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EUR/USD Forex Commentary February 21, 2012

As I mentioned in yesterdays forex commentary the IMF had began working on the estimates for the Greek debt to GDP and had come out with a preliminary estimate of 129% by 2020. ( I was off by 6% but does it matter?) I tend to agree with an article I read yesterday that pointed out the fact of determining any countries debt to GDP ratio over a 9 year time horizon is niave at best.

Well the IMF finally accounted for the state of disarray the Greek economy is in and now say the debt to GDP will be in the neighborhood of 160% in 2020 as reported by Ekathimerini today.

The baseline scenario in the 9-page report, obtained exclusively by Reuters, is that Greece will cut its debts to 129 percent of GDP by 2020, well above the 120 percent target.

“The results point to a need for additional debt relief from the official or private sectors to bring the debt trajectory down,» said the report, which is being discussed by euro zone finance ministers at a meeting in Brussels on Monday to decide on a second financing program for Greece.

“There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term,» says the report, dated February 15.

“In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation).

“This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it,» it said.

Lets all say it together again. GREEK DEFAULT! Now it sure looks like anything the Troika does Greece is going to default. I actually was trying to be a bit more optimistic but have been proven wrong on many levels so be ready come April would be my guess. In April the Greek elections are scheduled (for now) and I expect the people in Greece will be even more furious with the Troka if its possible and will elect a government that will trash the whole idea and start fresh . Its anybodys guess as to what that will look like so Im not even going to try.

I found it best summed up by Der Spiegel this morning in an article titled “EU should admit Greece is bankrupt” Noting that they should stop the bailout mainly because the money really doesnt go to help Greece but its creditors that are just as much to blame for lending to a debtor that cant pay as Greece for borrowing what they cant pay back. Its seems to me both should be put through the grinder for their roles in this mess. Otherwise the banks who know they will get bailed out by unwitting tax payers around the world and just keep on making bets that blow up knowing in the end they will get help while people suffer for generations to come. Here is a noteworthy excerpt from Der Spiegel

Sure, Greece will need help from the other European Union member states for years, possibly even decades, and Germany shouldn’t refuse that help. Europe will likely end up pumping far more money into Greece in the coming years than the fresh aid now being discussed in Brussels.

The mistake isn’t the size, but the construction of the bailout package. It isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.

How else can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors? The holders of Greek government bonds are to get some €30 billion as an incentive to convert their old paper into new bonds. The aim is to keep alive the illusion that Greece isn’t bankrupt — after all, the creditors are voluntarily forgiving part of the debt. The financial sector is cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction.

That leaves €100 billion. But that too isn’t geared to what Greece needs in order to get back on its feet. It’s linked to an estimate of how much debt the Greek economy can bear without collapsing.

News today is light except for the ECOFIN meetings discussing the Greek deal so there will be the typical tape bombs during the London session and I expect price action to be choppy at best.

The daily chart did run up and test the 1.3256 level and was rejected and the 15 minute has a nice topping formation after a 3rd level of rise so I will be looking to short after a break out of the 3rd level bottom or since price is more likely to chop through level 3 I will also consider low risk longs from the bottom of the range as long as the price action agrees. As i type this it looks like the Asian market may push into level 1 of a drop. If so i will be looking for the stop run up during Frankfurt open to short.

Happy trading all


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