Posts Tagged ‘Greece’

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: , , ,

Spain Begins to Echo Greece

June 16th, 2010 Michael McDonough Comments off

The spreads for Europe’s economically weak peripheries over equivalent German bonds—the European benchmark—continue to approach their pre-bailout highs.  The 10Y spread in Spain again reached record levels amidst rumors that IMF, EU and the U.S. Treasury may be creating a EUR250bn credit line for the country (so far the EU and the Treasury department have denied the report).  This coming Friday the head of the IMF, Dominique Strauss-Khan, is scheduled to meet with Spanish Prime Minister to discuss, “structural reform measures the government is undertaking, the labour reform to be approved tomorrow by the cabinet, and other measures to tackle the deficit, as well as measures by other countries and other economic zones.”  Spanish officials have indicated that these meetings were scheduled prior to reports of a Spanish bailout.  But, in the minds of some investors this visit is too coincidental, echoing a similar visit by the IMF to Greece just prior to that country’s own demise. 

Amidst this strife, Spain is expected to auction 10Y and 30Y government bonds tomorrow totaling an estimated EUR3.5bn.  This auction will be watched closely by investors, and any signs of weakness could spell trouble for Spain, Europe and any global risk correlated assets.  Here is a complete list from Barclays of expected European bond auctions for the remainder of the week:

Date            Country     Bond                                       Amount (EURbn)

17-Jun-10     Spain        10y SPGB (total range €2-3.5bn)    2.00

17-Jun-10     Spain        30y SPGB (total range €2-3.5bn)    1.50

17-Jun-10     France      2yr BTAN (range €6.5-8bn)              2.00

17-Jun-10     France      3yr BTAN (range €6.5-8bn)              2.00

17-Jun-10     France      New 5yr BTAN (range €6.5-8bn)     4.00

17-Jun-10     UK            2014 Gilt tap                                     4.00

17-Jun-10     France     OATi Auction (range €1.3-1.8bn)      0.50

17-Jun-10     France     OATei Auction (range €1.3-1.8bn)    0.40

17-Jun-10     France     OATi Auction (range €1.3-1.8bn)      0.70

Categories: Europe Tags: , ,

A Crossroad for the Eurozone’s Survival

May 9th, 2010 Michael McDonough Comments off

Europe’s rapidly escalating out-of-control debt crisis has brought about a rare occurrence, solidarity amongst its members; an elusive attribute in the European experiment.   Eurozone members, who have worked tirelessly over the weekend, appear to have agreed on creating a $645bn loan package to help defend its currency and stymie fears of Greek contagion to other countries.  It is still too early to tell whether or not Europe’s new found cooperation will be enough to restore investor confidence, but the Euro has regained some ground in Asian trading.  The true test will come in its ability to bring down skyrocketing yields for Portuguese and Spanish debt, which has come under the microscope of investors due to each countries’ weak fundamentals.  Portugal’s close mirroring of Greece just prior to that country’s breakdown may have been a major catalyst to the creation of this unprecedented loan package—along with a free falling euro.

If this package fails to bring down yields for Spanish or Portuguese debt or stabilize the Euro this situation will very quickly escalate out of control with the potential of tearing apart the Eurozone.  Many already believe the best solution for Greece with but to withdraw from the EU, and return to the Drachma, which only a few months ago would have been an unspeakable idea.  However, historically these types of programs tend to work, or at least stabilize the situation and buy more time for a more permanent solution if necessary.  Nevertheless, a bigger risk may lie ahead for Europe in the form of a double dip recession brought on by austere fiscal policies necessary to repair most member nations ailing budgets.  The EU’s weakest members, commonly referred to as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) could find it extremely difficult to survive another recession.  Think about someone who has maxed out all of their credit cards, and is about to take a large pay-cut at work.  The only difference here is these countries are indebted to more than just a few credit card companies…

The next twelve hours will be critical for Europe, however, investors mustn’t forget about the next 12 days or 12 months either as this package could prove to be a Band-Aid for a much deeper wound.

Early comments from Paul Krugman raise some good points, but aren’t promising for either Portugal or the rescue package. But, I think the precipitous drop in the euro is indicative of plunging confidence in the region, and both aspects need to be addressed simultaneously.

