The financial markets have been suffering the whiplash that resulted from the uncertainty of the Greek elections. It is no surprise to the readers of this blog that politics would provide a problem for those “WHO ASSUMED A CAN OPENER.” The eurocrats and European financial elite are so vested in the EURO and the politics of the EU project that they assumed all citizens of Europe would fall in line. Every referendum that did not pass was reissued under threat of a curtailment of Euro funds from Brussels. Now that the bill is coming do for all the promises. The angry electorate is saying NEIN to more AUSTERITY through the ballot box and financial markets and Europe’s bankers are quaking.
It seems that the Greek politicians know that the fear of GREECE not “honoring” its previous commitments is a powerful tool to use in negotiations with the powers in Brussels. GREECE HAS NOTHING TO LOSE IS THE OPERATIVE MINDSET OF THE SYRIZA AND ITS LEADER, ALEXIS TSIPRAS. It is the BANKS, ECB and IMF who are on the hook for a great deal of money. It is the ultimate moment of the PRISONER’S DILEMMA.
Yes, the GREEKS know they owe a great deal of money, but your banks own the paper. Also, if the Greeks were to turn violent at the continued threats from the ECB and the GREEK election results were overturned through the impact of interference from Brussels, there would be fallout from the other European nations searching for relief from austerity. I warn all readers to be leery of the nonsense that continues to be written about the politics of Europe as the SYCOPHANTS WANT TO PAINT A BETTER POLITICAL PICTURE.
A danger to the Greeks leaving the EURO would be that the drachma would be reinstated at a very depreciated level, leading to a massive resurgence in Greek tourism and other service industries, which would come at the expense of the Spanish and French tourism industries. A “liberated” Greece has the potential to create all types of economic turmoil for the other periphery nations. Just threatening the Greeks is not as simple as many optimists want to believe.
Today, Bloomberg ran a piece by a noted Financial Times journalist, Clive Crook, “Hollande Must Betray His Supporters to Save Them.” The writer notes that Mr. Hollande cannot betray the left until after June’s Parliamentary elections but then, “Whether it’s sooner or later, Hollande will be forced to acknowledge reality, and the disillusionment of the French left will be terrible.” Here again, the elite want their wishes to prevail over any sense of the PUBLIC WILL. Mr. Crook goes on to say, “Wisely, Hollande’s campaign was more about posture than specifics. We know he’s against austerity and for taxing the rich–but he hasn’t drawn up a budget.”
This is the view of the status quo within the EU at all costs camp, but if the Greeks play their HAND OF NOTHING TO GREAT ADVANTAGE THE POLITICS OF EUROPE WILL BECOME VERY VOLATILE. This afternoon it was learned that Greece will receive its next TRANCHE OF BAILOUT MONEY tomorrow. See, NOTHING CAN BE A VERY GOOD HAND.
The problem for the policymakers in Brussels is that all the other debt-stressed nations are watching closely to see if the banks and the EURO GROUP cave in for fear of a CREDIT CRISIS emanating from the Greek’s decision to soften the BAILOUT AGREEMENT. Crook ends his article with this warning: “But Hollande can’t be a good thing without letting his supporters down. That’s a hard truth to contemplate in your first week in office.” This is a major dilemma for the financial and political elite of Europe. Let’s ASSUME A CAN OPENER.
Quick Hitter: The two-year Schatz dropped to a record low 6 BASIS POINTS. Again, the rush to safety added to China’s need to invest its EUROS is playing havoc with the world’s DEBT MARKET. Finnish two-year notes dropped to 18 BASIS POINTS and the Netherlands to 28 BASIS POINTS. The demand for safety and the need for quality collateral is causing massive dysfunction in credit markets. PRICE IS NOT A BAROMETER OF QUALITY POLICY. This is causing many hedge funds to place bets on the short side of the DEBT MARKETS. They are right that the risk/reward is certainly a temptation. It will just depend on your time horizon.
A CAVEAT FOR CHAIRMAN BERNANKE: BEN, you are opening up the Pandora’s box of the FISCAL CLIFF. The world’s financial markets and commodities are starting to be very concerned about the FISCAL CLIFF that Bernanke warned about at his last press conference .This is a problem as he has alerted investors that CONGRESSIONAL and presidential failure to deal with the fiscal problem can result in a 2 1/2% to 5% negative impact on GDP in 2013. Added to this is the possibility of an increased tax on dividends. The S&Ps and DOW are nervous as a major hit to the U.S. economy coupled with the EUROPEAN MORASS can send the GLOBAL ECONOMY into a massive deflationary spiral.
