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…..
Nearly forgot: Happy July 4th