Word On The Greeks

May 29, 2012 1

May 29, 2012 – AAPLTrader

Investors right now are signaling increased concern. The euro has dropped about 5 percent in the past month against the dollar, while the cost of insuring Spanish government and financial debt reached a record this month.

Greece’s four largest banks received a €18bn transfer yesterday as the first installment of a recapitalization plan agreed as part of the country’s second bailout by the EU and the International Monetary Fund. The funding, in bonds issued by the European Financial Stability Facility, will help banks reduce their dependence on emergency liquidity assistance, a temporary lifeline provided by the Greek central bank after they were excluded from European Central Bank liquidity operations this month.

The fund received €25bn from the European Financial Stability Facility (EFSF) to strengthen Greek banks more than two weeks ago, but its disbursement was delayed by a legal dispute between the government and lenders over future control of the sector. The remaining €7bn would serve as a capital buffer, a fund official said. The four banks are now expected to regain access to the ECB’s (European Central Bank) liquidity operations, using the bonds as collateral for funding at cheaper rates than under the emergency liquidity arrangement.

Bloomberg Analysts Say

Greece is responsible for 0.4% of the world economy and now poses a threat to international prosperity as investors raise bets. Its days using the euro are numbered. The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance. The European Union President, Herman Van Rompuy, said that contingency planning for Greece leaving the euro “isn’t a priority,” while Morgan Stanley economist, Elga Bartsch, says Greece has a 1-in-3 chance of a euro exit.

Beyond the euro area, major trading partners such as the U.K., Switzerland and nearby emerging economies including Romania’s could be hurt as demand slows. Their currencies probably would rise against the euro, making exports less competitive. China’s biggest investment bank says that nation could see its weakest growth in more than two decades.

Former Greek Finance Minister

George Papaconstantinos told CNBC on Tuesday, “Allowing Greece to be pushed out through a process of default or leaving the euro would be a disaster for the country. Incomes would drop another 20 to 30 percent, and inflation would skyrocket up to 30 to 40 percent again. Our European partners want us in the euro zone … the stability of the euro zone would be very much weakened if one country exits, because the contagion effects are very hard to predict. So leaving the euro would be very bad for Greece and would be very bad for the rest of Europe. In that sense I think that every effort will be made to see if we can improve on the current set up. We need a broad coalition government that has not only a majority in government, but also manages to convince the Greek society that there is light at the end of the tunnel.”

The Wall Street Journal today says a Greek departure is likely to be disorderly and cause “systemic shock,” pushing the euro to around $1.15-$1.10 against the dollar and causing a 2 percentage-point drop in euro-zone GDP.

The Washington Post

Gives a clear vision of the current global status and explains to us that these are tough times for the global economy. China seems headed for at least a mild downshifting in its previously hectic growth. Brazil’s central bank says that country’s economy contracted in the first quarter of 2012. Bond-rating agencies have just marked down Japan’s debt. The United States, though relatively strong compared to other industrial countries, has just notched a decline in business orders for capital goods. And in Europe, where a recession is underway, worse could be in the offing because of the threat that Greece will end its membership in the common currency, the euro.

CitiGroup Sees Three possible Exits

A managed departure with an implemented firewall (pushing the euro to $1.20), a scenario where such a firewall is insufficient to prevent a euro-zone break-up or risk aversion (heralding a drop to $1.13) and a disorderly worst-case exit with excessive volatility in other markets, with the euro falling as low as $1.01. Citigroup also states that if the process is managed, which the U.S. bank deems unlikely, expect a short, sharp selloff in the euro, with a subsequent rally up to $1.45 or higher. If Greece just dumps the austerity program and walks, the risk of contagion rises, and “the euro could begin to rally…from a much lower level and probably not be anywhere close to the current level at the end of the year.

CBC news says a tumultuous Greek exit from the Eurozone would have a harder impact on Canada’s economy than the credit crisis recession of 2008 and 2009. The Toronto-Dominion Bank put out a report this week outlining what the impact of such an event might be on Canada’s economy. The bank also states that a disorderly exit of Greece from the Eurozone represents the No. 1 risk to Canada’s economic outlook.

Bank of America-Merrill Lynch Quotes

“The risk of a Greek euro exit is rising, but so too are the incentives to keep Greece in. If it does happen, expect a short, sharp shock to the euro’s exchange rate. However, in the short run if the ECB responds decisively we believe risky assets, especially bank stocks and periphery bonds, may be prone to a short squeeze. In the longer run, exporters would have scope to outperform domestically geared stocks for a lengthy period. If Greece exits the euro, Greek oil demand drops one third… and in a disorderly euro breakup, demand could contract sharply, with profound implications for oil prices.” Brent oil prices could drop as low as $60 per barrel, from the $106 area now. Economists from Bank of America Merrill Lynch and JPMorgan Chase & Co explain that at worst, it could spur sovereign defaults in Europe as well as bank runs, credit crunches and recessions that may spark more euro exits.

Eric Consiglio – AAPLTrader.com