Thread: Greek Ouzo crisis escalates into global margin call as confi

Greek Ouzo crisis escalates into global margin call as confidence ebbs

For the third time in 18 months the global financial system risks spinning out of control unless political leaders take immediate and radical action.

By Ambrose Evans-Pritchard
Published: 5:46PM GMT 07 Feb 2010
Comments 117


A driver stands near parked trucks on the road leading to the Kulata border crossing between Bulgaria and Greece. The roadblock was set up by farmes protesting higher taxes.
Greek surveyors work above the pediment of the ancient Parthenon temple on the Acropolis in Athens. The surveyors are checking the alignment of marble blocks as part of ongoing conservation and restoration work on the 2,500-year-old building.
Greek surveyors work above the pediment of the ancient Parthenon temple on the Acropolis in Athens. The surveyors are checking the alignment of marble blocks as part of ongoing conservation and restoration work on the 2,500-year-old building.

Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing. Greece's drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.

Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe's bubble and foreign debts top €2 trillion.

The scale matches America's sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit. Just as Benelux funds and German Landesbanken bought subprime debt for high yield with AAA gloss, they bought Spanish Cedulas because these too had a safe gloss – even though Spain's property boom broke world records. They thought EMU had eliminated risk: it merely switched exchange risk into credit risk.

A fat chunk of Club Med debt has to be rolled over soon. Capital Economics said the share of state debt maturing this year is even higher in Spain (17pc) than in Greece (12pc), though Spain's Achilles' Heel is mortgage debt.

The risk is the EMU version of Mexico's Tequila crisis or Asia's crisis in 1998. This Ouzo crisis is coming to a head just as tougher bank rules cause German lenders to restrict loans, and it touches on the most neuralgic issue of our day: that governments themselves are running low. Britain, France, Japan, and the US are all vulnerable. All must retrench. The great "reflation trade" of 2009 is over.

Far from containing the crisis, Europe's response recalls the Lehman/AIG events of 2008 when Brussels sat frozen, and Germany dragged its feet. On that occasion France took charge, in the nick of time.

Today's events will not wait. The rocketing cost of (CDS) default insurance on Iberian debt speaks for itself. Lisbon retreated from a €500m bond issue last week, even before the government lost a crucial finance vote. Can Athens raise money at all on viable terms?

There are echoes of early 2009 when East Europe blew up, with contagion hitting global bourses, commodities, and iTraxx credit indices. That episode was halted by the G20 deal to triple the IMF's fire-fighting fund to $750bn. The odd twist today is that Greece cannot turn to the IMF because that offends EMU pride, yet no other help is on offer because the EU has no fiscal authority. Greece lies prostrate between two stools.

Both the City and Brussels seem certain that Europe will conjure a rescue, crossing the Rubicon towards fiscal federalism and a debt union. The emergency aid clause of Article 122 is on everybody's lips. Insiders talk of a "Eurobond".

On balance, such a rescue is likely. Yet leaving aside whether North Europe can afford to guarantee Club Med debt – or whether a bail-out pollutes more countries, as HBOS polluted Lloyds – there is one overwhelming fact missing from the debate: Germany has not endorsed any such rescue.

Jurgen Stark, Germany's champion at the European Central Bank, said markets are "deluding themselves" if they think others will pay to save Greece. He shot down Article 122, saying Athens was responsible for its own mess.

Bundesbank chief Axel Weber said it would be "politically impossible" to ask taxpayers to bail out a profligate state. Both the finance and economy ministers have forsworn a rescue. Die Welt has called for Greek withdrawal from the euro.

I cannot judge how much is brinkmanship, pressure to make Club Med sweat. But I remember vividly lunching with the British prime minister's economic adviser in August 1992 and being told that Germany would soon rescue sterling in the Exchange Rate Mechanism by cutting rates. Such was the self-deception of the British elite. Anybody following German politics – such as George Soros– knew it was nonsense.

