February 26, 2010 Patrick Oliver-Kelley

“Beware of Greeks bearing gifts” wrote Virgil in Book 2 of the Aeneid. Oh, had the Euro zone only listened! Greeks are presenting the Euro zone with a whopper now. Wishing that the Greek financing crisis an outlier does not make it so.


With hedge fund jackals at its throat, Greece is rapidly finding it impossible to get finance. Though tiny in respect to the grand alliance of bigger European economies, the fear of a contagion, spreading to Portugal, Spain, and Ireland cannot be ignored nor, dismissed. The Greek government was caught fiddling the books, and Greek workers are rallying in the streets to resist stringent measures to haul in its deficit. With over 60% of its entire workforce employed by the government, it is easy to see why bond markets do not welcome Greece into the borrowing markets. Problem is, that Portugal, Spain and Ireland share similar economic profiles with that of Greece. There now is fear of a contagion of reluctance spreading to these other economies?

The premium on Greek credit-default swaps has doubled in the last six months. Because Greece needs to refinance 51 billion Euros this year, it is forced to try to issue paper in a weakening market. Alarmed at the increase in premium, investors do not buy Greek debt without increased yields, thus reinforcing the cycle of concern and Greece’s inability to get finance.

Dubai and Greece will most likely be followed by others calamities. The road from government assisted credit creation to private sector sustainability is going to be long and rough. Slower than expected economic growth, ample liquidity, rising corporate profits under an umbrella of tacit government guarantees, mean equity markets should rise and bond markets stagnate. But the economic system remains vulnerable to an interconnected financial system. Buyer Beware.

Sniffing Blood, the more aggressive Hedge Fund managers have determined to short the single currency, “to parity with the dollar,” quoting some Wall Street Savants. Not satisfied that the Federal Reserve and Euro zone Monetary Authorities saved their desiccated industry from implosion a few shorts months ago, these Savants intend to force the Euro currency lower, but may also force the Euro zone into creating a ‘Federal Reserve’ of its own .

What is relevant to American investors is that taken together, all the troubled economies of Europe would equal the size of one systemic institution in the US. Greece is 2% of the GDP of that of Europe; California represents less than 1% of the US GDP. We should begin to focus more on Asia and other emerging markets.

Be Sociable, Share!
, , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *