Is Greek Debt Crisis Over or Postponed?

by: Ralph Shell

The Greek credit crisis boiled over last week when the rates charged the Greeks went as high as 700 points over the German two year paper. Rates like these confirmed that the credit markets were not impressed by the central bankers' terms of endearment and undying support for the from euro. More than empty platitudes were needed to access the necessary sum of money required to finance their debt at more reasonable rates. The new arrangement apparently provides €30B at subsidized rates by the euro banks and €15B by the IMF.

In our Friday comments about the euro, we cautioned that the short side of this trade was very popular, and a surprise fix to the Greek debt problem would cause a rally. Indeed this did happen today, as the euro, which had suffered in conjunction with the Greek debt crises, gapped higher, making it to 1.3690 before the current pullback to 1.3580.

The price action has produced an interesting chart, which gives us multiple signals. This morning's high spike left a gap between 1.3495 and 1.3567. We all know that gaps are made to be filled, but should this prove to be a breakaway gap, this might take a while, much to the discomfort of the euro bears. This market, with today's higher trading, is threatening to form a W. Twin tops at 1.3589 suggest we may have a return, this week, to the 1.38 handle.

Ambrose Evans-Pritchard at had an interesting take of the situation in an article entitled 'The Greek people are being punished for Europe's errors.' He said:

Brussels has failed to bluff investors with fudges that the mask the battle between Germany and France over the shape of Europe...The cleanest option for Greece is an Argentine default with a 65pc haircut for creditors, and exit from the euro. ......True, but Greece is just "the tip of the iceberg", in the words of China's central bank. The design faults of EMU have left all Club Med trapped in debt deflation or perma-slump. Europe's banks are in turn stuck with fatal exposure. You cannot safely uncork Greece without risking a chain

Evan-Pritchard continues that:

This is not a bail-out for Greece. It is a bail-out for European creditors that account for most of Greece's €391bn external debt.

Which will shift the burden from the banks to the tax payers. He blames the Greek debt crises on the Europe Central Bank that let the money supply grow too fast during the expansion phase of the cycle. Despite the current rescue measures, default will be the eventual result, he concludes.

Perhaps this will be the ultimate result, or perhaps the analysis is too harsh, a manifestation of the intramural rivalry amongst Europe and their currencies. In the meantime, how long are the specs going to carry their shorts? Failure to close the gap probably means this pair is to check out the 1.38 level later in the week.
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Disclosure: No positions