The Troika And The Greeks Reach An Agreement

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Includes: FXE, GREK, UDN, UUP
by: Ralph Shell

Finally, there is an agreement between the Greeks and the Troika. Terms of the new austerity plans, punishment for prior deviant fiscal behavior, will commence. For the Greek politicians representing the New Democracy, Pasok, and the Laos Parties, there are many objections to the belt tightening, but the parties did agree on one thing, no one wanted to take the blame for the failure of the next tranche of bail out euros arriving in Greece.

While the bureaucrats in Brussels, and the bankers in Paris and Frankfurt, as well as the politicians in Berlin are doing their sophisticated version of high fives, Athens residents are making preparations for two days of strikes.

For the strikers it is hard for them to understand, they were the beneficiaries of the politicians generous promises, over spending and borrowing. Those days are gone. Now the politicians must beg for northern European money to remain solvent as they attempt to keep up with maturing debt.

This week, for example, Greece borrowed €1B of six months bills, yielding 4.86%, to roll over €1B of euro paper maturing February 10th. Borrowing short to pay for long term obligations usually results in default, or bankruptcy.

What the strikers do understand is the current bleak outlook. Today the Hellenic Statistical Authority reported that the unemployment rate in Greece for November was 20.9, a record high. Unemployment among those 16 to 24 years was approaching 50%. Industrial output shrank by 11.3%, more than the 7.8% in November and manufacturing was down 15.5% in the month.

Increased austerity, demanded by the troika will only hasten the economic death spiral. Go ahead, do your banker high fives in Frankfurt, light the cigars and enjoy the moment. Chances are, however, the problem is not solved, and you are merely throwing good money after bad. The final chapter in the Greek saga is yet to be written.

The celebration of the Greek settlement seems subdued in the Forex markets, partially because the euro has been creeping higher, anticipating an agreement. Tempting as it might be to sell the news, there may be some other factors working in the euro's favor. As we noted in last week's COT Report, futures speculators had amassed a short position in the euro approaching 200K contracts. As the euro has rallied against the USD, there has been short covering. This we know because the open interest in the futures market has gone down this week. With the big open interest and new highs on the euro, we expect there will be more short covering.

Another factor in the euro strength versus the USD may be speculative USD selling versus purchases of the two currencies down under. Combined speculative longs in the Aussie and the Kiwi futures now exceeds 100K contracts.

A close above 1.33 for the week may put some additional pressure on the shorts. Markets that close well on a Friday often carry through the following Monday. Although we want to sell this pair we prefer to wait and watch the market action.

The Troika and the Greeks Reach an Agreement
(Click to enlarge)

The Troika and the Greeks Reach an Agreement
(Click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.