Waiting on the European
‘Surprise’
By Paul Lamont
March 5th, 2012
Last month, we compared the investment herd to the buffalo
that were stampeded over the cliffs of the Great Plains by Native American
hunters.
Buffalo don’t meander over cliffs. Neither does the stock
market. The
stampede is on and investors won’t see that the ground has given way
until it’s too late.
Greece
Every time we hear that Greece has been bailed out and that it has
‘bought more time’, we just pull up a chart of the 1
year Greek Bond (chart below).
As you can see, the yield of the 1 year Greek Bond is greater than
900%. So despite the hope and hype surrounding the Greek debt situation, the
market is telling us that the crisis has continued to worsen (and at a quicker
pace!).
In order to get its €130bn international bail-out package
agreed to in February, Greece was forced to give the European
Central Bank preferential treatment bonds at the expense of private
bondholders. Ninety-five percent of these private bondholders must volunteer to
take a 70% loss on their bonds by March 12th; otherwise Greece will
face an imminent default according to S&P. More likely, if the hedge
funds that hold the Greek bonds refuse, credit default swaps would be triggered
(insurance bets that brought down AIG). Greece has also already been downgraded
by
S&P to ‘selective default’
on February 27th and to ‘default’
by Moody’s on March 2nd. Perhaps, the authorities will get
it right over the next few days. But they can’t make people keep their
money in the weak European banks.
In January’s How
European Failures Affect U.S. Investors, we stated that we expect credit downgrades to
“deliver the coup de grace” on the “weak and leveraged
banks of Europe.” This would “spark the contagion.” The
European banks will have to hurry and fail if they are going to get ahead of
the country of Greece. Fortunately, their depositors (especially in Ireland and
Italy) have increased the speed at which they are pulling out their bank
deposits (chart
below).
Perhaps, they might just make it.
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