THE PORTFOLIO BALANCE CHANNEL IS BEN’S BABY, SO CHAIRMAN BERNANKE you had better gain control over the FED GOVERNORS AND PRESIDENTS who are pushing for a near-term rate increase. Bernanke and Geithner have been silent on Europe, but the phone lines are burning as U.S. policymakers are pushing Europe into a greater stimulus plan for if Europe implodes America will more than sneeze. Sometimes a walk to the FISCAL CLIFF RESULTS IN A PEEK INTO THE ABYSS.
A final note: The Portuguese 2/10 curve has exploded out to 414 BASIS POINTS. Being that the Portuguese 10-year is still yielding 11%, somebody is aggressively buying the Portuguese two-year note. It could be the use of LTRO money by private banks in an effort to enhance return but it may be the ECB adding to its purchases of sovereign debt. It is important to stay attuned to yield curve moves that indicate some action from authorities or very large investors. Could it be China chasing higher short-term yield to offset the ridiculous rates on the Schatz? Chinese buying of Euros has to be invested somewhere.
Tags: Alexis Tsipras, Bernanke, can opener, Dow, ECB, Euro, fiscal cliff, Geithner, Greece, IMF, Schatz, SPS, Syriza
May 9, 2012 at 6:30 pm |
As always, a great post with plenty of outside the box analysis. Although I am by no means an expert on EZ politics, it seems that we’re definitely looking at another Greek election come June, and personally I’ll be very much interested in how the Pasok/ND coalition paints this vote in the eyes of the Greek public – with supposedly 70% of Greek citizens in favor of staying with the EUR, one would assume that the best strategy would be to paint the vote as essentially a ‘referendum’ on the EUR, potentially bringing a majority to the pro-bailout/austerity coalition and a stabilization of things (for now). In fact I wonder if Tsirpras’s withdrawl of mandate and calling for dropping of the EUR was in fact that playing out today, leaving the public to vote in the ‘pro-EUR’ party/coalition come June.
Per Portuguese spreads, it seems that curve has become the play thing of the hedge fund community as of late with notes passing around about entrenchment of official sector in Port. bonds and too high risk of contagion if severe restructuring means at worst recovery rates will be high and thus recent prices at half (or less) than par are attractive – leading some funds to get long here. Not sure how much of this is actually being done but interesting nonetheless. All the talk about Paulson’s short bund trade and one can’t help but wonder if he’ll be proven right for the wrong reasons, i.e. stabilization and major bear steepening of the curve. Would be curious about your thoughts in this regard – is German long end now binary outcome – short term stabilization and massive outflow of haven, or serious deterioration on refocus on poor credit quality of entire EZ – both leading to yields blowing out? Maybe a short German and long Port. 10s is attractive in this regard.
May 9, 2012 at 7:13 pm |
Fantastic summary, Yra. Rare form!
May 9, 2012 at 11:07 pm |
Appears the powers that be are trying to avoid upsetting the debt paying slaves and the ice is very thin.
Conditions are ripe for more street revolts, bankers losing their grip, Euro members not being able to adhere to the low standards of maintaining membership, domino effect or collateral damage to the world at large or maybe a worst possible scenario as in the reemergence of a third riech, starting with a magnetic figurehead.
Or, it’s just death by a thousand paper cuts.
May 10, 2012 at 2:45 am |
great post. FT says “Bundesbank signals softening on inflation” , your view? http://www.ft.com/intl/cms/s/0/54fa4006-99ed-11e1-accb-00144feabdc0.html#axzz1uQsSXexN
May 10, 2012 at 6:07 am |
MATTW: much food for thought .Yes,Paulson is playing an interesting hand and hoping for the best result or ultimately Germany will cave on austerity and massively bailout Europe and the BUND will pay the price or if the Germans say the hell with it and leave all the others to their own devices–Germany reinstates D-MARK and currency rallies but debt becomes more accurately priced–it seems that Paulson believes it is a win/win in that thinking–if the second scenario plays out the Portugese 10 year will not be your friend—so much uncertainty and we will have the U.S. and German elections before us
May 10, 2012 at 6:09 am |
Arthur–yes I have seen the headlines on German inflation softening and the proof will be in the tire marks on Jens Wiedmann’s BACK.