Tag Archives: PIGS

What did the Greeks ever do for us?

The politicians are very happy to accept credit for taming the debt dragon which, in fact, they themselves created by allowing the banks a free rein for far too long.

The Bank of England’s solution of Quantitative Easing, that is to say handing more and more cash to the banks has done little else apart from allow institutional investors and  the investment banks to maintain Stock prices at  falsely high levels and to push Commodity prices to new stratospheric levels.

These days, the name of the game is to hunt around for any excuse to push the markets higher and higher – not by buying stock and holding it but by keeping it on the move, i.e.   “working those shares”, thus making a dying market look as if it is in rude health.

Last week’s announcement about a possible Greek bailout moved prices up as did the Greek government’s announcement that their austerity measures had been voted through. Good news is all that investors want to hear.

They are all in La-la land!

Scratch the surface and what do you see?  How do all the investors really feel about the possibility of a Greek default? In short, they KNOW that it is going to happen.

That is clearly demonstrated by how much they are willing to pay in premiums for the insurance  contracts which are designed to protect them from future losses in case of default.

The equation is simple, the more the likelihood of a default, the bigger the premium.

The billions in bailouts have made no difference to the perceived likelihood of Greece defaulting and in fact, the likelihood of a total collapse and default is increasing daily.

Today, the cost of insurance against a Greek default is FOUR times greater than it was when their Euro partners announced the very first bailout package.

On May 12, 2010  the European Union (EU) and International Monetary Fund (IMF) announced a €110 billion  bailout for Greece. At that time, the cost of insuring $10 million in bonds against a Greek default was close to $540,000. Last week, it was $2.3 million –  FOUR  times more!

As a comparison, when Lehman Brothers failed and even when the likelihood of a global collapse was at an all-time peak, the absolute maximum that investors were willing to pay for $10 millions-worth  in Greek debt-default insurance was only $52,000.

So, the premium for the cover has increased from $50,000 to over $2 million for the same amount!!  THAT’S FORTY TIMES MORE!!!

To put it simply, investors believe that the likelihood of a Greek default is over 40 times greater today than it was at the height of the 2008 financial crisis.

Meanwhile the politicians are celebrating. Do they really believe that as far as the Greek economy is concerned it’s “job done”? Of course not. Not really!

It’s all window dressing, prevarication, obliquity and procrastination, designed to protect the Sacred Cow of the Euro for the time being, in the vain hope that by some miracle, under-investment and austerity will reboot the Greek economy.

The austerity measures which have been agreed for Greece – massive tax increases and suffocating spending cuts will make it impossible for Greece to pay both its bills AND its debts.

In the United Kingdom we are following the same path to decreasing government revenues by killing entrepreneurial confidence and creating the ideal conditions for another recession – or worse.

Like any business, making staff redundant and selling assets is not the way to generate higher net revenue because in the background, debts are constantly increasing. Both Sovereign States and Commercial enterprises have been forced into this totally nonsensical process.

Without new revenue streams and by “over-slashing” costs there is only one possible end-game. All that we are all achieving is putting-off the evil day whilst at the same time hoping for the lottery win which never comes.

The lotterry win which our own Chancellor is hoping for, is a sudden Phoenix-like rising of  non-existent entrepreneurs who do not have the non-existent backing of the banks. These entrepreneurs’ job (theoretically) is to create new businesses or grow existing ones in order to create employment and produce goods which we can exchange for foreign currency.

Greece is hoping for a similar Miracle on Skid Row but in reality, it will survive through the summer and then the begging bowl will reappear. This time, however, it will remain empty.

So, who do we believe? The politicians who have achieved very little except boot the can along a narrowing cul-de-sac OR the investors who are willing to pay incredible insurance premiums to protect the money that they have lent? The Dreamers or the Pragmatists?

In spite of very generous Euro handouts, Greece is already twitching and Rigor Mortis will have well and truly set-in by the final quarter of 2011.

The answer of who to believe is telegraphed to us daily by people who know – the global investors. Nowadays “buy and hold”  investment seems almost anachronistic.  If you look at Stock prices every day,you will see that they move up and then down , then up again….etc……What is known as a volatile market.

So what WILL the end game be?  What will the Greeks do for us?

Firstly, both European and American banks will collapse (again). European Banks have loaned money to Greece but it is the American Banks who are holding a lot of European bank debt. If European bank shares plunge to ridiculously low levels, financial markets could freeze whilst at the same time, investors will want to withdraw their non-existent money.

Incidentally, money is already being withdrawn and in the last 10 days, over $50 millions has gone from primary money market funds.

Secondly, the market for short-term debts — especially corporate IOUs (commercial paper) may freeze up. (That’s what happened in 2008 as a result of the Lehman Brothers collapse). The difference is that for instance in the United States, the Federal Reserve will not step-in with guarantees or cash – they have said so. Safety net gone.

No doubt other Central Banks will come running-in with the sticking plaster and splints but hopefully, by then, we will have learned to recognise more futile attempts at a temporary fix.

Thirdly, Greece has more cash tied up in debts than their economy produces in a year (debt/Gross Domestic Produce ration of over 100%).  Greece is not alone. Their protests and riots may be just a foretaste of what most Western economies will experience in the not-too-distant future. America is just one example of an economy which has passed the danger threshold and is currently playing a waiting game.

It is not just the well-publicised countries such as Spain, Portugal, Ireland and Italy which are on the brink. The United Kingdom is not far behind.

So what do we do? Do we dance to the politician’s drum-beat?

To a certain extent we have to. Even a wounded tiger is dangerous, so we are forced to ride it along with our governments.

However, we should follow the facts and not believe government “spin”. Do not forget that a skilled tailor can make a hunchback look straight – and our governments have been sewing like crazy for nearly three years!

