Misguided Hope about Greece has Kept Markets Afloat, Until Now

March 9th, 2012
in contributors

Written by Gary, Econintersect Live Market Commentary

hopiumAll this week the markets have succumbed to the “hopium” hangover until today. Tuesday markets went through a strong “correction” which has now gained back some of the losses that occurred. Today's reports (Thursday) concerning Greece are looking up at noon-time because of some severe arm-twisting behind the scenes and politicians singing their song of how well everything is going. Doing their best in injecting another strong dose of “hopium”.

Follow up:

@telegraph: “We are hearing reports that the Greek debt swap participation has passed 75pc. The deal aims to cut €107bn off Greece's national debt and is a critical part of the country's second international bailout. If the deal fails, Greece faces default in a fortnight.”

“The International Monetary Fund also said that Greece is making "steady progress" towards implementing agreed "prior actions" to qualify for IMFlending and that most actions are now in place.

The IMF states that it has an interest in the Greek debt exchange being successful, and it will require a "high" participation rate of private bondholders.

The Greek programme does "carry risks" but the IMF is hopeful agreed measures will put the country back on the path of growth.”

“While all this has been going on, the ECB has just released a separate statement saying it will start accepting Greek government bonds again as collateral.

The ECB stopped accepting Greek bonds early last week after Standard & Poor's downgraded Greece to "SD" - or "selective default". The ECB's decision to start accepting the bonds as collateral follows a €35bn payment guarantee backed by the EFSF - or temporary eurozone bailout fund.”

Articles this week have some thoughts on what will happen if there is a default.

Dueling Prophets: 2 Perspectives On A Greek Exit From The Eurozone by The Inflation Trader

So will the default, if it happens, and the likely exit of Greece from the Eurozone, end all multi-cellular life on the planet?

One answer to that question was carefully leaked Monday by the IIF, the organization which was responsible for negotiating the surrender Private Sector Initiative. It falls squarely in the camp of “a disaster of epic proportions,” and predicts that certainly every possible pestilence will befall the planet (with the possible exception of dogs and cats living together).

In any event, a safe stance is warranted. And keep in mind that for most investors, it isn’t Thursday that matters: long before there is an announcement that the PSI has succeeded (or more likely, that CACs will be invoked or the deal fails altogether), the market will be trading the information because some people will know well before you and I will.”

Gold has fallen along with silver. Oil has risen over fears of Middle East oil delivery and those pesky issues with Iran.

Increasing worries that Greece will default still remain as time runs out. The Greece debt crisis is not going to simply fade away even avoiding the default as the problems continue to mount. This is one situation that won't fade away just because the politicians say everything is O.K. And they have everything under control. (How many times have we heard that line?)

Despite Hype, Market Tells Us Greek Debt Crisis Continues To Worsen by Paul J. Lamont

". . . the yield of the 1 year Greek Bond is greater than 900%. So despite the hope and hype surrounding the Greek debt situation, the market is telling us that the crisis has continued to worsen (and at a quicker pace!).

. . . if the hedge funds that hold the Greek bonds refuse, credit default swaps would be triggered (insurance bets that brought down AIG). Greece has also already been downgraded by S&P to selective default on February 27th and to default by Moody's on March 2nd. Perhaps the authorities will get it right over the next few days. But they can't make people keep their money in the weak European banks."

At ZeroHedge more harsh words doubting Greece's ability to overcome its debt issues:

Presenting Europe's Schizophrenia Post LTRO

"Since Draghi's second savior LTRO, European markets have been flip-flopping gradually lower. These four charts do not seem to suggest a market that is confident about tail-risk containment, sovereign firewalls, or an orderly restructuring by Greece.

Sovereign spreads are broadly higher (Spain, France, and Portugal the most), CDS spreads are underperforming (as protection is sought and CDS seen having value as a hedge), non-financial and financial credit is notably weaker, LTRO Stigma remains notably wide, stocks are broadly lower, and the EURUSD is back at 'fair' with its swap spreads (removing its over-pessimism).

There has been no change in the price trends for UK-law versus Greek-law GGBs (i.e. noone believes this is over) and even if it were, a renewed focus on growth is hardly a market positive given lending trends and macro prints in Europe recently."

The headlines in the UK indirectly point unfavorably to any quick solution of removing 'doom and gloom' from the market place. Next week the PIIGS, notably Italy, will be in focus again. Big debt problems loom over the Euro Zone and are not going to go away. These problems are enormous and Europe tax payers do not have enough money to solve them.


• ECB to accept Greek government bonds as collateral
Greece on the brink of default as bond deal falters
• Investors have until 8pm (3 EST) Thursday to participate in bond swap
• Greek unemployment rate at record high of 21pc
• ECB cuts eurozone growth forecasts
• Bank of England leaves rates unchanged at 0.5pc

One more issue that has not been publicized. The commerce section of Greece is faltering and showing little signs of recovery.

@Athens News: Greek trucks head north Three in every five Greek international freight trucks are sitting idle while just 40 percent of the country’s exports are served ...”

Follow Gary's running commentary every day the market is open at Econintersect's Live Market Commentary.

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