The Euro took quite a tumble this week as the Euro Central Bankers declined to pick up the tab for overdrafts from Greek government spending. Continuing its retreat versus the dollar dropping, it slipped to 140.27 prior to a minor relief rally back above 1.41. So we have sold off over 1100 points since we printed the high in late November.
Amazing the influence that Greece, a country with only a little over 11 million people, and a country better known for tax evasion than tax collection, can have on the rest of Europe. There are estimates that the Greek government debt is €216B of which over 70% is owned by foreign banks. So far Fraulein Merkel and her band of fiscal conservatives, perhaps worried that other troubled big spenders are in the wings, have failed to exhibit any compassion.
So far the USD has held up as a bastion of strength as the trade worries about the next problem country in the single currency Euro. Will it be Spain with the 19% unemployment rate and the broken real estate bubble. Or what about Portugal? or Italy? Well, what if the next in line to default on government debt is Illinois?
The state of Illinois does not get as much publicity as Greece, but the population of Illinois at 12,419M, and is larger than Greece. It is estimated that the budgetary deficit for the entire state will exceed $9B, as tax receipts dwindle and the state teeters on the verge of bankruptcy. According to a website, For the Good of Illinois.org, it is estimated that the state debt is $120B and growing. This does not count Chicago and Cook County, where the Daley political machine has long specialized in voter fraud, rather than tax collections. With Chicago city sales tax around 10%, the highest in the country, it is still insufficient to pay for the bloated city bureaucracy. Mayor Daley has resorted to giving some of the city employees a non paid day off, in an effort to stay solvent.
California, with a population 3.5 times the size of Greece, is another candidate for bankruptcy and default. There the budgetary deficit is projected to be over $20B. While the state debt is reported to be only $68B, this does not account for the many city and county governments. Buried in the budgetary fine print is the amount of unfunded deferred liabilities needed to pay for the generous retirement benefits of all public sector employees. Will the Obama administration come to the assistance of Illinois or California?
US equities, banks in particular, were sharply lower Thursday. The market is not happy with the Administration's new plan to tax and regulate banks. Banking problems have in part been the result of government regulations that required banks to make loans to high risk borrowers. Installation of central government regulations for bankers is the latest from a government transferring as much power as possible to Washington.
If the market puts some of the US debt to detailed scrutiny, will the dollar retain its relative beauty? It is hard to be a contrarian, and be a buyer here, but most of the sell off is probably over, although the CME shows the open interest went up 7500 contracts Wednesday. We chose to stand aside and see what develops in the next few days.
Disclosure: no equity positions