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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Chief Analyst of anyoption.com, a leading binary options broker, and Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He is also the author of The Sensible Guide To Forex, and publisher of... More
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  • THE GREEK RESTRUCTURE EPIPHANY: THE BIGGEST NEAR TERM MARKET THREA 0 comments
    May 7, 2011 10:26 PM | about stocks: UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, AUNZ, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, SLV, OIL, SPY, SDS, RSW, BXDC, SPXU, SH, DIA, EWC, EWA, TLT, XHB, ITM, IGOV, VGK, TBT, GSG, DBC, CORN, ICN, SZR, BZF, GRU, DAX-OLD, FRC, DB, SAN, BNO, ENIA

     Why all hell could break loose when Greece restructures of leaves the EU, advice on how to cover your assets for traders of both binary options and traditional spot market stocks, indexes, forex and commodities.GREEK RESTRUCTURE APPROACHES

    Timing a potential market crisis is always hazardous, but when the German daily Der Spiegel dropped its bombshell news Friday that Greece has threatened to leave the EZ unless it gets a restructure deal, after weeks of not so subtle German hints that Greek restructure is coming, it’s time to make plans for this contingency and its ramification.

    BACKGROUND: THE WARNING SIGNS HAVE BEEN THERE

    In addition to the now well known news:

    1. That despite bailouts and payment extensions, Greece’s deficit for 2010, in keeping with Greek custom of recent years, will greatly exceed estimates of 9.4% this past February to now come in at 10.4%
    1. Greek bond yields continue to price in a roughly 50% loss
    1. EU officials have long been rumored to be working on a plan for a Greek debt restructure that would minimize the damage and risk of market panic and contagion risk.

    Just last week Lars Feld, one of Angela Merkel’s most senior advisors, (and thus an assumed mouthpiece for Merkel herself) advised Greece to restructure now in order to end the uncertainty and minimize panic and contagion risk. This was the third not so subtle hint from the former anti-bailout Germans that Greece was a lost cause. In case you forgot, here are the other two:

    1. April 14th: German Finance Minister Wolfgang Schaeuble said Greece may need to restructure.
    2. April 23rd: ECB Chief Economist Jurgen Stark told German television that in essence,  German aid to Greece had gone to waste, and that a restructure, if not handled carefully, could repeat the damage wrought by the Lehman Bros collapse. The usual custom for EU officials is to deny the possibility sovereign insolvency until all hope is already gone. When they start such public musings of the option, that’s usually their way of telling us to get ready to assume the position.
    Why All Hell Really Could Break Loose: A Short Scary Summary
    1. Hits to major EU banking and insurance firms will be deep and widespread
    2. That raises the risk of contagion (spreading financial crisis) just from the uncertainty this brings over who is stable and who isn’t. During last year’s spring 2010 crisis, uncertainty over exactly who bore direct or indirect exposure to Greece raised so many questions about EU banking stability that it
      1. Mostly shut down EU interbank lending
      2. Sparked a deep pullback in risk assets (aka minor market collapse at best)
      3. Brought the otherwise weak USD to a sudden multi-year high in a matter of weeks after the EURUSD had approached 1.5000 (gee, just like last week)
    3. Lehman Brothers was just one bank. A Greek restructure casts doubt on dozens of such banks, with concomitant unknown domino affects on other banks and insurance companies and those that have provided insurance again their default, just like AIG did.

    See how much greater the web of uncertainty and potential contagion becomes? To continue, Indirect effects may include:

    1. Possible credit crises in the CEE (Central and Eastern Europe region) and Balkans region, where Greek banks are big lenders. These banks hold a lot of Greek bonds and thus will have a much reduced lending capacity
    2. Unknown effects of indirect exposure via derivative instruments held or unforeseen domino effects. The ones we CAN see include:
    3. Other PIIGS nations are likely to see their own borrowing costs soar on guilt by association. If that gets bad enough, it could bring a self – fulfilling prophecy of others also needed to restructure or exit the EU.
    4. IMF and EU bailout funds further stressed, raising risks of other financial crises. For example:
    5. Japan liquidity crisis: Japan is one of the largest buyers of foreign bonds, and is beginning a huge ~$300 billion spending program for quake/tsunami/radiation damages. If they cut back bond buying or must even sell sovereign bonds, that opens a whole new level of risk from falling bond prices and rising yields, especially for those who sell the most bonds to Japan, the US, UK, and EU.
    6. Rising sovereign bond yields ultimately mean rising mortgage rates, meaning still another wave of bad mortgage debts, foreclosures, and bank failures. Numerous nations, including the US, Spain, Ireland and other nations that are already saddled with years’ worth of excess housing inventory, risk seeing further housing price declines, and concomitant damage to household wealth, housing related jobs and spending, etc.
    The Good News: The Situation Is Really Serious This Time

    That’s actually good news because crises are wonderful for focusing politicians and keeping otherwise unpredictable political decisions ultimately rational. For example last spring the EU and IMF quickly found the needed funds to stabilize the situation – but only after all other alternatives were exhausted.

    Thus far 2011 suggests they’ve learned from last year and could well yet save the day. The question is, in 2011, will they manage to avoid a market panic?  Lehman brothers was just one large bank. Now, we have tens of potential such banks, in addition to multiple sovereign states on the brink of insolvency.

    How to Cover Your Assets

    In the event of another panic, the short term ramifications are likely to include:

    Lots of money printing…er…stimulus, in much of the developed world to provide the needed cash for bailouts –either of sovereign nations to prevent defaults, or to support the TBTF banks taking the hits from the bad bonds they hold

    What are the likely ramifications of that money printing?  Two scenarios:

    • The better case: Where economic collapse is avoided and employment and spending don’t suffer too much, inflation is a threat so any inflation hedge, be it precious metals, fine art, etc should do well.
    • The worse case: If employment and spending are hit hard, and the middle class sinks further or needs to cut more debt, then deflation is the bigger near term fear. Cash in general, especially the safe haven currencies and their bonds then become the better shelter. If for some reason the EZ fails to avoid a wave of sovereign defaults or dropouts – unlikely but possible- then much maligned USD, for all its faults, just might be the least ugly of the major currencies with adequate liquidity for use as a repository of major central bank and sovereign wealth fund assets. In that case, the US Dollar might see an unanticipated long term bull market.

    DISCLOSURE & DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER.

    Stocks: UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, AUNZ, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, SLV, OIL, SPY, SDS, RSW, BXDC, SPXU, SH, DIA, EWC, EWA, TLT, XHB, ITM, IGOV, VGK, TBT, GSG, DBC, CORN, ICN, SZR, BZF, GRU, DAX-OLD, FRC, DB, SAN, BNO, ENIA
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