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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • Why Whatever Happens In Greece Is Irrelevant 1 comment
    Jun 22, 2011 4:32 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, ENI
     Greek parliamentarians could vote against austerity, vote to send themselves on luxury cruise, send the ECB the bill, and still avoid default.

     

    Greece will get cash for the coming months regardless of what they do.

     

    For all the hype this past week about the Greek no confidence vote, and the vote on latest austerity steps next week, it’s in fact all irrelevant.

     

    Why?  The short answer: risk of global financial crisis it too high, Europe and the US aren’t ready to handle another bank bailout yet, so Greece will get the cash to pay the banks holding their bonds and avoid default.

     

     Note that it’s not just the EU, but the US that’s at risk. US banks are exposed to PIIGS defaults about as much as those of Germany and France via their writing insurance against PIIGS bond default and their money market fund exposures to the PIIGS. See here for details).

     

    A Dummies Guide To Contagion Risk

     

    Here’s the short version of why Greece will not be allowed to default in the near term.

     

    A Greek partial (aka restructure) or full default will prove that the EU is not the unwavering preventer of defaults it was believed to be, and that default by other PIIGS is far more likely than previously believed.

     

    Ireland, Portugal, (and perhaps, dare we say it, Spain and other too-big-to-bail nations) will see their borrowing costs spike beyond reach as bond markets price in the new risk premium. They will be effectively shut off from credit markets and pushed into default unless they receive outside aid.

     

    If a Greek default alone doesn’t set off a banking crisis, risks that approaching defaults from Ireland and Portugal will. Exposure to these 3 nations’ bonds is significant in the banking systems of the EU core and US. Worse, Spanish banks are dangerously exposed to Portuguese bonds. Enough to risk default? Unclear, but the uncertainty enough will wreak havoc on Spain’s borrowing costs and once again raise concern about Spain. The EU’s current bailout funds currently can’t cover a Spanish default.

     

    The ECB, the last remaining lender for un-creditworthy banks, will itself possibly be insolvent due to losses on Greek bonds and thus be unavailable to help until/if it too is recapitalized.

     

    That will raise enough uncertainty about which banks will be destabilized via direct or indirect exposure to not just Greece but the other weaker PIIGS that are now at imminent default risk. Thus once again we could see both:

     

    ·         Interbank lending freeze up

    ·         A run on money market funds

     

    So one way or another, Greece will get the cash in order to avoid default until at least one if not both of the following occur:

     

    ·         The exposed TBTF banks in the EU and US have time to build up cash to absorb the likely haircuts from a Greek restructure and those of Portugal and Ireland that are likely to follow a Greek partial (aka restructure) or full default. They may not get enough time for that, but no big deal, as long as….

     

    ·         The US and EU governments have time to prepare to bailout banks put at default risk from a Greek default and those likely to follow. As long as they can convince markets that the banking system is safe, they stand a good chance of avoiding a true global financial crisis and market panic.

     

    Thus they may also secure their first priority goal: reelection – as taxpayers in Europe and the US grit their teeth and accept their exploitation as inevitable for avoiding another great depression.

     

    Ramifications: How To Profit

     

    While longer term prospects for Greece and the EZ as we know it are grim, take any fear about a Greek failure to pass austerity as a short term chance to get ready to go long the EUR and short the USD once Greece gets ‘rescued’ and markets calm, sending the EUR and other risk assets higher and the USD and other risk assets lower.

     

    So for at least the next weeks, and longer if the above mentioned preparations require more time, Greece can do whatever it likes.

     

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE? 
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  • mikenh
    , contributor
    Comments (226) | Send Message
     
    Sure, you are right about the present near-term situation, but, but, but history and culture matter! The actions the Greeks take will define the reactions of other nations. It will set a pattern, and it already has, and it's already bad. American politicians lifted speeches from Tony Blair. Italian politicians modeled themselves after Clinton. Nationalists in every deep-debtor country will copy what works in Greece, and it will snowball. The end is default, the only question left is the level of contagion.
    22 Jun 2011, 06:29 PM Reply Like
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