28 March 2010

Open letter to the President of the Eurogroup about the Greek Crisis

For my French speaking readers (but not exclusively!), I post a copy of an open letter about Greece I wrote Wednesday to Jean-Claude Juncker, Prime Minister of Luxembourg and President of the Eurogroup, before Thursday's summit in Brussels. It was published in the "Luxemburger Wort" (the Local New York Time or Daily Telegraph) on Saturday.

"Lettre ouverte au Président de l’Eurogroupe à propos de la Grèce
Monsieur le Président,

La crise financière, puis économique, et probablement bientôt sociale, qui a débuté en août 2007, et non en septembre 2008 comme cela est communément admis, a atteint une nouvelle dimension depuis quelques mois puisqu’elle met en lumière la possible faillite d’un Etat souverain d’un pays membre de l’Union Européenne, la Grèce.

Chercher dans les « spéculateurs » des boucs-émissaires est facile et permet de détourner l’attention des peuples européens sur les véritables causes de cette crise. Les éluder et refuser d’en analyser les conséquences ne résoudra en rien les importants problèmes que traverse la Grèce mais nous préparera, nous Européens, à des lendemains encore plus douloureux, conséquence d’expédients. De même, si les « spéculateurs » ont tiré avantage de la crise financière, ils n’en sont en rien à l’origine. Celle-ci est la conséquence d’un surendettement des Etats, des ménages et des banques, résultat d’une politique monétaire laxiste depuis une vingtaine d’années, politique rendue possible par les effets déflationnistes induits par les délocalisations, une défaillance des autorités de contrôle, une absence d’administrateurs réellement indépendants aux conseils d’administration et une réglementation inadéquate y compris en ce qui concerne les ratios de solvabilité des banques.

La responsabilité de la situation grecque est en effet triple.

Premièrement, un Etat qui a manipulé les chiffres de ses comptes nationaux afin de rejoindre l’Euro en 2001 après avoir été recalé en 1998, ce qui est connu depuis plusieurs années. Les faits démontrent que cette manipulation a perduré. Le premier responsable est donc la Grèce qui a préféré, par facilité, camoufler la réalité plutôt qu’entreprendre des réformes en profondeur qui auraient dû améliorer sa compétitivité et sa solidité.

Deuxièmement, la façon dont l’Europe s’est construite et en particulier l’Euro. On a choisi de sacrifier l’efficacité et une construction solide de l’Europe, certainement moins rapide mais durable, à un projet européen dont la seule dynamique devenait un objectif en lui-même.

Troisièmement, le Traité de Maastricht avait pour objectif de créer une zone de prospérité, en facilitant les échanges et améliorant la compétitivité, la pierre angulaire étant le respect de critères de convergence. Or aucune sanction suffisamment dissuasive n’a accompagné ce Traité ou n’a été mise en œuvre. De nombreux pays ont bafoué ces critères, la France n’étant pas des moindre, sans aucune conséquence pour ces Etats. Ce qui devait conduire à une convergence s’est au contraire traduit par une divergence que la crise actuelle met en exergue. La raison en est assez simple: c’est la dilution des responsabilités au sein de l’Euro. Tout comme pour les ménages et les entreprises, l’absence de responsabilisation conduit soit à l’assistanat, soit à la faillite, soit aux deux.

On peut être solidaire d’une fourmi qui a des difficultés dues à un choc exogène, pas d’une cigale qui chante tout l’été et se trouve fort dépourvue lorsque l’hiver est venu.

Les « spéculateurs » n’ont été que le révélateur d’une réalité que ni la Commission Européenne, ni Eurostat, ni l’Eurogroupe, ni la BCE ni aucun autre organe européen n’a perçu. Que s’est-il passé à l’ encontre de la Grèce depuis qu’en 2004 Eurostat s’est aperçu de cette manipulation? Rien, ou du moins rien de tangible puisque la Grèce a continué.

Le malaise actuel a au moins l’avantage de souligner que les prémices de la construction de l’euro étaient viciés: soit il fallait que le Pacte de Stabilité énonce des sanctions suffisamment dissuasives allant pourquoi pas jusqu’à l’exclusion de la monnaie unique ou la mise sous tutelle de l’Etat qui n’aurait pas respecté les critères après une procédure et selon un calendrier établis en toute transparence, soit une intégration fiscale et sociale qui engendrerait une perte de souveraineté.

