Somebody once said that without deadlines, little would get done. The problem with the ongoing Greek drama seems to be the lack of a deadline. The schism between the thrifty Germans and their friends, with the defenders of the big spenders in the periphery, continues. Basically, the German finance minister is unwilling to open the state coffers any further unless private lenders to the Greeks share some of the write downs.
A write down implies default, takes the possibility of IMF funds out of play, and probably puts a lot of banks in big trouble. Perhaps the biggest loser would be the European Central Bank. For the past year the ECB under the tutelage of President Trichet has accumulated a debt portfolio that is of dubious value. Trichet had said that since this debt would be held until expiration, therefore, the ECB was not at risk.
The recent downgrade of Greek sovereign debt to the worst in the world and the current market yield of Greek 10-year notes, 17.8%, are evidence the ECB has blundered big time. Accordingly, "Mish" Shedlock, in HoweStreet.com, made the observations this morning:
"The market is about ready to slap ECB president Jean-Claude Trichet smack across the face with a hard dose of reality regarding Greek debt restructuring ... and ... the idea that restructuring will be contained to Greece is pure nonsense. Portugal and Ireland are on deck with Spain right behind.
What cannot be paid back won’t, and that extends far beyond Greece."
According to Reuters columnist James Saft, in an article entitled "Greek Actors Seek Divorce," estimates the ECB has 40-50B euros worth of Greek bonds in its balance sheet, and perhaps another 90B euros in Greek bank debt. Obviously a Greek default would incur a lot of pain that would extend far beyond the Greek borders.
While the U.S. is not at the epicenter of this pending debt crises, the country like all global bankers has exposure. The derivatives that Barney Frank and Chris Dodd supposedly regulated with their Financial Reform Act are bound to come into play. In an article "What Is the U.S. Exposure to the EU Mess," the author points out that Bank of America (NYSE:BAC) took in $9.1B in 2010 writing credit default swaps. Goldman Sachs (NYSE:GS) has been in bed with the Greeks for years so it is hard to believe they as well as the euro and Swiss bankers are not also exposed with the risky credit default swaps.
The Greek's do not appreciate the bail out terms, and are once again rioting in the streets. There are calls for PM Papandreou to resign with some members of his Socialist Party deserting. Perhaps PM Papandreou should return to St. Paul, Minnesota, where he was born, and seek office there. With an ex-governor, a Congress-lady both running for president, and an ex comedienne in the Senate, Minnesota voters might find a position for a used prime minister.
As for the rioters, it might take a little longer to get them off the streets and back to work, but with unemployment at 16%-plus there is a lot of time for riots. What is needed is an uber-euro for Germany, Finland, the Netherlands and a few others, and a cheaper ordinary euro. This way no one leaves the euro, and tourists once again come flocking back to Greece with the help of a cheaper currency and cure the unemployment problem.
The uncertainty caused by the Greek debt crises is part of the reason for the lower equities. In Europe the markets were 1% to 2% lower, and the Dow was lower. The USD is the winner today, and the euro at 1.4180 is down about 1.8%. Today's weakness in the euro extends beyond currency traders calculating the impact of change in business activity. Involved now is the psychology of the market. There is a feeling that Fraulein Merkel, responding to the will of her constituents, will decide the price for saving the euro with the present membership included is too expensive. Perhaps this will be untrue but until there is some resolution, this market can remain on the defensive.
Adding to the vulnerability of the EURUSD was the last COT report. Both of the large and small specs were long the euro, and the large spec had increased his euro long by 30K contracts. Unless a solution fixes the anxiety of the speculator, it looks like the euro should be sold on minor rallies.