, traders have seen
this horror movie before, and the ending is always the same, - a massive
government rescue with a bailout.
Still, there was
a noticeable divergence last week, between the Spanish IBEX index, which
tumbled 5%, and the German DAX, which continued to climb 2% higher to the
6,350-level, its highest in 19-months. Spain’s
IBEX was dented by a quarter-percent jump in its 10-year bond yield to 4.10%,
while Germany’s
10-year bund yield fell 15-basis points to 3-percent. Spain must service
560-billion Euros of outstanding debt, nearly double Greece’s debt, but
it’s more manageable, since Spain’s debt-to-GDP ratio is only 53%
compared with Greece’s 115%.
Finally, a bit of
reality set in the delusional German DAX Index on April 27th,
after S&P shocked the global markets, by cutting the credit rating of
Greece three notches to BB+, or junk status, and lowering Portugal’s
credit rating two notches to A- from A+ earlier, while putting Ireland on
negative watch. In regards to Greece,
the outlook is negative, meaning S&P could downgrade the rating again. “In our revised projections, we forecast Greece’s
net general government debt-to-GDP ratio reaching 124% of GDP in 2010, and
131% of GDP in 2011,” S&P warned.
Within minutes
after Greece’s
credit ratings were slashed into junk territory, the UK’s
FTSE-100, Germany’s
DAX, and France’s
CAC-40, lost a combined 80-billion Euros in market capitalization. Bullish
speculators in the top-3 European bourses had figured that the Greek debt
crisis would be fully contained, with the 45-billion euro bailout package,
and would no longer be a nagging headache. As John Maynard Keynes famously
observed, “The market can stay irrational longer than you can
stay solvent.” However, once Greek 2-year CDS rates jumped above the
psychological 1,000-level, the German DAX bubble quickly popped and fell
200-points.
The sighting of
an “inverted” yield curve is as rare as spotting a lunar eclipse.
So it’s of great interest, to observe the deeply “inverted”
yield curve in the Greek bond market, where the 2-year note is yielding
680-basis points more than 10-year notes. If the yield curve inversion
persists for an extended period of time, the fate of the Greek economy would
be perilous, - perhaps, a 1930’s style Great Depression.
The “green
shoots” rally on the Athens
stock exchange has gone bust, with its economy suffocating under the
chokehold of double-digit bond yields. Traders betting on a strong global
economic recovery were dumping Greek shares and shifting the proceeds into
the German DAX, a safer haven. The Bundesbank said on April 18th,
the German economy is on track for a solid rebound in the second quarter,
with its manufacturing sector expanding at a record pace in April. German carmaker,
Volkswagen said its first-quarter operating profit nearly tripled.
Athens
aims to unwind the inverted yield curve as soon as possible. Greek Finance
Minister George Papaconstantinou warned CDS
speculators they will “lose their shirts,” if they bet
cash-strapped Greece will default. He said market rumors of Athens cutting or
delaying payments to bond investors, is a “red herring, and restructuring is off the
table. Greece
will not leave the Euro,” he added. The
next day however, the bottom fell out of the Greek bond and stock markets.
Opting out of the
Euro currency regime, and reinstituting a sovereign central bank to print
Greek drachmas and monetize debt, carries huge risks for Athens.
Abandoning the Euro for the drachma could spark hyper-inflation, and send
10-year bond yields soaring into the mid-20% range, which in turn, would send
its economy spiraling into a Great Depression. Still, the alternative -
adopting draconian austerity measures, tied to IMF and German loans, is also
a poison pill leading to severe recession. According to the latest opinion
poll, 70% of Greek citizens are opposed to dealing with the IMF, or accepting
loans from the European Union.
Last week, the
ECB kept interest rates at a record low of 1% for the 11th month
in a row, pointing to the debt problems facing the Club-med governments. With
German and French banks holding more than 650-billion Euros of Club-Med debt,
many traders prefer the safety of gold, over German DAX shares, since the
Greek tragedy could turn out far worse than anyone could imagine right now.
