EUR/USD FX Commentary Weekly wrap Up March 10, 2012
This is the default we were looking for. The ISDA did declare a credit event with the activation of Collective Action Clauses used to force the holdouts of Greek bond holders that were issued under Greek law. They needed a participation rate of 90% in order to activate the CACs in the original contract and they only got 85.8% so they enacted the new law they passed last month and got the percentage up to 95%. This is what triggered the credit event and just as I said in a previous post the credit rating agencies were racing to give Greece the bottom of the barrel credit rating.
So what is next?
At this point its time to watch the exposure the Greek banks have to the derivatives market and see if any of them go into default. Then we may see a cascading effect on banks around Europe but could be buffered by the LTRO but since the ECB has been already giving margin calls it may not be much help.
There are those and I tend to agree that the write down and loan from the Troika actually increased Greek debt. However the maturity is much further down the road so even so they did give the can a good boot this time but sure doesnt look like the goal of getting Greek debt down to 120% by 2020 is going to be doable. Especially considering the Greek economy actually shrank 7.5% rather than the first reported 7% so Greece is on a slippery slope and losing traction fast.
This is from Mark Grant, author of “Out of The Box and onto Wall Street”
The Debt of Greece
The somewhat amusing part of this entire transaction is that the debt of Greece has been INCREASED.Greece and the EU handed private holders $138Bn in write-offs but with the addition of the new loan, $171Bn, the gross debt for Greece increased by $33Bn and this is if all of the legal challenges favor Greece. The total debt of Greece (sovereign, municipal, corporate and bank) has just increased from $1.20 Trillion to $1.233 Trillion and all accomplished by this brilliant plan that did nothing except to tag investors and ramp up the debt load for the country.
The IMF Contribution to Greece
The IMF has tentatively offered $17Bn for the next round of Greek funding while the EU expected $56Bn keeping the IMF ratio the same as in the first round of the Greek bailout. The IMF has said that it will not increase its position without a larger firewall and this is something that Germany has refused to do to date. I ask then where is the $39Bn going to come from then as no government in Europe has approved funds to make up for the deficit. Then as this morning the EU has indicated that any new funds may only be released in tranches we may find that the EU releases money to pay off their banks and other financial institutions but with only a paltry sum released to be used in Greece. The IMF/EU contribution may become quite fragmented and we may hear screams emanating from Athens soon.
Plus as I mentioned before next in the cross hairs will be Portugal and eventually Spain and Mark agrees there too.
The Next Continental Plays
Keep your eyes on Portugal. Very poor economics that are worsening and I think they may be back to the till quite soon. Then watch Spain as they are the first country to publically tell the EU to “Shove It” as they are sticking to their 5.8% deficit and refuse to adhere to the EU mandated 4.40% number as the maximum debt allowed. They have also refused additional taxes and additional austerity measures as several other European nations have cried “foul” and threatened to demand penalties and fines for the country. Then turn to the north and watch France as with elections looming on April 22, run-off on May 6, that Sarkozy appears to be the loser and the most likely winner, Hollande, supports economic and financial policies that are in direct opposition to the policies laid out by the German Chancellor.
The fact is the games have just begun in the EU and its going to be fun to watch all the politicians scramble with the big banker cronies to put the lid on the Pandoras Box they just opened. There have been several precedents set recently that have large potential to kill bond markets as they are not the safe financial vehicle they used to be considering a Central Bank can subordinate bonds and governments can enact retroactive laws to kill any bond contract issued by that government. Scary days for bond traders.
Getting to the charts. Man did I take the wrong day off last week. Both the EUR/USD and the GBP/USD have had failed 1st levels and the GBP/USD has plowed through its previous level 3 and closed well below it. This is a classic Smart Money trend reset and now has a much higher chance of continuing the downside movement. Given the Greek deal and better than expected Non Farm Payroll numbers the market seems to be in the decoupling mood again (the US decoupling from Europe) of which may send US stocks higher along with the USD for the time being anyway.
Next week I will be looking for the trap move after the Asian session and taking a short. The GBP/USD is most likely the pair to trade considering it has already made new lows.