“I’m not encouraged by the remarks of some of the leaders, who keep talking about protecting the euro as if speculation against the currency were the problem. Actually, a weak euro helps Europe. Speculation against the debt of weak nations is another matter; will they have any real answer to that problem?”  -Paul Krugman

Krugman’s Blog


First Portugal, Then New Home Sales, Next…

March 24th, 2010 Michael McDonough Comments off

What a day, I wake up to the news that Fitch has downgraded Portugal, leading to a strong sell-off in Euro–reaching a ten month low against the dollar. This news was not tremendously surprising, and I expect the situation in Europe will get far worse before getting better, especially if Greece doesn’t find a funding source before its first massive debt payment on April 20th.  Aside from Greece I am also very concerned about several of the other so-called ‘PIIGS’ as well as the UK.  Pending how this situation unfolds if risk is rebalanced across Europe (to Germany), other more ’secure’ European nations could come under the scrutiny of worried investors.

Greek Monthly Debt Payment Schedule:

Source: Bloomberg

The day progresses, its then announced new home sales unexpectedly tumbled -2.2% on a monthly basis in February (compared to a consensus forecast of +1.9%).  The sales number was actually the lowest in the series recorded history, which tracks back to 1963.  As I highlighted in a column last month on titled ‘Housing Recovery Starts to Buckle’, I do not believe last year’s budding recovery, fueled by a then effective first time home buyer tax credit, will provide enough force to navigate the headwinds facing the sector. A now impotent stimulus combined with the likelihood of higher mortgage rates over the near-term, as the Fed stops purchasing MBS on March 30th, should prove too much to bear for the sector making any future recovery modest as best.  The sector is still being besieged by foreclosures and now rapidly growing inventories of existing and new homes for sale. 

Inventory of New & Existing Homes:


Source: Bloomberg


Japan Still a Big Concern; More so Than Greece?

March 1st, 2010 Michael McDonough Comments off

While all eyes remain on Greece, Japan’s fundementals continue to weaken, and in some instances look worse than Greece.  There are of course numerous technical and economic differences between the two nations; however, I do not believe Japan’s current deficits and debt load will be sustainable without drastic changes.  This is an update from my piece titled ‘Positioning Yourself for Japan’s Potential Demise…’.  The charts below illustrate some areas of concers for the Land of the Rising Sun:

Fiscal Deficit

Source: Bloomberg


Debt to GDP

Source: Bloomberg

 GDP Growth

Source: Bloomberg

Debt Coming Due % of GDP

Source: Bloomberg


Market News International: Internal Report Says Germany’s Govt Cannot Help Greece

February 10th, 2010 Michael McDonough Comments off

FRANKFURT (MNI) – Germany’s government is not allowed to help Greece, as such aid would violate European Union law, German business daily Handelsblatt reported Wednesday, citing an internal report from the German parliament.

The legal report also rules out any form of financing of the Greek budget through the ECB or national central banks.

“Moreover, member states may not guarantee the debts of another member state,” the report argued.

Handelsblatt noted that the report was commissioned by the free-market oriented Free Democratic Party, which governs in a coalition with the Christian Democratic Union and its Bavarian sister party the Christian Social Union.


Comments from Fitch and EU Commissioner on Greece & Credit Ratings

February 9th, 2010 Michael McDonough Comments off

EU Commissioner Joaquín Almunia Mira recently said that he believes the current situation is the most difficult situation the EU has ever faced, and that Thursday’s meeting will be critical.  He also said EU leaders have indicated that they will support Greece.  Fitch anticipates that a Greek plan is ‘achievable’, but not ‘a given’.  Fitch’s analyst said, “A bailout for Greece is not completely out of the question but the likelihood of it happening is not strong enough for Fitch to base its ratings outlook on.”  Reuters is also indicating that in principle German government officials are ready to help Greece, and along with other CBs and governments are studying support plans.  German press is reporting that German officials are working on a support plan for Greece.

Fitch also highlighted that Greece could come under some serious pressure in April/May when the bulk of its debt outstanding is coming due.  Fitch also believes the UK is the most vulnerable AAA rated sovereign, stating the credit needs a ’strong exit strategy’.   Fitch went on to say that the default probability for Portugal is close to 0.

Categories: Europe Tags: , , , , ,