We (as individuals) should ensure that whichever institution (bank or insurance company) is holding our money, has the ability, will and wherewithal to fulfil its obligations. Not all of them do. Some will have to rely on more government handouts and guarantees.  When you want your money, you want it in full and NOW.

Finally, we should all be very very vigilant.

Remember the 2008 crisis?  The banks did see it coming but to all outward appearances, it all seemed sunny and “business as usual”. Profits….. bonuses……..obsequious governments prostrating themselves before the Gods of Banking…..

Once bitten……….

Nearly forgot: Happy July 4th

PIGS will kill us

The Irish Prime Minister

Portugal, Ireland, Greece, Spain. PIGS. What do they have in common? Everyone of them, so far has been quite adamant that it did not need any outside help to help sort out its finances – until 24 hours before they accepted the promise of money from whoever was willing to dish it out.

Ireland has been the latest to take weeks rather than minutes to succumb. One of the great mysteries is why the “we don’t need help” phenomenon keeps on being replayed. The solution is most-likely testosterone-related. Accepting help because your economy is in the red is the same phenomenon as not having the humility to admit defeat when lost.

A man will drive round aimlessly for hours rather than stop his car, approach a local and simply say “I am lost. Can you please help me.” Why? Because asking for help suggests failure, incompetence and ultimately a small willy.

If women had been in charge in Ireland , they would have accepted outside-help months ago. The Irish cock-up didn’t happen within the last few days. They’ve known for ages that their economy had run out of steam but like the lost driver, they have been having pointless meetings and briefings in the vain hope of hitting upon some self-engineered rescue plan which, just like the lost driver, would somehow allow them to accidentally arrive at their destination.

Unfortunately, the Brussels Protectorate of Eire (formerly known as Ireland) cannot just have unconditional money. There are conditions. Firstly, austerity laws will HAVE to be introduced even before even one euro is paid over. Secondly, Ireland’s accounts are now open for Brussels to peruse at its leisure and no doubt an unelected Viceroy of Eire will be nominated by the Eurocrats just to make sure that the Irish government is dancing the right  jig  and singing the right song to the newly-composed Euro-tune.

The civil unrest has already begun. The Irish are a proud lot and the thought of Johny Frog and Fritz Hun running the Irish Economic Song Contest is as unpalatable as it gets. Make no mistake, the Irish economy is now in the hands of International Monetary Fund and European Union pen-pushers. The Irish Finance Minister is an observer.

The Prime Minister Brian Cowen is now regarded as “walking-dead” and it seems unlikely that his administration will last to 2012 which would have been the normal term had the economy not hit the fan.  He has enemies both outside and within his own Party but so far he has managed to hang on to office. There is serious talk of an imminent vote of no confidence which, if carried would cause the government to collapse  and result in a late December General Election.

That would make Ireland’s new Euromasters very nervous because at the moment they understand that after tomorrow’s announcement of  a new 4-year Irish economic plan, the new policies will be signed-off in a December 7th Budget. Their Irish economic Blitzkreig will have been wasted.

Economic crises always go hand-in-hand with political crises and because of the depth of the current mess, it is almost certain that Prime Minister Cowen’s Fianna-Fail party will be out of government for the first time in over 100 years. Presently, they are in power only because of the Green Party’s parliamentary support but relations between Fianna Fail and the Greens have reached such a low-point that the Greens’ support of the forthcoming budget is conditional upon a January General Election.

The latest polls indicate that support for Fianna-Fail among the electorate is currently at a historic low of 17%. That suggests a total wipeout in any forthcoming election.

All electorates imagine that when an economy is not functioning, a simple change of leadership and administration provides an answer. It rarely does. For instance in the United Kingdom, the electorate did not so much vote for the Conservatives as vote AGAINST Labour. In Gordon Brown, they saw an inept leader who was floundering and whose own party was divided. They saw the solution in a vote against Brown.  The Irish are seeing Cowen in the same light.

It was not the fault of the government that their economy collapsed. It was the banks’ fault and contrary to popular opinion, no amount of regulation would have prevented the fiscal crisis.  For a bank, the system is simple:  You buy-in money at a certain rate and you sell it at a higher rate. Simple economics. Alternatively, you can balance the books by lending against assets. If you lend 100,000 euros on a house valued at 100,000 euros, your books balance because you have 100,000 on both sides of your balance sheet.

However, if property values collapse and one side of you balance sheet now shows that you have lent 100,000 euros and the  other shows that the asset against which you lent (the house) is only worth 50,000 euros, you have a problem – a banking crisis.

Ireland’s property market has been collapsing for months and the Irish government went from making things happen to watching things happen. Now they are at the final stage of the cycle and they’re wondering WHAT happened.

The British government has pledged a loan of £7.5 billion loan to the Irish. That seems like a lot of money until you realise that the Irish exposure of the British government-owned Royal Bank of Scotland is well over £50 billion. RBS owns the Ulster Bank where the downward spiral in property prices has effectively meant that the bank has £30 in assets for every £100 that it has lent to mortgagors. That’s the equivalent of a bank giving you a £1 million mortgage on a £300,000 house.

George “Schadenfreude” Osborne’s macho white charger is nothing more than a painted lame donkey. His £7.5 billion is “gesture politics” at its most pointless. His primary worry is RBS and to a lesser extent Lloyds (Irish exposure nearly £30 billion).

Because the markets believe that much of the RBS-owned debt will eventually be written-off, RBS shares are once again falling in value and yesterday stood at  39.4p. Less than three years ago they were over £5. Lloyds Bank is experiencing a similar drop.

RBS also has an exposure of about £15 billion in Portugal which is also employing Ireland’s macho “in denial” technique and announcing to the world that it does not need a bailout.

We’ll see.  Two PIGS down with two to go.