February 14th, 2012
See editor's note at end of article.
Is this upcoming deal on Greek debt a situation of “Buy the rumor, sell the fact?” It’s widely rumored in the press there will be deal on Greece this week. Follow up:
This deal might solve the problem for Greece – but it does set the standard for future deals on the remaining problem debt. From here on out, the deals will only get better.
And, any resolution to the Greek problem just serves to highlight the problems that are not solved.
For example, just last week we had an Irish journalist ask an ECB official: “Why should Irish taxpayers pay for unguaranteed loans?”
The problems in Ireland cause the greatest issues for the ECB and the Eurozone. Ireland was a model citizen prior to the crisis – they ran a tight budget and GDP growth was strong.
Post 2008, Ireland is getting creamed by the private debt they were forced to guarantee. It’s a situation so unfair I am surprised Ireland hasn’t dropped out of the euro yet.
The solution to the Greek problems will cause the rest of the countries in the euro to negotiate much better terms on their deals. It’s clear there were problems in Greece – they lied about their budgets even before the crisis hit.
But Ireland played by the rules pre-crisis. Spain may have not been entirely clean, but they were far better than Greece – and they too ran budgets within the constraints of the euro pact.
So if the “slacker” gets treatment like Greece, what does Spain and Ireland deserve? Better. And that’s exactly what they will get.
It’s this observation which makes me think the euro is reaching an interim high over the next few days. This deal does not solve any problems outside of Greece.
But more importantly, this deal sets the worst case scenario for treatment of the non-core countries by the ECB and Germany.
This should be 100% clear after the Greek deal is struck this week. The deal solves only a fraction of the euro problems, and sets lowball terms for every subsequent debt negotiation.
I pointed out in prior posts Germany would like the euro to weaken, so once the Greek deal is done, I think it will become clear to many people subsequent deals will be made on more generous terms for these countries.
More generous means “quicker resolution with less burden on the taxpayers of those countries”. This to me means a weaker euro as Germany and France are forced to writedown these loans more quickly and to lower levels.
All of this means medium term weakness for the euro. The new conventional wisdom is “The ECB will purchase all the debt necessary to keep the euro going, which weakens the euro”. Expect the purchases by the ECB to accelerate as other countries play hardball on new terms for their debt, now that Greece as defined the worst case terms for these countries. They will demand lower interest payments in the interim too and the ECB will comply.
The 1.32-1.33 level is a problem for the euro due to technical reasons. It also happens the EURUSD is near this range right now, so the timing is right. When we see a deal, I do expect it to be a case of buy the rumor, sell the fact for the EURUSD.
Follow up:The ECB official doesn’t have a good answer – he evades, stalls, makes circular statements and then just asks for help from a moderator. You should really watch the video, because it’s astonishing. The video has 191,000 views on YouTube. That’s about 4% of the population of Ireland.
Editor's Note: This article was written at the very end of January. From January 16 to February 10 the EURUSD rose by 5.0% to 1.3286. Since this article was written the rise was 1.5%. The weekend following February 10 marked the end of the rumor and the start of the fact. In the first subsequent day of trading the value has dropped by 1.1%.
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