Gold is soaring
to record heights against the Euro, as traders bet that at some point in
time, the wealthier Euro-zone governments would lose their resolve to finance
Greece
over the next five-years. The EU-IMF rescue package of 45-billion-Euros will only
cover Greece’s
financing requirements for one-year. Fears about a default,
restructuring, or rescheduling of Greece’s
debt payments in the medium term would still persist. Either scenario
could hurt European bank earnings.
In the event that
Athens
decides to opt out of the Euro, or calls for a moratorium on its debt
payments, after the first tranche of EU-IMF bailout money is used-up, gold is
a good hedge against a devaluation of the Euro. However, gold is also
following time honored fundamentals, such as acting as a hedge against
commodity inflation. The CRB Commodity Index is surging +22% higher against
the sinking Euro from a year ago, signaling an outburst of inflation in the
months ahead, as factories pass along the cost of increasingly expensive raw
materials, to end users.
Bundesbanker
Juergen Stark, the ECB’s token inflation hawk, said policymakers must
consider the consequences of keeping ECB rates “too-low for
too-long,” which create stock market distortions and cause banks to
become addicted to cheap money. “Central banks ought to be aware of
asset prices. There are times when it would be appropriate to raise interest
rates to cool them if they appear to be overheating. Risks to the global
inflation outlook are tilted to the upside. A multi-speed recovery of the
world economy has the potential to exert upward pressure on prices.”
“In the
same vein, we also need to closely monitor the adverse impact from fiscal
developments on the inflation outlook. High levels of government budget deficits and debt may
push up inflation expectations, and place an additional burden on the
monetary policy of central banks. Additionally it could push
up the borrowing costs of troubled countries, constraining growth, and leave
little capacity to support economies in future crises,” Stark warned on
April 15th.
However, his
boss, ECB chief Jean “Tricky” Trichet, is strongly opposed to
lifting interest rates anytime soon, arguing that inflation is dead.
“We have inflation under control and that’s the reason why I have
said on behalf of the governing council that interest rates are
appropriate,” Trichet said on April 26th. “Raising
interest rates too soon would crush the green shoots of recovery,”
added Austrian central bank Ewald Nowotny. ECB officials are pointing to
phony inflation statistics massaged by bureaucrats, and not viewing commodity
inflation that is galloping ahead.
For European
banks, Greece
is too-big to fail, but it remains to be seen whether the Greek populace
would choose to live under the yoke of EU-IMF austerity for the next several
years. In the event of the un-thinkable, a Greek exit from the Euro, or debt
restructuring, a Lehman style shake-out would ensue, rocking global markets.
The odds of that happening are higher than most believe, about a 50-50%
chance.
The German
economy is emerging from its deepest post-war recession, led by its booming
export industry, with two-thirds of Germany’s
exports shipped to other Euro-zone countries and 75% sold to Europe.
In February alone, Germany
earned a trade surplus of 12.1-billion Euros. Germany
uses these surpluses for foreign direct investment and bank lending to its
Euro-zone partners, which in turn, buy German goods. However, along
with the buying binge, huge increases in personal debt have sprung-up in
countries such as Greece
and Portugal.
Germany
was the world’s biggest exporter of goods for five-years thru 2008,
before being overtaken by China.
Die-hard bulls bidding-up the German DAX since it hit bottom in early
February, are optimistic that German multinationals can deflect a downturn in
the Club-Med economies, such as Spain, where the jobless rate is above 20%,
by increasing sales to the booming Chinese economy, where GDP expanded at a
sizzling +11.9% annualized rate in the first quarter.
However,
what’s been overlooked is the recent sharp slide in Shanghai
red-chips, skidding 8% lower over the past 10-days, after Beijing
ordered local governments to take strong steps to control speculative buying
in real estate. Banks listed on the Shanghai
and Shenzhen stock exchanges fell sharply on fears that a government
clampdown would increase the number of bad loans, since Chinese banks have
lent a large amount of money to property companies and speculators. Beijing
says property values on average rose 12% from a year ago, but in some sectors
of the country, property prices have skyrocketed by 45-percent.
