Posts Tagged ‘Euro’

No Publicity is Bad Publicity? Tell that one to Greece…

June 21st, 2011 Michael McDonough Comments off

While it’s often said no publicity is bad publicity Greece is a clear exception to the rule.  Mentions of Greece in stories on the terminal are approaching its May 2010 high; corresponding with the period Greece first accepted an EU sponsored bailout.  Greece’s more frequent mentions has come at a cost for the country and investors alike as bond yields soar, while the price of protecting against a Greek default through CDS rises precipitously.

Greece’s ten year yield is presently trading just shy of 17 percent, highlighting that investors have likely already accepted the inevitable that the country cannot survive without bond holders taking a significant haircut.  The cost of protecting against a Greek default is approaching 2000 basis points, making it more than three times as risky as Argentina on a five year CDS basis.

Greece will be holding a critical confidence vote tonight for Prime Minister George Papandreou that will likely determine whether the country will be forced to default/restructure now or in several months’ time.  After this vote Greece will have two weeks to pass additional austerity measures to unlock an additional EUR12bn in aid from its neighbors—Greece owes approximately EUR18bn in debt payments now through August.  In any case, any European aid will likely prove to be a temporary relief with this scenario playing out again and again until a painful restructuring is finally undertaken.

Hesitation from Eurozone officials around a Greek restructuring are being stoked by the possible impact on their own countries.  Officials are likely trying to buy time in hopes of finding calmer markets before forcing Greece to restructure limiting the potential contagion effect.  The problem is markets can’t calm, while there is still a hurricane raging in Greece.

Categories: Europe Tags: , , ,

Spreads in Europe on Track to Test Pre-Bailout Levels

June 7th, 2010 Michael McDonough Comments off

The aggregated spreads of Europe’s weakest peripheries plus Belgium are on track to test their pre-bailout levels, as investors question whether or not a default will become necessary and what contagion effects it might have.  The biggest concern is that a default could lead to a Lehman like effect halting liquidity as banks and investors question each other’s exposure to the defaulted debt potentially leading to a significant funding issue for seemingly non-effected nations.  On this note, the German backed-bailout was not just a rescue of its profligate neighbors, but also its domestic banks, which are said to have significant exposure to the bonds in question.  In any case, trader sentiment toward the Euro is likely to remain weak as spreads drift higher for economically weak nations as the fine balance between effective fiscal austerity and growth is hopefully discovered. 

 Aggregate 10Y Government Bond Spreads Over Germany:

Source: Bloomberg

As an aside, over the past week Belgium yields have experienced the largest increment of the 20 European nations I track, which should continue to be monitored.  Belgium has one of the largest debt to GDP ratios in the region, a relatively weak fiscal deficit, and regional and political strife.  As the situation in Europe deteriorates, investors will likely continue focusing on Belgium, a trend that can already be seen through the past week’s spike in yields.  Prior to now investors had given the credit a pass partially due to a history of positive primary surpluses and its historical precedent of reining in wavering finances.  Belgium’s debt to GDP ratio is expected to climb to over 100% of GDP by the end of this year.  

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Stocks say Goodbye, & Euro says Hello (to the Crisis)

May 13th, 2010 Michael McDonough Comments off

European equity markets and the Eurozone currency look to be pricing in separate outlooks for the future of the Eurozone after an unprecedented rescue package.  As the chart below highlights, European equities as tracked by the MSCI European index has rebounded sharply from its pre-bailout low–surely aided by the ECB’s recent actions–, while the Euro has gone on to set a new interim low.  Many view the bailout as a temporary fix to a much deeper problem that can only be solved with through harsh continent wide austerity plans—if even then.  If Europe manages to somehow seamlessly enact these cuts, many nations have dug themselves so deep into debt that the slightest hint of a missed number, or even worse a failed debt auction has the potential to derail the entire process; quickly leading investors away from risk.  While the Euro seems to be pricing in this possibility equities do not.  This analysis doesn’t even mention the impact austere policies will have on the European growth outlook, which could also weigh on equities. 

Source: Bloomberg

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Europhoria Already Wanes…

May 10th, 2010 Michael McDonough Comments off

Since the announcement of Europe’s unprecedented rescue package late last night, the Euro rallied to as high as almost 1.31/USD off of a low of 1.2529 on May 6th.  However, as the dust settles from Europe‘s nuclear option to address the continents widening debt crisis, lingering risks are reemerging as the Euro shows signs of weakness falling to 1.2780.  It’s akin to a classic monster movie where the government—out of options—decides to drop the ‘A-bomb’ as a last ditch effort to destroy the monster; as everyone begins to celebrate at the monster’s demise, hints of movement are noticed in the lingering debris cloud.  These movies typically end with some sort of mundane or natural force ending the monster’s rampage, and that might be what’s necessary for the European debt crisis.  While Europe’s bailout package may have weakened the monster it will take long-term fundamental change to truly end the crisis. 

The European experiment created a chimera that all EU nations were created equal, permitting member nations, despite their own domestic woes, to borrow far beyond their means, at irrationally low rates.    As reality is exposed for the European periphery, bailout or not, solvency cannot be guaranteed as tough, yet necessary, fiscal austerity could lead to wide-spread protests, and in a worst case scenario a double-dip recession for the continent.  The Euro’s late-in-the-day weakness is likely the first sign that investors have begun to see movement in the lingering cloud.

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