EU Goes From Kicking The Can To Rolling A Growing Debt And Spending Snowball
Here’s our take on preliminary news from the EU summit on the second annual Greek bailout.
Short version: they’ve done a decent job – of insuring we get a third annual default threat somewhere.
They’ve gone from kicking the can down the road to rolling a larger snowball of potential trouble that just keeps getting larger the farther away it rolls.
We see 3 key problems
- Private sector “involvement,” aka losses, are still very much on the menu: However, these very significant, ahem, “details” have yet to be worked out. As ECB head Trichet and others have warned, once the precedent is set that the EU will no longer fully guarantee member bonds, yields on ALL GIIPS sovereign bonds will rise beyond what these nations may be able to pay. Why would anyone buy these bonds without a yield high enough to compensate for the likely “burden sharing” losses of unknown degree awaiting at some point later?
- The EU has now upped the bill for saving the other GIIPS, whose leaders will not be able to face their voters, who will be expecting equal concessions. Why not? Portugal, Ireland, and especially Spain can flash the blade of default and contagion threat under the EU’s nose.
- Moral hazard plus lack of unified budgeting controls, in addition to the above 2 problems with the latest Second Annual Greek Bailout means we’ve no reason to believe we won’t be facing a third annual default threat next year
EU leaders must know this too, so again, it appears they’ve opted for yet another band aid solution though a bigger one that might hold longer. We’re not so sure it will, for the same reason as ECB Head Trichet and others believe, because...
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