Tags: Greece | Eurozone | Confusion

Fate of Greece Keeps Eurozone a Ball of Confusion

By    |   Tuesday, 10 January 2012 08:35 AM

The German government recently auctioned six-month government bills above par, hereby yielding a negative -0.0122 percent, which means investors paid a little bit more than they will get back within six months.

By the way, this is not the first time this has happened in Europe but it is extremely rare.

In September 2011, Switzerland also sold three-month bills above par and therefore at a negative yield. In December, the Netherlands sold three-month Treasury certificates at a negative yield.

Investors should take notice that the U.S. Treasury auction rules don’t permit to auction Treasury bills with a negative yield.

Of course, we have seen U.S. Treasury bills at prices above par so they produce negative yields in the secondary markets recently as investors consider these types of investment vehicles as truly safe, but of which there isn’t enough supply to satisfy demand.

In simple words, that means large investors are willing to pay some kind of an insurance premium to get “capital preservation security” and disregard capital return.

All this is pointing to rising tensions and uncertainties as well as falling confidence in the markets once again and mainly caused, but not exclusively, by the European debt crisis.

In this context, it might be good not to overlook the fact that the 10-year Greek Treasury yielded a near record 35.34 percent (max 35.65 percent) on Monday. Interestingly, the one-year Greek Treasury yielded on Monday a near absolute record of 376.271 percent, yes you read well, this was “three hundred seventy six” percent!

Fitch says that Greece can still plunge Europe into worse financial crisis and Greece leaving the eurozone is a “potential option.”

About Italy, Fitch also says because the fact of Italy not having a firewall is a serious concern for the eurozone and there is a significant chance Italy’s rating will fall when reviews are concluded.

Fitch says France's rating is at risk from banks and EFSF liabilities. The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to combat the eurozone sovereign debt crisis.

But for now, let’s looking for a moment a little bit closer into the Greek situation. Following another meeting in Berlin between Angela Merkel and Nicolas Sarkozy, they stated at the press conference: “The second Greece program has to be implemented soon, otherwise it won't be possible to disburse the next tranche of aid.”

Interestingly, Ms. Merkel also said she will discuss the Greek bailout plan with the IMF’s Christine Lagarde.

Keep in mind, in mid-December the IMF began to express renewed concerns about Greece in its latest report on the outlook for the Greece’s economy.

In that IMF review, it predicted that the economy would contract by up to 6 pecent in 2011. The IMF also expected Greece further to contract between 2.75 percent and 3 percent in 2012.

The report stated that “the most important factor has been the slowing pace of structural reforms this year … Greece is still well away from the critical mass of reforms needed to transform the investment climate.”

The importance of this report became a little clearer when on December 30, 2011 the Greek daily morning newspaper Ekathimerini quoted some unnamed IMF officials as saying: “The debt sustainability analysis is not valid anymore” under the new economic forecasts. For Greece's debt to be sustainable now “requires either a deeper haircut or additional loans from Europe…”

And now, over the weekend, further signs emerged the IMF is becoming increasingly concerned about Greece before the initial talks on the second bailout agreement, due to start Monday, Jan. 16.

Citing an internal IMF memo, German weekly news magazine Der Spiegel reported the IMF is losing confidence in Greece's ability to clean up its public finances and work off its mountains of debt.

According to Der Spiegel, the IMF sees three options: either (1) Greece enacts further austerity measures, (2) private creditors write off more of their investments in Greek sovereign debt, or (3) the eurozone member states increase their bailout aid.

With what is known today, it is expected Greece bondholders are likely to suffer a haircut of 55 percent to 60 percent, which is up from the 50 percent originally agreed in October.

For now, at least one significant bondholder (Vega Asset Management) has already made it clear that it would “start considering all available legal options to refuse and challenge any exchange that implies a NPV (net present value) loss of more than 50 percent.”

Moreover, Reuters quoted a “senior insurance executive briefed on the negotiations” as saying that they are proving very difficult and are likely to be “unsuccessful.”

In simple words, all this means that at present there is by no means any certainty that the upcoming talks with the “EU/ECB/IMF troika” will conclude successfully. Greek Prime Minister Lucas Papademos was unequivocally clear about what this might mean when he said: “Without an agreement with the troika and further funding, Greece in March faces an immediate risk of an uncontrolled default.”

Keep in mind, Greece has 18.4 billion euros of bonds maturing on March 20.

As an investor, I think it’s better not to underestimate the seriousness of the situation.

I think it’s better to start preparing for the possibility, notwithstanding it’s a still remote chance for that to happen, that Greece might exit the eurozone before the first quarter is over.

I honestly hope that won’t happen because nobody really knows what the consequences of an uncontrolled default of Greece would mean for everybody, everywhere in the world.

We can’t say we haven’t been warned in advance.

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Tuesday, 10 January 2012 08:35 AM
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