Cliff Wachtel's  Instablog

The following is a weekly strategy guide for traders and investors, covering prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options. Perfect for those seeking a summary of prior week market movers & their lessons for the coming week and beyond, & a look at likely coming week market movers.

The belief that Greece is beyond saving grew more widespread.

1. New doubts about Greece were hitting the wires already on Saturday September 3^rd before the week even began: After a breakdown in talks between Greek and Troika (EU/ECB/IMF) officials over how to keep Greece on track to lower its deficits as per agreements,  a senior IMF economist was quoted in the Wall Street Journal report saying he expected a hard default no later than March, possibly much sooner. That same day Reuters reported that a senior member of Merkel’s party saying that if Greece couldn’t meet its obligations it should restructure and leave the Euro-zone. These themes, along with credit markets having written off Greece altogether, were echoed throughout the week.

2. MONDAY: Greek bond yields jumped, essentially pricing in a “hard default” as austerity without devaluation is kills the economy, guaranteeing that the country will miss its fiscal targets. This raises the question, at what point, it will become politically impossible for the EU to continue providing funding to Athens that all know will not be repaid? . Greek 1 year paper +1000 bps to yield 82%, 2 years + 317 bps to 50%.

3. TUESDAY: German Chancellor Angela Merkel told Christian Democrats members that Greece would not receive aid payments this month, unless it met its obligations under the bailout agreement. This comes after Merkel’s party suffered a historic loss in a regional election over the weekend

4. WEDNESDAY: A Greek newspaper reports private sector participation in the Greek debt swap at 75%, well below the hoped for 90%. Greece has threatened to reject the 2nd bailout if the target isn’t reached, but a finance ministry official said it’s too early to start talking percentages.

5. FRIDAY: This swap issue came back on Friday. Rumors circulated that Greece could default as early as the weekend. Greece has denied this but CDS swaps showed a 90 % chance of a Greek default. A possible reason for the Friday jitters was because a bond swap was expiring Friday and there was concern that the bondholders would take the loss rather than swap into longer dated bonds. If the number of bond swaps fall short, Greece may find themselves locked out of the credit market and forced to default.

6. FRIDAY:  An auction of €300M in Greek T-bills gets just €155M in noncompetitive bids as banks give a clear signal about their unwillingness to offer Greece funding. Greece could  run out of cash by mid-October if it does not immediately get the next tranche of financing.

7. FRIDAY: Reports were out that Germany was preparing plans to backstop German banks in the event of a Greek default similar to the bank-rescue fund that recapitalized banks in 2008. The headline was out before trade in Europe closed; it led Germany’s DAX to drop to a 4% loss. The euro also sold off in response to the headline. It sank to a 1.6% loss, as of the close in New York. Remember that Deutsche Bank’s Ackermann had said earlier this week that many banks could not withstand  losses on their sovereign holdings.
8. Also, Finland has yet to back down from its demand for collateral. This cannot be met simply because a host of other nations will demand the same, sucking away the very cash Greece needs to survive. Unless Finland backs down, at minimum Finland may well withhold its share of bailout payments, given the strength of the anti-bailout forces (third largest party is True Finn anti-bailout party) in the Finnish parliament.

The big question here is if confidence in a solution for Greece is reaching a breaking point. If it does, why should EU leaders risk looking foolish by contributing cash to the second Greek bailout? Until now the obvious answer was to prevent defaults of the rest of the GIIPS and a global crisis. However if Greece is beyond rescue, EU leaders may decide it best to focus on protecting  the EU banking system as a more direct and cheaper way to salvage what can be saved of the EU as we know it.