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Greece turns the Euro into a “Carry Trade” currencyGary Dorsch Last year’s parabolic rallies in copper, gold, Brazilian and Russian stocks, and the Australian dollar, are running out of steam. Suddenly, there are eerie reminiscences of scarier days gone-by. Volatility has returned to the money markets, amid worries about a possible “double-dip” recession for the world economy, capital flight from European sovereign debt markets, monetary tightening in Australia, China, and India, and the President Obama’s backing for the “Volcker rule,” – which calls for a clamp-down on the speculative trading binges of the Wall Street Oligarchs. As fate would have it, on February 6th, many of the world’s top central bankers were huddling in Sydney, Australia, for two-days of secret talks. European Central Bank chief Jean-Claude Trichet, New York Fed chief William Dudley, the governor of the People’s Bank of China, Zhou Xiaochuan, and the Bank of New Zealand’s Alan Bollard were all in attendance, while global commodity and stock markets were skidding lower, in their first significant correction since last June. Spooked by fears that Greece or Dubai World would default on their debt repayments, Australia’s ASX-200 Index fell below the 4,500-level, losing 10%, of its value in three-weeks, due to rapid unwinding of Aussie /yen carry trades. There were equally sharp downdrafts on Wall Street, the Nikkei-225 Index in Tokyo, and the Hang Seng index crashed below the psychological 20,000-mark. Sovereign debt fears hammered the Australian dollar to 78-yen from above 85-yen a few weeks earlier. It began to feel like 2007-08 all over again.
ECB chief “Tricky” Trichet didn’t have a chance to sip champagne or dine with his G-20 cohorts. Instead, he was flying back to Brussels to attend an emergency meeting. The worst of the global carnage hit the stock markets of Greece, Portugal, and Spain, three heavily indebted Euro-zone countries whose ability to re-pay lenders, including $331-billion owed to German banks, $307-billion owed to French banks, and $156-billion owed to British banks was in doubt. Swiss banks hold 47-billion Euros of Greek debt, equal to 12% of Swiss GDP. Furthermore, there’s an outer ring of fire surrounding Club-Med that could spread to Eastern Europe. Greece is the weakest link in the Euro-regime, and it’s in the eye of the storm, owing 300-billion Euros of outstanding debt. Athens doesn’t have an independent central bank that can simply print drachmas to pay-off its debts, so without a bailout from its wealthier neighbors, it could default on €50-billion ($72-billion) of debt coming due this year. But given the enormous amount of loans extended to Club Med from German and French banks in particular, Athens is betting that German Chancellor Angela Merkel and French President Nicolas Sarkozy have little choice, but to pay the tab for Greece’s flamboyant spending.
The size of Greece’s debt is roughly equal to that of fallen Lehman Brothers, whose bankruptcy in Sept 2008, ignited the explosion of $400-billion of credit default swaps (CDS), linked to its debt, and nearly led to the collapse of Wall Street titan Morgan Stanley. At the height of the panic, CDS rates on Morgan Stanley’s debt soared to 1,200-basis points, and MS’s bonds fell to 50-cents on the dollar. Thus, European leaders are keen to prevent a replay, this time with Greece’s budget woes spreading to Portugal or Spain, which in turn, could reverberate around the globe. “Euro-area member states will take determined and coordinated action, if needed, to safeguard financial stability in the Euro area as a whole,” warned EU President Herman Van Rompuy on Feb 11th. “Greece won’t be left alone, but there are rules that must be adhered to. On this basis we will agree on a statement,” Germany’s Merkel added. “The International Monetary Fund stands ready to help Greece with its debt crisis,” said IMF chief John Lipsky on Jan 30th.
The CDS market is a hotbed of speculation, where bankers and hedge funds, can bet on the price of contracts, without transparency, and without actually holding the underlying bonds. By whipping-up hysteria of a looming sovereign default in the media, and driving-up the cost of insuring debt in the CDS market, speculators can weaken confidence in a government bond market, and drive-up interest rates. “This is an attack on the Euro-zone by certain interests, - political or financial, - and often countries are being used as the weak link of the Euro zone,” said Greek Prime Minister George Papandreou at the World Economic Forum in Davos on Jan 28th. “We are being targeted, particularly with an ulterior motive or agenda, and of course, there is speculation in the world markets,” he said. Through the rigging of the opaque CDS market, speculators were able to conjure-up fears of a Greek default on its debt, while aiming to profit from short sale positions in Greek bonds or equities. Traders also profited by short selling the Euro against the Australian dollar and the Brazilian real. Since Dubai World requested a moratorium on $4.1-billion of debt payments on Nov 28th, the Euro has also fallen 10% against the pitiful US-dollar, sinking to a low of $1.3580 on Feb 17th. To read the rest of this article, please click on the link below: http://www.sirchartsalot.com/article.php?id=124 ### Feb 18, 2010 321gold Ltd |
