Monday, September 12, 2011

Why a Greek Default is Imminent

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

It may only be weeks, if not days, before Greece defaults on its debts. Interest rates and credit default swaps (bond insurance) have hit record levels and are still climbing. Stocks are getting slammed throughout the word, especially EU bank stocks. The Germans appear ready to abandon further attempts at bailing out the debt-ridden country. 

Yields on two-year notes in Greece were above 60% Monday morning -- the highest ever. The yield on the 10-year governments was over 20%. Both rates continue to climb making it more and more difficult for Greece to pay down its enormous pile of debt and requiring larger and larger bailout packages if Greece is to avoid bankruptcy. The market is becoming increasingly skeptical that Greece will survive financially however. The five-year credit default swaps on its government debt were at records highs last Friday and their cost keeps rising as well.

Markets presaged this week's trouble last Friday, with the Dow Industrials down 304 points. Juergen Stark announced he was resigning the ECB's executive board because of its program of buying bonds of the financially troubled EU members. Markets got slammed in Europe and in North America. The damage continued in Asia Sunday night with Hong Kong's Hang Seng down 836 points (4.2%) and the Japanese Nikkei down 202 points (2.3%).  Germany and France were down almost at mini-crash levels (a 5% drop in one day) after their Monday opening, but recovered somewhat by the end of the morning. As of last Friday, the German DAX had fallen approximately one-third (33%) from its highs earlier in 2011.

Bank stocks are bearing the brunt of the selloff in EU markets.  Major banks such as Deutsche Bank, BNP Paribas and Société Générale were down in the 10% range. Outside of Greece, German and French banks are the most exposed to Greek debt. German banks have more exposure to Greek government debt (the debt that wouldn't be paid off in the event of a default), while French banks have more exposure to commercial loans to Greek businesses. Reports indicate that BNP Paribas, Société Générale and Credit Agricole may have their credit ratings lowered by Moody's this week. Credit default swaps on some major European banks are also rising to record high levels.

The Germans appear ready to throw in the towel on the second Greek rescue package. Officials have increasingly been making statements that indicate that Greece must meet its targets for deficit reduction if further bailout payments are to be made. It is highly unlikely this will happen. Nevertheless, the Greek Finance Minister stated over the weekend that Greece was committed to the "full implementation" of the terms of the second bailout. He dismissed rumors of a possible default. Of course, so did the CEOs of Enron and Bear Stearns days before their companies imploded.

Disclosure:  None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

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