Contrairement à ce que je lis et j’entends ces dernières semaines, l’intervention du FMI (ce que j’ai préconisé sur mon blog il y a quelques semaines de cela – laissons les ego de côté et mutualisons le coût), n’aurait pas de conséquence négative sur la construction européenne mais au contraire la renforcerait à long terme en démontrant qu’elle a des fondations sérieuses et solides. On ne peut élaborer un projet commun viable dans la durée sur des fondements à géométrie variable en fonction d’intérêts particuliers ou à court terme, sinon on fait exactement comme les banques tellement décriées. Je crois à la vertu de l’exemple.

Sauver la Grèce par des garanties ou prêts bilatéraux ou tout autre système qui engagerait l’argent public, et donc celui des contribuables européens, serait non seulement immoral et injuste mais également inefficace, outre que je m’interroge sur leur légalité au regard des traités européens (la justification d’une telle intervention de la part de Vitor Contâncio, membre du conseil des Gouverneurs de la BCE, devant le Parlement Européen mardi était facile à démonter): immoral car cela reviendrait à aider un dissimulateur, injuste car cela reviendrait à ce que des pays comme l’Allemagne qui ont entrepris des réformes subsidient la Grèce qui n’a pas fait d’effort, et inefficace car le nœud du problème est dans le « one-fits-all » qui, en l’absence de réels efforts de convergence, ne fonctionne pas sans perte de souveraineté sur les politiques fiscales et sociales. Je trouve par ailleurs pour le moins cocasse que la France reproche à l’Allemagne de trop exporter et donc d’être trop compétitive ! Il est vrai que la France a de quoi préférer une solution « européenne » car après la Grèce, le Portugal, l’Espagne et l’Italie, la France est la suivante sur la liste avec la Belgique. La solution proposée par la France et la Commission a surtout pour objectif de protéger leurs propres intérêts au détriment d’une construction commune de l’Europe.

La première conséquence immédiate des discussions des deniers jours concernant le sauvetage de la Grèce est une baisse de l’Euro, et alors ? Nous vivons dans un monde ouvert où les monnaies sont manipulées par les Etats au mieux de leurs intérêts, qu’il s’agisse d’une dévaluation compétitive ou bien d’une réévaluation « contrôlée ». Il est d’ailleurs à ce sujet dommageable que la BCE ait vendu une partie des réserves d’or apportées par les divers Etats de la zone euro lors de sa constitution, le seul étalon qui à long terme a conservé sa valeur ; il est également significatif à cet égard que les USA n’ont procédé à aucune vente et les pays dit émergents ont très sensiblement accru leurs réserves.

La deuxième conséquence est un renchérissement du coût de financement des Etats peu vertueux et qu’y a-t-il d’anormal? En quoi la Grèce, le Portugal ou l’Espagne devraient-ils se financer au même taux que la Hollande ou l’Allemagne? La seule échappatoire à l’austérité budgétaire c’est l’inflation qui aurait des conséquences encore plus néfastes à long terme bien que moins douloureuses à court terme.

Les économies européennes, et encore plus les USA, ont trop longtemps vécu sous les stéroïdes de l’endettement qui a masqué la divergence évoquée plus haut. Une cure d’austérité et de profondes réformes sont inévitables; elles se traduiront notamment par une baisse du niveau de vie des populations concernées, mais c’est le prix à payer pour sauver l’avenir de nos enfants et petits-enfants, et celui de l’Europe.

Ne voyez dans cette lettre ouverte, Monsieur le Président, que l’opinion d’un européen convaincu que seule une construction fondée sur des critères non seulement acceptés, mais également respectés par tous permettra d’assurer le bien-être des européens: c’est le principe de base de la vie en communauté. Je conclurai en citant Friedrich A. Hayek: «La liberté ne peut être sauvegardée qu’en suivant des principes et on la détruit en ne se servant que d’expédients».

