After weeks of apprehension about a second Greek bailout, the announcement of an agreement seemed anticlimactic. There was a perfunctory rally in the EURUSD, that approached the 1.33 handle and retreated. European Equity Indexes were mostly negative. Treasuries declined marginally, and the U.S. equity markets worked higher.
So the deal is done, but why no champagne, no celebration? Maybe it is because there are no winners, in this bail out, only losers. The creditor countries and the IMF will have to kick in €130B. Does that make them a winner, and who really gets the money?
Avoiding default on a debt roll over, scheduled on March 20, seems to be of cardinal importance. But does giving money to the Greeks to pay off maturing loans and avoid default really help the Greeks?
It might help the political elites in Paris, Brussels, and Frankfurt to feel good about preservation of the euro, but did that really happen?
For the private creditors, forced to take a write down in excess of 50%, they are making history. A forced 50+% write down is no longer considered a default. And for the owners of credit default swaps, sorry you cannot collect because the rules have been changed. There is only the mirage of a default.
Greeks are going to get yet another dose of austerity, a stern but well meaning course in tough love designed to make them a better euro club member. Damian Reece in today's Telegraph described some of the details:
This is a giant debt refinancing, not a stimulus plan.
Before any of the €130bn is disbursed, Greece must pass a new Budget delivering further cuts of 1.5pc of GDP or €3.3bn this year. This will involve €1.1bn of healthcare cuts plus cuts to public investment, defence spending and pensions. A further €10bn of cuts will have to be announced in June, by whichever parties are in power in Athens by then, to take effect in 2013-15...
Again, before any of the €130bn is released, Greece must agree to cut its minimum wage by 22pc. For people under 25, it will be cut by more than a third. About 15,000 state workers will be placed in a "labour reserve" receiving 60pc of their basic pay for a year before being sacked. A "one in, five out" recruitment policy will cut the state workforce by 150,000 by 2015. Previously restricted professions such as accountancy and tourist guides will be forced to open to competition.
With the Greek economy in a free fall, does anyone think the austerity plan will result in robust economic growth? And how receptive will the Greek voters be, returning incumbent politicians to office? A survey in today's Athens News said support for the New Democracy Party was down to 19.4%, and 13.1% for the Pasok.
These are the two coalition parties who back the current PM Papademos. They may have not caused the crisis, but they are in office at, perhaps coincidentally, the wrong time. Who will be their replacements and what will be their policies? I suspect the euro politicians who today, were chirping how they had solved the Greek saga, are premature.
We prefer the short side of the euro but are wary because the COT report shows specs are short 173K contracts of futures and delta adjusted options. Usually when a market is this out of balance long or short, the market cleanses itself of the excess. In the euro, however, it is the guys with the deep pockets who are the shorts.
The trade in this pair today is not decisive. The bulls were able to halt the sell-off. It would not take much to send the pair to the top side of 1.33 where there might be a few stops. A down trend line in the weekly may come into play around the 1.34 area, where we are inclined to try the short side.