Germany is harder to read today. The euro is a giant step beyond the ERM. Yet there are powerful counter-currents. Germany's constitutional court issued a crushing put-down of EU pretensions last June, ruling that the sovereign states are "Masters of the Treaties" and that EU bodies lack democratic legitimacy.

So if you are betting that Germany must forever more efface itself for the European Project, be careful. Berlin hawks might prefer to lance the Club Med boil sooner rather than later.

http://www.telegraph.co.uk/finance/comm ... -ebbs.html

Euro under pressure as Greek crisis becomes a 'huge game of chicken'

The euro faced renewed selling in foreign-exchange markets on Monday morning as doubts about the ability of Greece to cut its deficit heaped pressure on the single currency.

Published: 6:53AM GMT 08 Feb 2010
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The euro fell more than half a cent against the dollar to $1.3630 in early trading and also weakened against sterling, though it had recovered by lunchtime. Analysts expect the currency to stay under pressure as long as uncertainty over whether Greece will need to turn to the European Union or the International Monetary Fund for a bail-out persists.

Greece's spiralling deficit - estimated at 12.7pc of its gross domestic product last year - stands far beyond the 3pc threshold permitted by the rules of European Monetary Union (EMU) and has left the single currency facing its biggest challenge in its short history.

"The euro continues to feel the impact of escalating concerns over sovereign credit risk," analysts at UBS said today.

Concern over the abillity of Greece to tackle its deficit spread last week to Spain and Portugal, which have both been hit hard by a severe downturn in the property and construction industries. The prospect of a sovereign debt crisis has been since by investors as a real risk in 2010 because of the fragile global recovery and the huge debts carried by some countries. The cost to the investor of buying insurance against a default by Greece, Spain and Portugal jumped last week, as stock markets across Europe fell.

"It's going to take years to sort out the sovereign balance sheet issue," Mohamed El-Erian, chief executive of Pimco, the world's biggest bond fund manager, said today in Sydney. "Europe has become a huge game of chicken, whereby the Greeks are waiting for help from the outside and donors are waiting for Greece to take a step forward."

Over the weekend, the world's finance ministers moved to reassure investors that the problems in Greece and southern Europe can be contained. Speaking at the end of the G7 meeting in Canada, Tim Geithner, US treasury secretary, told reporters that his European counterparts had assured him that the crisis would be "managed with great care".

"European authorities gave us a very comprehensive review of the programme now in place to address the challenges faced by the Greek economy," Mr Geithner said.

While Greek finance minister George Papaconstantinou said the country would cut its deficit to the 3pc threshold allowed under European economic stability rules by 2012, from an estimated 12.7pc of GDP last year, concern remains whether the Greek public will be able to stomach the austerity measures required. European leaders will meet for crunch meeting in Brussels later this week on Greece.

Alistair Darling, the Chancellor, said that Greece must "stick to its plan" to solve its debt woes and would be "backed" by the eurozone. "We understand collectively that it's in all our interests that countries return to good economic health as soon as they can," he said.

At the G7 meeting:

• Jean-Claude Trichet, president of the European Central Bank, said: "We expect and we are confident that the Greek government will take all the decisions that will permit it to reach that goal."

• Luxembourg Prime Minister Jean-Claude Juncker, the head of the Eurogroup of finance ministers, stressed that Spain and Portugal posed no risk to eurozone stability.

http://www.telegraph.co.uk/finance/fina ... icken.html

This is all 'planned' most likley. Watch the USA 'help' out the system. Anyone want to buy some tinfoil hats?

No doubt quite a few oligarchs sold short and now they are fanning the fires of sovereign debt default to drive down prices some more. But don't lose any sleep over it. Soon those short positions will be covered. Whoops, I mean Greece will be bailed out.

concern remains whether the Greek public will be able to stomach the austerity measures required

Unfortunately, they don't have a choice either way. Eventually, neither will we.