Je vous remercie, Monsieur le Président, d’avoir pris quelques minutes pour lire cette lettre ouverte.

Pascal Morin, Ph. D.
Markets & Beyond
http://marketsandbeyond.blogspot.com/

24/03/2010"

23 March 2010

Economy and equity markets: are they disconnected?

saSince July 2009 I have been ambivalent with equity markets after their strong recovery from March low and continued weak economic data. The magnificent 7 indicators are all favorable and therefore tell us that there is nothing to panic about equity markets. But is this disconnected from the economic reality? So, let’s review a number of economic indicators. More than the numbers themselves, I will be looking at trends. In this analysis, I will neither review the situation of the financial sector nor the housing sector.
1. GDP breakdown
The second estimate of the fourth-quarter increase in real GDP is 0.2% higher than the advance estimate at 5.9% annualized, primarily reflected upward revisions to private inventory investment, exports and nonresidential fixed investment that were partly offset by an upward revision to imports and downward revisions to personal consumption expenditures and to state and local government spending.
The trend is definitely improving. The next 2 quarters will tell us whether we may get into a second dip recession. Today, I tend to give the GDP the benefit of the doubt.
The Conference Board Leading Economic Index increased 0.1% in February (+0.3% in January and +1.2% in December) pointing to a slow recovery, but a recovery nonetheless.
Ken Goldstein, Economist at The Conference Board: "The indicators point to a slow recovery this summer. Going forward, the big question remains the strength of demand. Without increased consumer demand, job growth will likely be minimal over the next few months."
2. Consumption
Personal disposable income has grown for 5 month in a row until it decreased in January due to an increase in federal non-withheld income taxes according to the Bureau of Economic Analysis. At the same time, the personal consumption expenditures went up for the 9th consecutive month in January (+ $52.4 billion). The personal saving rate decreased to 3.3% from 4.2% in December, but is now in solid favorable territory, even if I would like to eventually see it in the 7-8% region.
The trend is positive. In my opinion, pay checks given by the Bush and Obama administrations were used to repair households’ balance sheets during H1 2009, and now we are witnessing a non-subsidized consumption growth.
Household debt service payments and household financial obligations as a percent of disposable personal income have also decreased from 13.92% and 18.87% in Q1 2008 to 12.60% and 17.51% in Q4 2009 respectively.
All this translated into an improving picture for retail sales.
3. Unemployment
Unemployment seems to have stabilized with an unemployment rate of 9.7% in February and 14.9 million unemployed; the number increases to 16.2% and 24.9 million unemployed if we add part-time workers for economic reasons and discouraged workers, but slightly off the high reached a coupe of months ago. However, the number of discouraged workers continues to increase unabated to 1.2 million people (+65% compared to February 2009 and + 13% compared to January 2010) .
The employment situation, according to the establishment data, confirms this stabilization. Total non-farm employment went down 36,000 in February vs. -26,000 in January, -726,000 in February 2009 and -109,000 in December. Weekly hours worked also point toward a stabilization.
The diffusion index for the total private sector dramatically improved to 48.0 in February vs. 44.2 in January, 39.6 in December and 17.1 in February 2009 (50 percent indicates an equal balance between industries with increasing and decreasing employment). The diffusion index for manufacturing jumped to 54.9 in February vs. 40.9 a month earlier.

4. Banks’ lending
In February, banks continued to shrink commercial loans for the 16th month in a row, shedding an additional $17 billion; total commercial loans outstanding are back to the summer 2007 and $345 billion below the peak reached in October 2008 ($1,645.6 billion).
Whilst this is negative for growth as a whole since less credit is available, I take it as a favorable element in what was an economy built on over-indebtedness steroids, particularly at the household level, and the system has to be purged.

