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Greek Wildfire Engulfs the Euro in FlamesGary Dorsch It takes a lot more time to safely extinguish a fire than it does to start it. There’s an important lesson to be learned from a sad story of a homeowner, who had been burning debris in the backyard of her home, and thought she had put the fire out. She later found out the fire had spread and was burning grass underneath her deck porch, which soon engulfed her two-story brick frame home in flames. The woman tried to put the fire out and called her 14-year-old son to help. Unable to extinguish the blaze, the woman finally called 911 for help. However, by the time fire officials arrived, the fire had burned most of the backyard and the home was fully engulfed in flames. The incident is a reminder of the importance of calling authorities early when fires occur, instead of trying to put them out your-self. “If we had gotten there early on, we could have gotten the fire taken care of. You can’t dilly-dally. It was an unfortunate situation,” the Fire Department explained. Similarly, a brushfire fire that starts in a dry area can quickly turn into a wildfire, spreading out from its original source at rapid speed, and bring about devastating conflagrations, if not contained early, and extinguished. While some fires are caused by natural factors, the biggest causes are man-made.
For most of this year, traders’ radar screens have been focused on the raging wildfire engulfing the Greek bond market, which became the flashpoint for unleashing a replay of a worldwide, Lehman Brothers style meltdown. The wildfire in the Greek bond market was ready to blaze widespread destruction throughout the European banking system, and is still engulfing the Euro currency in flames. Over the past several months, Euro zone politicians underestimated the destructive power of the tiny tinderbox – the Greek bond market, with Athens’ ability to redeem bondholders, including major European and US banks, growing increasingly in doubt. Token bailout packages were grudgingly offered by French and German politicians, but weren’t sufficient in quantity to put out the flames. Instead, while Bonn and Paris fiddled over the details of the wage cuts and tax hikes for Greece’s 11-million citizens, - the streets of Athens were burning in rage. When the wildfire in the Greek bond market began to wreck havoc on the Portuguese and Spanish markets, EU politicians hastily arranged an emergency meeting, to devise a rescue from the brink of Armageddon. “In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden. “We now see herd behavior in the markets that are really wolf-pack behavior. If we will not stop these wolf-packs, even if it is self-inflicted weakness, they will tear the weaker countries apart,” Borg warned. “The situation in the financial markets has gone in a very bad direction, even though the Greek situation was brought under control,” added Finnish Finance chief Jyrki Katainen. Facing a most desperate situation, - a systemic seizure of the European financial system, - the ECB “crossed the Rubicon,” and unleashed its nuclear option, – “Quantitative Easing,” (QE), printing vast quantities of Euros to douse the fire. The EU put up a staggering 750-billion Euros in loan guarantees to contain its spreading. Chronology of Greek debt Crisis Quite often, major forest fires begin with a careless throw of a cigarette. There was a trail of smoke rising from the Greek credit default swap (CDS) market in December 2009, - and where there is smoke, there is fire. The interest rate spread between Greek and German 10-year bond widened by 200-basis points, yet Euro-zone politicians and ECB central bankers didn’t sound the alarms. But this brushfire would eventually morph into a raging wildfire, wiping out $3.7-trillion of global stocks markets in a three-day plunge. The most notable fallout was a 1,000-point intra-day meltdown in the Dow Jones Industrials on May 6th. The first fire-alarm bells began to ring in early December, when Fitch, a credit-rating agency, downgraded its rating of Greece’s bonds from A to BBB+. As a consequence, the interest rate that Athens was forced to pay for two-year notes, jumped 200-basis points to 3.50-percent. The situation worsened when Greek Prime Minister George Papandreou admitted that the previous administration had understated the figures on its budget deficits. Papandreou revealed that Greece’s debt had mushroomed to €300-billion, or 115% of the size of its annual economic output. There was very little appetite in the wealthier Euro-zone nations to bailout Greece, which is famous for a political system rife with fraud and corruption, in which top officials routinely dole-out public money to special interests, engage in tax dodging, and are protected by laws shielding them against prosecution. “Greece’s problems are entirely home-made and do not meet the terms required to trigger the rescue mechanism under EU treaty law,” warned Jurgen Stark, the ECB’s chief economist and a member of the Bundesbank’s inner council. “The Treaties set out a no bail-out clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that other member states will at a certain point dip their hands into their wallets to save Greece,” Stark told the Italian daily Il Sole. “The country has not kept public accounts under control, nor worked to improve competitiveness,” thus, pouring more fuel on the fire.
On January 6th, German finance chief Wolfgang Schäuble said Greece would have to find its own “hard way out of the crisis,” distancing himself from the notion that the EU would ultimately bailout the Club-Med laggards. Volker Wissing, chair of the finance committee in the Bundestag, said it should be made clear that “Germany will not take on the burden of Greek debts.” These hard-line comments were music to the ears of raiders in the Greek CDS market, and the cost to insure $10-million of Greece’s bonds, for 2-years, doubled to $480,000 by January 28th. Yields on Greece’s 2-year note jumped above 6%, amid growing doubts that Athens could service its heavy debt, crushing the Athens stock exchange index. “This an attack on the Euro-zone by certain other interests, political or financial, and often countries are being used as the weak link, if you like, of the Euro zone,” Greek Prime Minister George Papandreou told the World Economic Forum in Davos, Switzerland, “We are being targeted, particularly with an ulterior motive or agenda, and of course there is speculation in the world markets,” hinting at CDS speculators. On January 30th, firefighters from the IMF tried to narrow the gap between the Greeks and the Germans, by assuring Athens that it would make available a stand-by loan facility of $25-billion. “The IMF stands ready to support Greece in any way we can,” said IMF chief John Lipsky. However, CDS traders were still probing for weak links in the Euro zone, and aiming their guns on Greece, betting it could be the next “subprime” debt bomb, referring to a situation that initially appears to be contained, but that quickly explodes into widespread destruction. Germany’s Chancellor Angela Merkel was walking a fine-line between letting chronic budget busters such as Greece get-off easy, while making it clear that any bailout would come with stringent austerity conditions attached, in order to finesse the moral-hazard question. On Feb 9th, the leader of Germany’s Free Democratic Party, Frank Schaeffler, was more blunt, “We don’t help the alcoholic by giving him another bottle of schnapps.” Still, amid reports that Bonn and Paris were fashioning a 25-billion Euro loan package for Athens, Greek two-year yields stabilized between 4.50% and 6.50%, lending false hope that the political gambit had worked.
On March 17th, the Euro began a five-day slide from $1.3800 towards $1.3300, after Merkel, facing fierce voter opposition to any bailout, said any aid mechanism for Greece could only be used as a last resort, in case of imminent insolvency.On March 19th, Bundesbanker Thilo Sarrazin told the Austrian paper Salzburger Nachrichten, “We cannot possibly say right now that Greece has exploited all means to fix its budget problems over the next few years. That means that there is no need to think about aid.” Asked what Greece should do if it could not refinance its debt, “It should do what every defaulter has to do and file for insolvency,” Sarrazin replied. To read the rest of this article, please click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=133 ### Gary Dorsch 321gold Ltd |
