Greece = Toast

 |  Includes: FXE
by: Dorsey Wright Money Management

By Mike Moody

According to a article:

Moody’s downgraded Greece’s bond ratings by a further three notches Monday and warned that it is almost inevitable the country will be considered to be in default following last week’s new bailout package.

The agency said the new EU package of measures implies “substantial” losses for private creditors. As a result, it cut its rating on Greece by three notches to Ca — one above what it considers a default rating.

This was an inevitable outcome, apparent when the Greek debt crisis first entered consciousness last summer. It may seem like a year of wrangling was overly painful and completely counterproductive, merely delaying the inevitable, but consider the positive consequences of the foot-dragging:
  • Markets have had an extended period of time to adjust expectations, thus smoothing market action if and when a default occurs.
  • Debt holders have had an extended period of time to accumulate capital reserves to deal with the losses.
If you are a major European bank that holds a significant amount of Greek bonds, it’s politically and financially complicated to sell your position. But you can use the year to build a loan loss reserve to cover yourself. (If the CFO hasn’t done that, the company probably deserves to go out of business.) This doesn’t happen if you just rip off the band-aid immediately.
The final result is still going to be some kind of partial default and subsequent haircut, but the long negotiation process provides cover for financial markets and bag holders. Investors have time to adjust to new trends or to reconsider their positions. This is one reason why a systematic relative strength process is often so effective. Once again, process is much more important than investors typically believe.