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Could a Greek Tragedy Morph into a Lehman Meltdown?Gary Dorsch In an eerie sense of déjà vu, German finance minister Wolfgang Schauble pleaded with his country’s citizens on April 20th, to back a joint EU-IMF bail out for Greece worth up to €45-billion, warning that failure to act would risk another global financial meltdown. “We cannot allow the bankruptcy of a Euro member state like Greece to turn into a second Lehman Brothers,” he told Der Spiegel. “Greece’s debts are all in Euros, and it isn’t clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank,” Schauble warned. The next phase of the global debt crisis could be on the horizon, if Euro-zone politicians fail to take swift action, and prevent Athens from defaulting on its debts. German banks have $330-billion of loan exposure to Greece, Portugal, and Spain,while French banks had $307-billion of claims, and British lenders have $156-billion. However, the European banking Oligarchs, such as Credit Suisse, UBS, Société Générale, BNP Paribas, and Deutsche Bank have a stranglehold on the public purse, and Euro-zone politicians readily submit to the interests of the powerful bankers. Yet official German backing for a bailout of Athens, failed to stop spreads on Greece’s 10-year bonds from surging 300-basis points over the past two-weeks to 660-basis points over German Bunds, the highest since the launch of the Euro. Two-years ago, Greece’s cost of borrowing for 10-years was only a half-percent above Germany’s. Until recently, Greece’s membership to the Euro club had relieved investors’ fears about currency devaluations and inflation. Trust in Greece’s budgetary statistics was always shaky, but overlooked. The under-pricing of default risk gave Athens easy access to longer-term loans at low interest rates, - until now.
However, Greece needs to raise €50-billion ($68-billion) for each of the next five-years, in order to roll over existing debt and pay interest. The rescue package that’s on the table right now, crafted by the IMF and Euro-zone governments, would only buy a year’s worth of time for Athens to get its financial house in order. But bond investors are looking longer-term, and questioning the resolve of wealthier Euro-zone states to cover Greece’s debts beyond April 2011. Yields on Greece’s 2-year note soared to as high as 17% week, from as low as 2% at the start of December, after Greece admitted that it auditors missed a few line items on the income statement, resulting in an even bigger budget deficit of 13.6% of GDP in 2009, up significantly from the previous estimate of 12.9%, and nearly double the 7.7% deficit recorded in 2008. That’s far above the average Euro-zone government budget deficit-to-GDP ratio of 6.3% last year. Germany’s PM Angela Merkel wants Athens to agree to tough austerity measures for the next several years, before handing-out German taxpayer money. But Athens has already slashed public sector wages, and raised taxes, - setting off violent protests and strikes across the country, where unions control half of the nation’s workforce. Greece’s jobless rate rose to 11.3% in January, with 69,000 jobs lost in December. The bitter medicine of fiscal austerity is unpalatable for Athens, and with its membership in the Euro, it lacks the ability to monetize its debts away.
Will Greece become the Lehman Brothers of sovereign credit? Greece’s outstanding debt is roughly equal in size to that of Lehman’s when it collapsed in Sept 2008. If it’s forced into debt rescheduling and restructuring, it could trigger a domino selling effect in other vulnerable European bond markets in Portugal and Ireland, - both wrestling with exploding levels of sovereign debt, and lacking the ability to engage in “Quantitative Easing,” or printing vast quantities of money. Even if the Euro-zone politicians and the IMF can cobble together a bailout of Greece, they simply lack the financial resources to bailout the next wave of European sovereigns. With G-7 central bank interest rates pegged near-zero percent, global finance houses are able to borrow money at next to nothing and deal in of all types of speculation. Trade is soaring in one of the most speculative forms of derivatives - credit default swaps (CDS), which played a key role in driving Lehman Brothers, Bear Stearns, and American International Group (AIG) into bankruptcy. The activities of CDS speculators are not restricted to Greece. In the past few weeks, they have increasingly turned their firepower on Portugal’s bond market.The odds of default for Portuguese debt over the next two years, has shot-up 135-basis points in the month of April to 335-points today. At the same time, the yield on Portugal’s 10-year note has risen 150-basis points from four-weeks ago to 5.75% today. The bond markets of Greece and Portugal are tiny, with trading volume of less than one billion Euros /day, making them easy and tempting targets for heavy hitters. Greece’s outstanding debt equals 300-billion Euros, and Portugal’s debt is about 126-billion Euros. Still, the nature of CDS trading, which is unregulated, gives speculators a big incentive to push companies or countries toward bankruptcy. There’s an incentive to burn the house down, in order to hit pay-dirt. Attracted to the highly indebted Greek bond market like vultures to a decaying corpse, CDS traders have moved in for the kill. By attacking Greek and Portuguese bonds, traders have injected greater volatility in the Euro currency, thereby leveraging little nations’ problems into gigantic trading-floor profits. The surge in Portugal’s CDS and bond yields is very uncharacteristic for a country, which enjoys a AA- rating from Fitch and Moody’s, and A- rating from S&P. Could the rating agencies be lagging far behind the eight ball again, getting it right long after the fact? To read the rest of this article, click on the hyperlink below: http://sirchartsalot.com/article.php?id=131 ### Gary Dorsch 321gold Ltd |
