Some Thoughts on Greece

Includes: ERO, FXE
by: Gary Greenberg

Now that the Eurozone countries have decided to handle the Greek crisis by agreeing to agree to a rescue at a later date, it's time for a few reflections:

1. The euro has fallen vs. the dollar by about 9.5% since the beginning of last December. Exporting countries such as Germany and the Netherlands, centerpieces of any Greek bailout, are likely of divided mind.

2. Any announced agreement will be tested by the rough and tumble currency and CDS traders. That they may be using prop trading with near zero-interest rate cost of funds (available due to their previous ability to bring the global financial and economic system to the brink of collapse) to profit from bringing down a EU country shouldn't bother anyone.

3. A history of massive corruption by a rich elite and a restoration plan that entails large sacrifices by the populace in the form of new taxes and restrained wages will likely result in a modest uprising by the citizens of a country known for the occasional demonstration.

4. Cash is king, especially in a crisis. EU banks in the past two weeks have been reticent to lend to Greek banks. As Gary Jenkins, head of fixed income research at Evolution said, "Without European Union support, it is quite possible Greece, as well as its banks, will run out of money." [FT, Feb 11, 2010]

5. With all of the recent, official comments centering on "containing" the Greek crisis ("firewall" to some), one can only think of Chairman Bernanke's statement early in the financial crisis that the subprime problem had been "contained."

Niall Ferguson suggested in Thursday's FT (A Greek crisis coming to America - Feb 11, 2010), the contagion will likely spread across southern Europe and cross the channel to Britian. As Freguson notes, the U.S. has quite a budget deficit that the IMF has estimated would require an 8.8% of GDP adjustment (fiscal tightening) over the next decade (sixth largest on the list). Thus, he poses the question of when the crisis "will reach the last bastion of western power, on the other side of the Atlantic."

Disclosure: No stocks mentioned