In addition, the rate of decline seems to be arriving at or near a trough.
5. Net export of goods and services
The balance of net export of goods and services dramatically improved, whilst higher again for the last two quarters, to represent a $449 billion deficit. This suggests that the US trade deficit will have a long way to really get any closer to being balance.
As soon as the economy will improve on a sustainable basis, energy and commodities prices will forge ahead and will add more weigh on the US trade balance. Any oil alternative like gas or shale gas, will take some time to gap the national output/consumption imbalance, but worth watching since it could change the ball game.
Conclusion
Equity markets have anticipated the economic recovery which is in its infancy. The important indicators are at worse stabilizing. Markets paused in July and again in January/February to go back to their previous high and extend to new post crisis highs.
As of today, market patterns are justified by economic data. However, on a simple valuation based on Shiller’s cyclically adjusted PER, the S&P 500 is becoming expensive at 21.3 x earnings on March 18 vs. 13.3 x in April 2009 and an average of 16.4 x. On a simple PER basis, the S&P 500 is trading at the top of its mid 30s - mid 90s range but well below its mid 90s – 2008 exuberance.
I conclude that equity markets are not disconnected from the real economy and there no reason, under the current circumstances, to fear a market collapse. The S&P is however no longer cheap and, despite a good earning season, I would continue to selectively buy on weakness quality stocks having displayed their ability to pay dividends. I would favor energy (oil in particular), technology and consumer companies with worldwide brands (P&G, Nestlé, Unilever, J&J for example) as well as “progressing” markets (terminology that I prefer to emerging) and stay wary of bank’s stock at least in the "regressing" world (i.e. developed).
Monetary policy will remain accommodative until the real estate market has fully recovered and don't forget, “never fight the FED”. As my friend, Jacques-Henri Gaulard, Managing Partner of Autonomous Research – a top notch independent research firm specializing on the financial sector -, says about interest rates : "we have moved from L4L to L4E – Low for Longer to Low for Ever…"

Sources:

Bureau of Economic Analysis: National Economic Accounts
http://www.bea.gov/newsreleases/national/gdp/2010/txt/gdp4q09_2nd.txt

The Conference Board: Global Business Cycle Indicators
http://www.conference-board.org/pdf_free/economics/bci/birdairc2.pdf

Bureau of Labor Statistics: Employment Situation
http://www.bls.gov/news.release/empsit.toc.htm

Federal Reserve Bank of St Louis: Economic Research
http://www.research.stlouisfed.org/

Yale Department of Economics: Robert Shiller Online data
http://www.econ.yale.edu/~shiller/data.htm
FullerMoney: S&P 500 Graph
http://www.fullermoney.com

Markets & Beyond: The Magnificent 7 and Equity Markets
http://marketsandbeyond.blogspot.com/2010/03/magnificient-7-and-equity-markets.html
Autonomous Research
http://www.autonomous-research.com/x/default.html

21 March 2010

Chart of the Day: Stock market rallies

Chart Of The Day The published an interesting chart providing some historical perspective to stock market rallies.

The current Dow rally that began just over one year ago can be classified as both short in duration and below average in magnitude: most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days has entered the low range of a "typical" rally and would currently.



The question often asked is whether this is a bull rally in a bear trend or a secular bull market. The definition a bear market is probably more important: in my opinion, and I agree with David Fuller, it is a contraction in valuations; this contraction does not mean that the stock market must fall, it may just trade in a range for an extended period of time or grow very slowly, and well-below historical average.

Source:

http://www.chartoftheday.com/20100319.htm?T

16 March 2010

The magnificent 7 and equity markets - Review 7

The S&P 500 has fully recovered its January/February correction and continues trading above its 200 days moving average, itself in a positive slope. We are now a year after the through reached on 9th March last year with a 68% gain. The magnificent 7 are telling us that equity market are resilient with no sign to become negative. Most markets are positive and among the BRIC countries, Brazil is near it all time high and China is still in consolidation phase that started during the 2009 summer (I recommend the reader to go to the GTI web site for their monthly newsletter, one of the best available – don’t forget to quote Markets & Beyond to get a special welcome).



S&P 500 Banks index: the index has finally breached the 140 mark, a level not reached since December 2008. The index continues to trade above its 200 days moving average. Technically, the sector is slightly in overbought territory but nothing to worry about. Positive.


Global 1200 financial index: The world financial sector has almost totally recovered from its beginning of the year weakness, following the alleviation of fears of a Greek default. The index is back above its 200 days moving average. If there is no meltdown in the Eurozone area due to difficulties to finance budgets deficits and refinance public debt, the index should rather quickly break the 1000 level. Positive.



