Greek Default Now Looms - Mike Swanson (09/12/11)
Bonds on Greek government debt have collapsed and the yield for a two year bond is now 60%. The bonds are trading 50% below face value. Italian bonds yields have also risen to 5.48% on their 10-year bond while Spanish 10-year yields are at 5.23%. In comparison the yield for a 1-year US Treasury bill is 1.91%.
The news of Greek debt problems have been an issue for the global markets now for a year and a half. Yes Greece is a small country in the big scheme of things, but the real fear is that if Greece defaults then debt fears will spread to Ireland, Italy, and Spain and cause those countries to default on their debts too.
These fears are now becoming the focus of everything, because on Friday some big moves occurred in European markets. For instance look at this recent move in the Euro:
Currencies normally do not move like this!
At the same European stock markets have once again come under tremendous pressure. For example just look at the ETF's for Italy and Spain:
As for the US markets I am still of the view that they are trying to stabilize and form a base to launch a sustainable rally back up towards it highs. The one good thing the market has going for it, is that investor sentiment has become extremely bearish and is almost at the point it go to last year in August right before the market took off. From a charting stand 5-10 more days of basing will put it in a position to begin another big rally. All the market has to do it hold up above its August lows.
It seems to me that the issue of Greek default is now keeping the market down and it is only a question now of how long will it take to default. The European Union and the IMF have issued two big loans to Greece this year, both of which had attached to them austerity budget cutting measures to go along with them, including firing 120,000 government employees and taking away the pensions of many retirees.
The problem is that even if Greece had been able to meet all of the austerity measures it probably still wouldn't be able to pay off its debts properly or cause it deficit to shrink materially, because, as the newspaper The Australian reports, "the first bailout requires Greece to reform its finances and its economy, and to meet tough targets for increases in revenue and cuts in expenditure. But for more than a year, European leaders have overpromised on Greece's ability to change. The rosy estimates have led them to provide insufficient sums of rescue aid, requiring a cavalcade of revisions and adjustments to make the numbers line up. That has bred resentment among taxpayers in northern Europe footing the bill, particularly in Germany, the Netherlands and Finland."
And then as for "the second bailout, struck in July, is a consequence of two miscalculations in the first bailout. First, the accretion of wider-than-expected deficits means Greece needs more money than originally planned. Second, the bailout planners assumed Greece would be able to borrow long-term money on its own from financial markets. That won't happen any time soon."
IMF style austerity bailouts almost never work and in reality probably are not even intended to really work in the end.
The problem is that a sovereign debt crisis tipping point comes just as a country slips into recession after years of debt driven growth. That recession causes government revenue from taxes to shrink. Then the IMF steps in and demands more budget cuts, but less government spending weakens economic growth which brings less tax revenue for the government - all of which creates a death spiral the country really can't get out.
These demands are made so the government can contribute more money to pay the loans owed by international bankers. But in the end they totally wreck an economy.
Look at it this way they make it so that it is pretty much impossible for a country to pay off all of its loans, because they throw a country into depression conditions. However, what they do is make a country pay up more than they were for a period of time, usually 6-12 months, before their economies totally collapse.
This happens over an over again with IMF style bailouts.
They bring living hell to the regular people living in the country, but provide a window of time for international bankers to loot the country and get as much money out of the country as they cane before their economies collapse.
No one ever describes it this way, but it is in effect what happens every time a country gets an IMF style "bailout."
So when we saw European lenders start to demand austerity measures a year ago it pretty much created a situation where a debt default would be inevitable.
And so that is where we are today.
This weekend The Telegraph of London, reported that Germany is now preparing for an "orderly default" for Greece and its economic minister came out and publicly declared that is deficit-reduction measures have been "insufficient."
According to The Telegraph, "Mr Roesler’s comments come as Germany’s their Spiegel magazine said finance minister Wolfgang Schaeuble had ordered preparations be made for a Greek bankruptcy. The report claimed the German government is preparing for two eventualities under that scenario – Greece staying in the euro or the country exiting and reintroducing the drachma. Despite the speculation, the European Commission said it was sending a team to Athens “in the next few days” tasked with finalising the payment of a new tranche of loans for Greece by the end of the month."
As for the US stock market at this point a Greek default would actually be good for the market, because it would remove this issue of uncertainty from the stock market. The process of getting to the default may cause more turmoil, but once it is over it would be over.
For years finance ministers and bankers in Europe have been lying about the extent of the debt crisis Greece and other debt infected countries. A default is a bankruptcy and creates a situation when the lies stop, the hard truth comes out, and all the bad news really comes out at once. After that things stabilize. So its means a hard crash and a bottom.
As famed investor Jim Rogers put it, "the euro will go down a far amount. But I would buy all the euro I could at that point because then that would mean that Europe is going to have a very strong, sound currency. People can not lie about their finances anymore, people have to run a tight ship. It would be a lot of pain between now and then, but boy if that happened in the next month or so, buy all the euros you can."
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