Anyone who thought the eurozone debt crisis was 'fixed' after the Greek debt restructuring, the Spanish bank bailout, and the recent EU Summit has now been proven wrong -- definitively.
Reuters said today that preliminary reports showing Athens had already failed to meet some 200 out of 300 spending targets appear to be accurate as the troika's visit seems to show that Greece will now need yet another debt restructuring. According to Reuters, Athens is set to miss 2020 targets by as much as 30 billion euros. The miss will likely cause the IMF to pull out of the second bailout agreement, leaving the eurozone and the ECB to shoulder the 100 billion euro burden on their own:
In that case, the only way to keep Greece afloat ... would be for the ECB and member states to write off some of the Greek debt they own or change the terms to give Athens ever more time to pay back at lower interest rates
To say that either of these options will face stiff opposition from eurozone core countries would be an understatement. Considering the difficulties Spain encountered in securing a loan for its collapsed banking sector, the odds that Germany, Finland, and the Netherlands will support any sort of third Greek bailout or relaxation of terms are slim to none.
In addition to this rather disturbing news, the Spanish 5-year/10-year curve actually inverted early in the session Tuesday, meaning yields on the shorter-term notes exceeded yields on the longer-term debt. If 10-year yields in excess of 7% are unsustainable, 5-year yields above 7% are simply disastrous. This event is yet another harbinger of a full-on Spanish bailout.
As I noted Monday, with each passing day, the situation in Europe seems to deteriorate further. Tuesday's news means that the market may end up facing two systemic risks at once: a third Greek bailout or, alternatively, a Greek exit from the eurozone and a bailout of Spain. It is quite difficult to imagine that the simultaneous occurrence of these events has been 'priced-in' to equities. There is every reason to believe substantial profits can be had by purchasing long puts on the S&P 500 (SPY) or going long volatility. I have recommended this simple trade on several occasions and it becomes more compelling seemingly everyday.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
