Tags: greece | euro zone | exit | draghi

It's Wise to Prepare for Greek Contagion

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Monday, 20 April 2015 06:35 AM Current | Bio | Archive


China's financial moves are making the world a bit more interesting while we wait for the Greek drama to possibly reach its dramatic conclusion.

The central bank of China (People’s Bank of China , or PBoC) cut its reserve requirement ratio (RRR), which is the amount of reserves banks must hold at the PBoC, by 1 percent (expectations were 0.5 percent) to 18.5 percent, which was the largest cut since the financial crisis in 2008, because economic growth expanded much less than expected and the planned annualized quarterly growth rate is only 5.3 percent while most investors only look at the annualized growth rate that now stands at 7 percent.

We could ask ourselves what would be the impact to world growth if China wouldn’t be able to reverse or even stop its present growth downtrend path over the next couple of quarters?

Anyway, the Chinese could still go much lower with their RRR.

One could say their race to the bottom only has to be tested so far.

What is more troubling is the fact the Chinese RRR money growth rate; firstly, has been halved on a yearly basis since end of Q1 of 2014 and secondly, it has practically collapsed to zero on a seasonally adjusted annual rate (saar) quarterly basis since end of Q1 of 2014.

Because of all the above, all investors could do well to keep a close eye on how China corrects, be it all or in part or not at all, its slide towards “unacceptable” too low growth.

Besides that, over the weekend at the IMF and World Bank spring meetings in Washington, D.C., Greece was “unsurprisingly” one of the hottest topics in many conversations over there as well as at side events.

Interestingly, in Germany, a poll by YouGov, which is an (international) internet-based market research firm, shows the majority (55 percent) of the Germans still remain in favor of Greece leaving the eurozone while only 29 percent wants Greece to stay.

Please keep in mind and maybe it could be only anecdotal, but German Chancellor Angela Merkel very rarely acts conversely to the opinion of the majority of the German voters.

We’ll see if this time she will make an exception to her usual way of governing…

Anyway, ECB President Mario Draghi said when asked about the risks of contagion from Greece: “We have enough instruments at this point in time ... which although they have been designed for other purposes would certainly be used at a crisis time if needed … having said that, we are certainly entering into uncharted waters if the crisis were to precipitate, and it is very premature to make any speculation about it.”

At the same occasion he denied the ECB is examining the possibility of a parallel currency in Greece adding: “I don’t want even to contemplate such an event. The Greek leaders have repeatedly stated that they intend to honor their commitments. We all want Greece to succeed. The answer is in the hands of the Greek government ... Much more work is needed now, and it is urgent.”

At his closing press conference at the IMF spring meeting Mr. Draghi was asked: “Question: In 2012 you said ‘There is no going back to the Lira or the Drachma or to any other currency. There is no point to go short on the euro… It is pointless because the euro will stay and it is irreversible.’ Mr. Draghi answered: ‘Yes, exactly, all the same. It’s pointless to go short on the euro. Do it! So I’ll say exactly the same words today.”

Now, the question is if markets are going to believe Mr. Draghi as they did in 2012 this time around. So far, it doesn’t look like that.

Here are some examples:

• Looking at what is happening now, the euro non-commercial net long futures positions continue hovering around their lows of the 2012 crisis.
 
• Greek bank stocks as measured by the FTSE/ATHEX BANKS (DTR.AT) -Athens quote 468.33 today when on October 29, 2007 it peaked at 77,065! Talking about a disaster...

Private-sector bank deposits in Greece have plunged from about 240 billion euros in 2009 to about 5 billion euros now. I don't think any comment is necessary. 
 
And we could go on...

Let’s not fool ourselves. There is no more good solution for Greece on the table. Be it a “temporary exit from the euro area” or a full Grexit; or help from Russia and/or China; or whatever, which includes "tricks," to me it’s very simple: “You can’t make today’s Greek elephant fly!”

Of course, miracles do happen, but unfortunately, not frequently.

Maybe it could be wise to be ready for “Greek contagion.”

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HansParisis
Let’s not fool ourselves. There is no more good solution for Greece on the table. Be it a “temporary exit from the euro area” or a full Grexit; or help from Russia and/or China; or whatever, which includes "tricks", to me it’s very simple: “You can’t make today’s Greek elephant fly!”
greece, euro zone, exit, draghi
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2015-35-20
Monday, 20 April 2015 06:35 AM
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