TED spread (LIBOR USD 3 mth - US 3 mth T-bills): The spread is now near its 20 years low reached in 2000, at less than 12 basis points (0.12%). The interbank market shows no stress and reflects the continued ample liquidity provided to US banks by the FED. Positive.



USD bank BBB 10 yr - US 10 yr yield: The picture continues to steadily improve despite the increasing number of US banks being taken over by the FDIC. Whilst still high and above historical average, the spread has steadily decreased to 3.5%, where it was in July 2008. Positive.



OEX volatility: OEX volatility is back to its low of the year at 17%, 10% less than the spike registered in January when the Greek crisis became widely known. We need this indicator to stay at or below 20%. Positive.



S&P Case Shiller house price index: The latest data (December) published 23rd February continue to show improvement in their annual rates of return. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. This is a significant improvement over the annual rates reported in the first, second and third quarters of the year, at -19.0%, -14.7% and -8.7%, respectively.

In December, the adjusted 10-City and 20-City Composites numbers show the 7th m/m consecutive increase in both indices; the unadjusted data are however showing for the 3rd consecutive month a slight decrease.

Composite-10: December 2009: m/m +0.3%, y/y -2.4%
Composite-20: December 2009: m/m +0.3%, y/y -3,8%

The rate of improvement seen during the summer 2009 has not been sustained and the health of the recovery is still unclear. Signs are becoming more positive but still ambivalent. Slightly positive.

 
Oil price: The oil prices continue to be capped at +/- $80/b. Not much happening on the energy front. In the US gas prices, after recovering to +/- $6/btu from +/- $2.5/btu, are back below $5/btu with the number of rig count increasing rapidly. Uranium is back where it was in April 2009 in the $40 region: Positive.




Conclusion: All these indicators are positive. The 10% correction seems to have just been a pause in a bull market, does it?

I cannot however believe that all is fine. There are too many headwinds ahead (I will write an analysis on this subject in a forthcoming paper). This is mainly a trading market. For the rest, invest in high yielding securities / net cash companies with strong franchise.

I continue to expect no tightening by the FED (only the fed funds really matter, not the discount rate) and the ECB any time soon despite the rhetoric. This will be supportive to equity markets and a major tailwind.

09 March 2010

Greek crisis and the evil speculators: the scapegoats again

In February, George Papandreou, the Greek Prime Minister, started the chorus by pointing the finger at hedge funds and other so-called speculators for the troubles of Greece. Nicolas Sarkozy, the French President, Jean-Claude Junker, Luxembourg Prime Minister and Head of the Eurogroup, Angela Merkel, the German Chancellor, and Barak Obama, the US President (Obama by demanding that certain hedge funds keep record of their transactions on the Euro and Greek bonds and CDS) followed suit.

For a couple of days, during Papandreou visit to France, Luxembourg and Germany, the rhetoric rolled again. These are misguided and counterproductive.

Tue culprits are the successive Greek governments that had disastrous fisacal and economic policy, not the speculators. Deficits are not the results of speculation, investment decision is the result of an analysis on a given situation. Investment has no emotion, it is factual. What are the facts?

First, Not all market participants buy CDS bet on a default of Greek bonds; many buy CDS to protect their Greek Government Bond portfolios – which due to the Greek fiscal policy has risen considerably. No speculation here, just a fiduciary duty to protect investors’ savings.

Second, if investors could not protect their portfolio against a country default risk, (i) either this country could not access capital, markets or (ii) at very/prohibitive cost.

Finally, and I quote Commerzbank (courtesy of Saxo Bank):
“Due to the well known facts (deficit and debt levels, manipulation of official statistics in Greece) these market participants however demand a considerable risk premium. Following the collapse of the US housing market the financial markets were accused – by the same politicians as those quoted above – to have been too casual in their approach to risk taking. Now that a more careful approach demonstrates that political errors have been made, this approach attracts equal criticism. A little more consistency would not go amiss here!”
Again, all this, like the prohibition of short selling bank stocks during the 2008 financial crisis, is just smoke screen to hide the reality of 20-30 years of policy mistakes that have been unfolding since August 2007 (one could go back to 1971 with the end of the USD/gold peg).

