Notes From Underground

The question of the impact from the austerity budget passed by Greece will not be visible under the lights of television but will rather be a process drawn out during the coming years. Tears will flow not from the irritation of tear gas but from the “NEGATIVE FEEDBACK LOOP” that has been initiated by the power of Brussels to exact its pain from the citizenry of Greece while applying the salve of credit relief to the global banks and financial entities saddled with the debt of the profligate PIIGS.

Today’s televised political theatre was merely the “END OF THE BEGINNING” as the debt drama will continue to play out during the next few years. The tough-talking IMF will punish with words and the threat to withhold further funding, but analysts forget to figure what the Greek budget will look like when GDP is deep in negative territory. Yes, the global equity markets have rallied in anticipation of the staged event but it means that the world is back to focusing on the impact of zero interest rates and the desire of central banks to provide liquidity in times of potential crisis. The FED stepped into the fray–HOORAY–as they announced that the DOLLAR SWAP LINES that were set to expire in August have been extended for another year.

Regardless of what the pundits have to say about Christine Lagarde, she will prove her political savvy at the expense of whatever credibility the IMF retains. Lagarde is a Europe-firster and it will be interesting to see how she uses the IMF treasury to further aid the European crisis. If she floats IMF GOLD-BACKED BONDS to fund the next round of IMF bailouts, I will have new respect for her, but being a political stool of Sarkozy will be a weight upon sound policy. There will be a banking crisis in Europe as the economies of the PIIGS become more stressed. And, as a new crisis arises, the solutions become much more limited.

In a BLOOMBERG article quoting Deutsche Bank CEO Josef Ackermann, he offers a very candid picture of what played out in Greece: “Speaking to Chancellor Merkel …  we’ll offer our hand in solution, but not because we’re doing it gladly, but actually to enable policymakers to do something so that we–I’ll say it frankly–so that we don’t have a meltdown.” Ackermann, who is also head of the Institute of International Finance (IFF) also said that the IFF was working on tests to see if any of the proposed resolutions to the DEBT ROLLOVER would trigger a CREDIT EVENT, adding that “any agreement is ‘highly complex’ and could force investors to write down their Greek holdings by an estimated 30 % to 45% if done incorrectly.” So if Ackermann is to be believed, this is only the end of the beginning.

The Greek vote gave rise to BROAD-BASED RALLIES in all risk on assets. Commodities rallied with CRUDE OIL rising above the IEA intervention day of June 233–and all the policy makers say, just think how much higher oil would be if we didn’t act. Global equities rallied and the U.S. DOLLAR was again the target of the risk-on crowd. Interesting that the risk-on crowd gets some reprieve just in time for month- and quarter-end that happens tomorrow.

The only non-participants were the yield curves of the PIG, as the 2/10 curves of Portugal,Ireland and Greece remain inverted to a very severe degree. Spain and Italy remain positively sloped but I will be paying close attention to see if any new stress emerges in the bigger of the PIIGS, for it is the 2-year note that will become immediate the target of any sovereign debt fears, thus the steep inversions of the three little PIGS. The EURO currency rallied again but its strength on the CROSSES was not as robust as I would have expected. If there is true confidence in the EUROPEAN BAILOUT, the EURO/SWISS currency cross OUGHT TO HAVE A SIZEABLE RALLY. The cross that has been the barometer of European angst has had a rally but still remains weak. Check your technicals to ascertain any type of real reversal in market psychology.

The DOLLAR has been weak in anticipation of the GREEK VOTE, but today’s weakness took on added importance as the U.S. 2/10 curve steepened along with the weak dollar and rising asset prices. If the U.S. curve were to begin moving higher, it would be a key indicator for the risk-on crowd and the asset rally would have a new source of energy. If the U.S. curve were to steepen to new highs, it may be just the element to give lift to the financial sector, for when the S&PS were trading 1350 the bank stocks were a non-participant. If the banks cannot get healthy with a 290 basis point 2/10, one is left to wonder what it will take. Do I hear 350 to 400?

Tags: Christine Lagarde, credit event, crude oil, debt rollover, Deutsche Bank, Dollar Swap Lines, Euro, euro/swiss, european bailout, Fed, GDP, Gold-backed bonds, Greece, IEA, IFF, IMF, Josef Ackermann, negative feedback loop, PIIGS, U.S. Dollar

This entry was posted on June 29, 2011 at 8:17 pm and is filed under Austerity, Europe. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.