Tuesday, May 4, 2010

Greek Debt Contagion Worries Rattle Wall Street

Stocks sold off sharply today as worries around the fiscal health of Greece and the rest of the PIIGS finally hit equities in the US.

I must admit that yesterday's bounce surprised me after the sharp selloff in Europe earlier in the day. I guess I shouldn't be shocked: The bulltards are really good at sticking their head in the sands and pretending everything is fine as they buy buy buy.

It usually takes a sledgehammer to the head like we saw in late 2008 in order to finally get the bulls to finally stop hitting the "buy" button. I thought Greece would be a suffucient blow to the skull on Monday, but the message didn't get through until today.

Let's get real here for a second folks: The European soveirgn debt crisis issue is a serious problem for everyone around the world and it is not going away anytime soon.

The US banks alone have $176 billion in exposure to the PIIGS:

"NEW YORK, Feb 9 (Reuters) - U.S. banks have $176 billion in exposure to Greece, Ireland, Portugal and Spain, with risks concentrated among the 10 largest U.S. banks, Barclays Capital said on Tuesday.

The FFIEC data shows that 10 U.S. banks -- Bank of America (BAC.N), Citigroup (C.N), JPMorgan, Wells Fargo (WFC.N), Bank of New York (BK.N), State Street (STT.N), Goldman Sachs (GS.N), Morgan Stanley (MS.N) and the U.S. branches of Deutsche Bank (DBKGn.DE) and HSBC (HSBA.L) -- hold 96 percent of the risk, Barclays said.
The banks have $86 billion in exposure to Ireland, $68 billion to Spain, $18 billion to Greece and $9 billion to Portugal, Barclays said."

My Take:

If the issue was just Greece it could easily be handled. The problem is Wall St is asking "who is next?" versus saying its contained because the debt burden looks just as bad among the other PIIGS countires.

As a result, this is slowly developing into a game of domino's where the risk is if one of them tips over(via default like Greece) the rest go down with them.

As I said last week, the money is not there to save all of the PIIGS without massive money printing which I don't believe the ECB is willing to do.

The Euro then becomes a giant question mark because countries may decide to take things into their own hands by flipping back to their old currencies.

Haven't We Seen this Game Before?

This debt crisis(although different) reminds me a lot of the subrime crisis which eventually almost took down the banking system here in the USA.

Like Greece, our meltdown started with a small area of the global financial system which we called subprime loans. The bankers quickly came out and said that subprime was "contained" just like Greece "supposedly" is right now.

Later on of course we learned that this was a bunch of hogwash when we realized that just about all of the MBS's of mortgage debt that were created during the housing bubble turned out to be basically be worthless.

Of course,you would never know this if you saw it on any banks balance sheet today. Most of this debt is still market at full value thanks to our new "fraudulent" accounting standards.

I think we are about to see the same thing occur in Europe as this crisis no longer stays "contained" and begins to unwind.

Fiscally these two crisis are very different: Fundamentally however, the problem remains the same:

The oligarchs of the world want to live the good life at the expense of the middle/lower class peasants. When a crisis hits, the elite want the peasants to pay for their greedy mistakes via higher taxes and other austerity measures.

The bankers/oligarchs pulled it off over here by creating the TARP and forcing the taxpayer to backstop all of their mistakes.

The same thing is being attempted in Europe as we speak. The ECB and IMF are ready to puke up $146 billion to Greece alone! This is absolutely disgusting in my view.

The retirement age in Greece is 55! What are they smoking over there?

The Bottom Line

It appears the looting will never stop no matter where you are in the world. The bankers in the USA told us that the economic system would blow if we didn't bail them out.

They thanked us by gambling our taxpayer money in the stock market casino where they took enormous risks and made billions in bonuses. The bankers didn't care if they lost because it wasn't their money they were spending: It was ours!

Once they got the game rigged via faulty accounting standards and front running the market via HFT's"high frequency trading", they paid us back our TARP money. Sigh.... The whole thing makes me want to vomit.

I expect too see a similar extortion attempt by the PIIGS and bankers in Europe in coming weeks. Remember, if the PIIGS go down so do the European bankers.

I am sure they will try and threaten the world by saying that the whole financial system will blow if they let someone fail or default.

It won't be so easy this time though because I think the world has wisened up. For instance, there is vehement opposition in Germany to bailing out any of the PIIGS. Making things even more interesting is the fact that the German elections are held in May.

In the meantime, the German politicians vote on the Greek bailout on Friday. All 16 countries involved in the Euro need to approve this bailout via their own forms of Congress. This includes Portugal and Spain which is a joke in and of itself since both countries are broke.

Germany however is the key, and the concern is the Germans are not sure that Greece has the political will to enforce the austerity rules that have been agreed upon by the two countries.

I guess its kinda hard to tell an angry mob of Greeks that they can't retire until age 67 when they used to be able to walk at 55!

There are HUGE protests scheduled later in the week in Greece. If things get outta hand with torches and pitchforks, it might force Germany to second guess their agreement and make the politicians lean towards voting "no" on Friday.