I do not believe that by the end of 2012 the Greek budget deficit will be down to 3% against 12.7% today. The Greeks have a Herculean task facing them, but shifting the attention from the roots of the problem will end being even more painful. Nor do I believe that France, Spain an other Eurozone countries will be able to be below 3% by 2012.

All this gesture and noise from politician really outline the lack of understanding of markets dynamics and investing psychology. Interesting enough, after some EUR/USD relief following Greece successfully placing EUR billion bonds last Thursday, the EUR is again under pressure since these renewed declarations against the so-called speculators are out. Speculators should thank Junker, Merkel, Papandreou and Sarkozy for their recent declarations. Whatever the Politicians say, markets will be right in the long term since it is not possible to double cross economic fundamentals in the long run (and thanks God for that): it seems they forgot that the forex market is over a trillion trading volume a day and difficult to manipulate…

I maintain my negative stance on the EUR. 

Source:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_iFwvoYMrUA&pos=3
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHW5673_XI2I&pos=2

07 March 2010

Greece's EUR 5 billion issue

Finally, Thursday Greece sold EUR5 billion of ten years bonds yielding 6.37%, below the top seen on its debt in the past few weeks at nearly 7%, but still twice the level of German bunds. It was reportedly oversubscribed 3 times, investors being attracted by the yield and the implicit backing of Germany and France. This was again outlined today by Nicolas Sarkozy, the French President, who declared that the euro region must meet Greek obligations if needed.

Mr. Christodoulou, the head of Greece’s debt management agency, said that 97 percent of the bonds sold on Thursday were allocated to what he called “real money investors” — institutions with a long-term outlook, like pension funds and insurance companies — and not to more speculative investors like hedge funds. It remains to be seen whether these “long term” investors will renew their confidence during coming money raising exercises and will not become sellers if Greece does not abide by its commitments.

This bond issue was launched after a heavy marketing campaign undertaken during the past 10 days culminating with Wednesday’s announcement of additional cut spending and taxes raises in order to ease concerns over its runaway budget deficit and getting the UE backing.

Amidst this austerity package, strikes and protest, sometimes violent, continue unabated. Next round: 16 March 24 hours strike.

In any case this success will reduce the pressure on Greece short term and other PIGS countries as well as the Euro, but it has to be seen whether the economic, fiscal and social convergence will go as far as necessary for the one-fits-all work.

Source:

http://www.nytimes.com/2010/03/05/business/global/05greece.html?dbk

http://www.bloomberg.com/apps/news?pid=20601087&sid=an2asJYRraac&pos=1

02 March 2010

Greek crisis: an update

1. The news

On Friday, Reuters and the WSJ reported that France, Germany and possibly the Netherlands would directly or indirectly bailout Greece. 48h later, Mrs Merkel, the German Prime Minister, denied this.

What is clear is that we have entered a period of marketing/smoke screen/market testing campaign to assess a market response to Greece issuing a couple of billion EUR part of the EUR 23 billion refinancing exercise of maturing debt coming due by May to be refinanced. Then, you would get EUR 30+ billion of issuance by the end of the year (without taking into account new debt to bridge the fiscal deficit). This refinancing is therefore crucial for Greece.

The rumored plan would have powerful State owned financial entities in Germany (KfW) and France (CDC) either buying bonds outright or issuing guarantees to national banks buying the bonds to be soon issued by Greece. This means that private banks would get a nice yield (probably in the 7% region) with no risk but with a bit of arm-twisting from Governments… This would not only be an indirect bailout of Greece but also a subsidy to the banking sector.

However, on Sunday, Germany's Angela Merkel told German ARD public television, according to the Sydney Morning Herald:
"...the German chancellor denied any such plan was in the works, saying "there is absolutely no question of it."
"We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty."
And she is right.
Last week strike and the violence that followed do not bode well for the Greece successfully reigning in debt and budget deficits. This would be particularly true if they get some kind of bailout from other European countries. It seems however - if one believes what European politicians are saying- that the pressure is mounting on Greece to take more drastic measures.

