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The market has been watching Europe, particularly the fact that (as of this writing) a deal still hasn’t been struck between the Greek government, the Troika (the ECB, IMF, and euro-zone leaders), and private holders of Greek debt (bankers, hedge funds, and sovereign wealth funds).
In order for Greece to avoid a default on €14.4 billion, which comes due on March 20, these groups must agree to reduce the value of Greece’s debt. Basically, they are negotiating to see how much money lenders will lose — in other words, accept a massive “haircut.”
Negotiations have been ongoing for a while, and a deal is expected to be reached. But the original agreement was supposed to have been struck months ago. So it’s interesting to see why this is taking so long.
The reason is because the Troika wants to get Greece’s debt/GDP ratio down to a manageable 120 percent from the current 200 percent. The problem is that every time they look at the Greek economy, they see that it’s slowing.
Consequently they have to re-do the growth forecasts, which then requires more of a haircut on the bonds to reach the 120 percent target debt/GDP ratio.
Think of it this way: Suppose you go to buy a house, and the bank wants to make sure that the mortgage isn’t more than 120 percent of your annual income. Let’s say you make $100k a year. The bank would be willing to loan you up to $120k. But, if your income decreases to $80k, the bank will only loan you $96k.
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| “It is about avoiding a 1930s moment … a moment, ultimately, leading to a downward spiral that could engulf the entire world.” — Christine Lagarde, chief of the IMF |
The point of this is that every time the parties think they have an agreement, the private bondholders are told they need to take a bigger loss. Originally they were told it would be 50 percent, now the figure is 70 – 80 percent, so they’re taking a hard line approach.
In all likelihood, the negotiations will get done and a deal struck. But given the slowing of the Greek economy due to austerity the Greek government will have to impose to receive a bailout, the probability of the deal having to be re-negotiated at some point is high.
Longer-term Problem
Looking further down the road, the question comes up: How are the PIIGS countries supposed to pay back all this bailout money, when they are simultaneously being forced to implement austerity measures that will slow their economies, and in return tax receipts?
The answer isn’t at all clear. But it is a stark reminder that this whole European crisis is one that will take years to figure out — something to keep in mind the next time we get a furious rally in the European markets, like we’ve seen lately.
Remember that in the short term, the market focuses on the rate of change in a trend, not the direction (i.e. are things getting worse than they were last week), not “are they getting better?” The rate of change in the euro zone is positive, and markets are reacting accordingly, but fixing the problems will take years.
So when the talking heads start saying the situation is fixed, you might consider the ProShares Ultra Short Euro (EUO) and Ultra Short MSCI Europe ETF (EPV).
Both could potentially profit from overly short-term optimistic traders. Just keep in mind, though, that these are leveraged ETFs, and as such are good trading vehicles, but not meant to be buy-and-hold investments.
Have a good day,
Tom
{ 5 comments… read them below or add one }
Is Europe Throwing Us into a 1930s Moment?
If this question is meant for the US alone, then NO Europe are not throwing us into a 1930s moment! The FACT of the matter is the US is very much behind the EU’s problems/demise starting with Goldman Sachs helping Greece “cook” their books etc., so to become a member of the EU.
Europe are being forced to deal with their financial problems unlike the US who are kicking the ball down the street and the day will come, that ball will bounce off a wall right back into the US’s face, then (some say) what will happen here, will dwarf that of the EU.
Be ready!
Have to agree with the above commenter “DD”!
Also if people elect a govt then by definition Austerity is Less spending of money the people didn’t earn yet. Anyone who claims debt can ruin you should think that is a good thing.
It seems common in the world of economic and market commentators to confuse the real economy with economic numbers which have been manipulated by various means(Corporate lying, Bankster manipulations of markets with the help of govt, Govt lying, Media reporting such lies and aiding the lying), data which Do Not indicate what is really going on.
Even with govt spending, the economic downturn is felt by all, excepting those in govt, their cronies they feed money to, and those they redistribute money to, taken from others.
If there were true Austery IN govt in the first place, rather than a bloated govt wasting money to buy votes, it would be a lean govt and the people would have more money to spend. If the govt regulators were not bought and paid for, the Enrons and Banksters would not be allowed to manipulate economic conditions causing the unwise people to waste their money.
When the govt comes to help us by being “nonAustere” one must know they have to steal the money from someone first(whether now or obligate them into the future) to give it to you. “I’m the govt and I’m here to help you” means they are screwing someone else and you as well. How is that improving the economy? It is merely rearranging the chairs in a game of musical chairs and tossing chairs over the side of the Titanic(govt overhead and wasteful spending and buying votes) as the game plays on. Seems great for those left with a chair …until the money runs out. In reality Govt Spending IS ALWAYS a drain on an economy. You have to ignore many things to consider Austerity or lack of govt giveaways as causing an economic downturn.
The govt cannot spend more than it takes from others forever even if it seems that way. Eventually the can will come to rest somewhere down the road, where the real data will be MUCH worse than it would have been had the govt done it’s job properly in the beginning.
The govt IS the problem. The more they do the worse and more problems they make.
Is greedy Capitalism failing or is the infectious virus of Socialism the problem?
In Capitalism people look for a need to fill and help themselves as they fill other’s needs. This created the strongest most innovative economy the world has ever known. Is looking to fill a need greedy Capitalism?
In Socialism the govt takes from the productive to give to those who mostly choose to not be productive in order to buy their votes as well a dribble some to a few who are truly unfortunate that Capitalists not being stolen from by a Greedy Govt under the guise of helping the poor, would help anyway. They still are despite it all and more so than the socialists.
The framers of our Constitution knew this.
WE the people are the cure, if we so choose.
WE personally need to see to it decent uncorruptible people are running in multiples from all parties for all offices, that way it doesn’t matter who the unwise vote for.
Mr. Essaye,
I recommend you submit your column to another investment advice firm. The W pundits have lost all credibility with their bearish stance that began in 2009 and still going strong.
It’s more like throwing us a 2008 moment….betcha miss it again..
It looks like they are going to print there way out….our contra positions are getting hammered, guess the election year fix is on….