Keep an eye on the developments across the pond. The bond vigilantes started pounding the PIIGS bonds once again today. Spreads are blowing out after a brief 1 day relief rally following the Greek bailout announcement.

The bond market loves to call your bluff and force your hand after you make a play like the ECB did on Friday after announcing the Greek austerity bailout.

The bond traders know that the debt issues run much deeper than just Greece, and they want to know what the ECB is going to do to "save" the other PIIGS. What's scary is I don't think there is an answer to this question because the money isn't there to save all of them.

If they don't get an answer, I believe credit spreads will continue to blowout which means the risk of a sovereign default is very real.

If this default fuse gets lit, all hell could break loose in the markets.

Disclosure: No new positions at the time of publishing.

12 comments:

Herb said...

The ECB and IMF are ready to puke up $146 billion to Greece alone!

Of course, the US funds 40% of the IMF, so really its the ECB & US Taxpayers who are ponying up money to the Greeks.

Jeff said...

Herb

Yup.

This is now a global bailout.

It works until it doesn't, and we all know that in the long run it will fail.

I think the bond market has had enough with Europe.

Obama must really be worried about the financial failures over there.

I am independant politically, but if the Euro fails he is in deep trouble over here because he orgasms over the idea of turning this country into France.

Europe's social tendancies are a fiscal failure in the long run and it's being proven as we speak.

Anonymous said...

Not much time left until 12/21/2012 leverage, leverage, leverage!!!!
The video of Greece protests coupled with some natural disaster footage has to get one thinking.
The funny thing is the commentary on CNBC this morning talking about the results of government spending beyond GDP and yet no one is saying what is happening in Greece could be the prelude to what we can expect to see here in the U.S. if we do not take action now.

Anonymous said...

EU is stuck between a rock and a hard place here. PIIGS want to print their way out, strong members do not want to pay for it. Yet they still want their unified currency...what to do...

Option One - PIIGS are kicked out, they print or default to their hearts content, and the Euro (in theory) becomes a strong currency. The problem of course is you assume no one other than the PIIGS bolt. If you lose a few middlings like Belgium & Austria, the Euro wont survive.

Option two - Germany & France withdraw from the Euro, go back to their Marks & Franks (which would be pretty strong), and allow the rest of the weakened EU to print and go on without them. The problem of course, is again the middlings. The Euro may survive (but still could fail) without Germany & France, but if Belgium, Austria, Slovenia, etc bolt, thats it. There is no chance the Euro survives if its just a bunch of PIIGS & afterthoughts.

Third option is the least palletable, but likely the best way to assure survival of the currency. If Ger & Fr really want to have a unified currency, they are going to have to swallow their fiscal pride and allow the ECB to print and pay for the PIIGS mistakes. I see that as being inevitable IF the euro remains a currency.

So thats what it really comes down to. Do the French & Germans value their fiscal responsibility more than they do their 2nd strongest currency in the world? I really dont know the answer to that one.

flipdippy said...

Anon

Does it matter what the outcome will be? At a high level, I can tell you exactly what will happen.

First, we'll get some sort of temporary but market satisfying conclusion. A few months of peace and kumbaya will ensue.

Eventually (as soon as weeks as long as 1-2 years) it will all go terribly sideways and the repercussions here will be bad, and the Eurozone will be screwed, whether it holds together or not.

Bond yields there will soar, the US will be crowned King of the game "Competitive Currency Devaluation", and will celebration the win with a severe case of stagflation followed by a deflationary collapse.

Anonymous said...

"At a high level, I can tell you exactly what will happen."

No offense, but your "exactly what will happen" is very similar to what I was told "what exactly will happen" after the 81-82 double dip recession.

And yet, we're still here...

Jeff said...

Great thoughts all

Flip

I see that as a plausible scenario.

I have also had bankers recall the 1981 scenario that anon was talking about who say the same thing.

Wall St. thought the world was going to end back then and we survived.

That being said, the debt levels this go around are mind boggling compared to '81 so I think you can't assume thats how this plays out.

The way I see it no one is that confident either way. I think this is why we are seeing so much volatility.

There is signs the economy is recovering somewhat which embolden the bulls.

However, the bears are emboldened by the fact that we are so deep in debt it doesn't matter.

I don't see us coming out of this like we did in 1981 because the situation is much worse.

Some version of what Flip said is more likely but I have had bankers tell me I am wrong.

Time will tell.

Jeff said...

Anon

regarding your scenarios I agree that #3 is the most likely to happen.

If it does the Euro will get smashed but it will survive.

On the positive side it will make traveling to Europe much less expensive.

getyourselfconnected said...

Good post Jeff. The UK elections tomorrow should be fun.

Jeff said...

Thanks Get

Maybe this will give us some insight on what happens in Germany Friday.

We have the jobs number friday as well.

The market should be a wild ride on Friday.

getyourselfconnected said...

I will play "Wild Side" by Motley Crue for Friday I think, HA!

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