All this gesture in Europe looks more as being for face saving -“We sold the EU political and economic integration as well as the EUR as bringing more prosperity for all Europeans”- than to see what happens when confronted to the reality of a deep crisis: it is not possible to integrate so many countries at so different stages of economic, fiscal and social development so quickly. Politics pre-empted reality and reality is catching up with a vengeance.

2. What’s next?

There is not necessarily a contradiction between what Mrs Merkel said and the behind closed doors drawing plans for a bailout of Greece by the European Union (or at least France and Germany and maybe some others): KfW and CDC could guarantee banks buying Greek bonds and/or directly buy them for their own fixed income portfolios. So this is a real possibility. This scenario is the most probable one in my opinion. The EU has now a tradition of bypassing rules casted in stone (just refer to France and Germany about their budget deficit higher than 3% and debt/GDP higher than 60% for years, not talking of Italy or Belgium).

I personally think that bailing out a cheater is not right: Greece should pay for its sins. In addition it would be just plugging a hole short term but would not solve the longer term problem of the EUR and the EU integration: the one fits all does not work without loosing sovereignty on fiscal and social policies. In any case what is feasible for Greece is not possible for Spain or Italy or France due to the sheer size of their deficits and debts in absolute terms.

A rescue from the IMF is not palatable to European politicians since it would demonstrate their incapacity to solve a Eurozone problem. The IMF receipts are generally not a particularly efficient one either, but in the absence of any good solution, always take the least worst one. This is my preferred solution as it would mutualise the potential cost to the IMF members and not Eurozone one only. It would also limit the usual arm-twisting/bagging wrapped as consensus between member states. Nevertheless, I rate this solution as a low probability (event if I think that at some stage the IMF involvement will be inevitable – BRICs should be delighted: they will be able to buy a big chunk of IMF gold-hard-asset for dollars-paper-money).

This would be my preferred route and the one that will prevail when the enormity of the task will make it inevitable.

All the rest, Greece leaving the EUR (or selling the Acropolis to the Chinese or the Minautor to the Indians) and other ideas, will not occur but for exceptional events (like violent social unrests bordering with a revolution or coup d’état) which I do no foresee.

Conclusion

This crisis was necessary for Europe to wake up to the reality of flaws and fraud in the construction of the EU and the EUR, and should therefore be welcomed in order to found the construction of Europe on solid ground instead of “grand” ideas based on thin air. This is a chance that Europe should grasp. Otherwise, the demise will accelerate.

However, as reported by Reuters, Jean-Claude Juncker Prime Minister and President of the Eurogroup (in charge of EU economic policy coordination) pointed the finger at speculators and declared to the German business daily Handelsblatt: "We have the torture equipment in the cellar, and we will show them if needed."

Here we are, the bad guys are the so-called speculators but not the ones who put Greece in such a mess (and Portugal and Spain and Italy; by the way add France and Belgium, and the rest of European politicians who forced the EU integration and disregarded facts). Not encouraging.

Where does this leave us for the Eurozone?
  • The growth in the Eurozone will be much smaller than enthusiastic and unrealistic forecasts at the end of last year
  • The EUR will weaken until the roots of the problem are properly addressed
But frankly, beyond Germany that wants a strong currency, most other countries don’t care if it is not (too) inflationary. We are in a world of competitive currency devaluation after all.

Buy real assets, invest in high yielding equities with strong balance sheet and a franchise.

Source:

The Sydney Morning Herald: No German rescue plan for debt-ridden Greece
http://news.smh.com.au/breaking-news-world/no-german-rescue-plan-for-debtridden-greece-20100301-pbj7.html

NYT: Germany, France, Netherlands to Buy Greek Bonds: MEP (reporting from Reuters)
http://www.nytimes.com/reuters/2010/02/27/business/business-us-greece-germany-mep.html?_r=2

Reuters: EU urges new Greek cuts
http://www.reuters.com/article/businessNews/idUSTRE6204QR20100301

WSJ: Greece Set to Outline New Austerity Measures Wednesday
http://online.wsj.com/article/SB10001424052748703807904575096960117502490.html?mod=WSJEUROPE_hps_LEFTTopStories