On March 27th,
former Fed chief “Easy” Al Greenspan was asked whether there is a
real-estate bubble waiting to burst in China.
“I think so. To be sure, there are significant bubbles in Shanghai
and along the coastal provinces. Some of that is going back into the
hinterlands as well. Remember, the bursting of a bubble by itself is
not a big catastrophe. We had a dotcom bubble, it burst and the economy
barely moved. It is hard to tell when that bubble bursts, what the
consequences are, because we do not have enough data on China.”
And who would know better than Greenspan, the world’s top serial bubble
blower.
The specter of a
bursting real-estate bubble in China
could wreck havoc upon the global economy. Most impacted would be the
satellite countries, which rely heavily on sales to China,
such as Korea, Taiwan,
Japan, and Australia.
A shake-out in Asian stock markets would also ricochet to the European
sphere, and eventually hit North and South American markets. The earliest
signal of trouble ahead, would be a break-down in the Shanghai
index below the key 2,900-level.
This article is
just the Tip of the
Iceberg of what’s available in the Global Money Trends
newsletter. Subscribe to the Global Money Trends newsletter, for insightful
analysis and future predictions about the (1) top stock markets around the
world, (2) Commodities such as crude oil, copper, Gold, Silver, and grains,
(3) Foreign currencies (4) Libor interest rates and global bond markets, (5)
Central banker "Jawboning" and Intervention techniques that move
markets.
GMT filters important news and information into (1) bullet-point, easy to
understand reports, (2) featuring “Inter-Market Technical
Analysis,” with lots of charts displaying the dynamic
inter-relationships between foreign currencies, commodities, interest rates,
and the stock markets from a dozen key countries around the world, (3) charts
of key economic statistics of foreign countries that move markets.
Subscribers
can also listen to bi-weekly Audio Broadcasts, posted Monday and
Wednesday evenings, with the latest news and analysis on global markets. To
order a subscription to Global
Money Trends, click on the hyperlink below,
http://www.sirchartsalot.com/newsletters.php
or call toll free to order, Sunday thru Thursday, 8-am to 9-pm EST,
and on Friday 8-am to 5-pm, at 888-808-7978. Outside the US
call 561-391-8008. This article may be re-printed on other internet sites
for public viewing, with links required to:
http://www.sirchartsalot.com/newsletters.php
Disclaimer: SirChartsAlot.com’s
analysis and insights are based upon data gathered by it from various sources
believed to be reliable, complete and accurate. However, no guarantee is made
by SirChartsAlot.com as to the reliability, completeness and accuracy of the
data so analyzed. SirChartsAlot.com is in the business of gathering
information, analyzing it and disseminating the analysis for informational
and educational purposes only. SirChartsAlot.com attempts to analyze trends,
not make recommendations. All statements and expressions are the opinion of
SirChartsAlot.com and are not meant to be investment advice or solicitation
or recommendation to establish market positions. Our opinions are subject to
change without notice. SirChartsAlot.com strongly advises readers to conduct
thorough research relevant to decisions and verify facts from various
independent sources. Copyright
© 2005-2010 SirChartsAlot, Inc. All rights reserved
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
Mr Dorsch worked on the trading
floor of the Chicago Mercantile Exchange for nine years as the chief
Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures
Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for
Charles Schwab's Global Investment Services department, Mr Dorsch handled
thousands of customer trades in 45 stock exchanges around the world,
including Australia, Canada, Japan, Hong Kong, the Euro zone, London,
Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts,
ADR's and Exchange Traded Funds.
He wrote a weekly newsletter from
2000 thru September 2005 called, "Foreign Currency Trends" for
Charles Schwab's Global Investment department, featuring inter-market
technical analysis, to understand the dynamic inter-relationships between the
foreign exchange, global bond and stock markets, and key industrial
commodities.
|
|