Friday, December 18, 2009

The Euro's Trojan Horse

'Tis the season of giving, so it should come as no surprise that at this time Sudden Debt invokes Troy's Laocoon in Virgil's Aeneid: "Timeo Danaos et dona ferentes" (beware of Greeks bearing gifts).

Why? Because as crafty inventors of the Trojan Horse Greeks may once again become infamous for yet another inside job: the euro's downfall - or, at least, its fall from grace.

Beware of Greeks Bearing Euros

If you have been following European financial matters at all, you know by now that Greece is in dire straits. It is beset by that trio of trouble that gives finance ministers white hairs by the hundreds: huge public debt (~120% of GDP), huge budget deficit (~13% of GDP for 2009), huge current account deficit (~10% of GDP for 2009). Oh, and its private sector debt went from 38% of GDP to 100% in less than a decade, mostly because households jumped on the debt wagon: their debt went from 15% to 50% of GDP in the same period, mostly on mortgage borrowing and higher housing prices.

Does the pattern sound familiar? Of course it does... this model of "economic growth", which substituted increased borrowing for earned income, was repeated all over the western world.

The immediate result is that rating agencies have now cut their marks for Greek government debt to BBB+, the lowest in the eurozone (S&P and Fitch. Moody's is still A1 but will soon downgrade) and borrowing costs have soared. Greek government 10-year bonds are currently yielding 5.74%, 271 basis points (2.71%) over the equivalent German bunds. In the years of the credit boom, of easy money and bubbly assets, this spread was a mere 20-30 b.p.

Likewise, credit default swaps (CDS) for Greek sovereign debt have now soared to 275-285 points (late Fri. updt.), up from 10-15 (see chart below, click to enlarge). This means that the mathematically calculated Cumulative Probability of Default (CPD) comes in at 21.5%, the 8th highest amongst sovereign risks (for comparison, Dubai is 6th on the list with 26.2%). To give you an idea of other eurozone members' CPDs, France is at 2.6% and Spain at 9.1%.

Greek CDS: Nosebleed on Mt. Olympus

All this trouble brewing in eurozone's weakest link is causing reasonable questions for the euro's viability as a global reserve currency. After all, claim the euro-naysayers, what is the EU if not a mere free trade zone with a common currency attached? In other words, Greece may be the euro's Trojan Horse... or at least, a damn good excuse for selling euros (see chart below, click to enlarge).

US Dollars Per Euro

Just one month ago I sounded the bell of euro's overvaluation vs. the dollar, having just seen the movie 2012. To use another Trojan allusion, there were simply too many Dollar Cassandras around, and they had even made guest appearances in popular movies. A sure omen of reversal, if ever there was one...


  1. This hell-as-ious,

    None of the so-called reserve currencies is still currently one.

    This issue is not whether the Euro is OK. It ain't as a reserve currency. And in view of the disastrous policies by both Japan and China, neither the Yuan nor the yen will the trick. As reserve currency the yuan is even more of a joke.

    ... As a short term means of bartering whilst the central bankers are busy monetizing the debts of the countries involved, why not? I have small change in my "bougette".

    But no way that we have decent money markets any time soon. Credit will shortly be a political item à la USSR. But finding a GENUINE long term lender working on financial premises will be history - even a central bank of a communist state...

    In this war - it ain't- there is no victory for anyone. Except possibly South Africa.

    If we push along the current path, gold will not even be alone. And this not a victory for mankind. A dreadfull historical regression.

    No computer and science do not restore trust in currencies. And past is no predictor of the future.

    In the very absence of a Volcker kind of banker in the US or China, the future is getting extremely dim.

  2. Shouldn't that be:-

    "beware of Greeks accepting gifts"?

    p.s. my word verification is "thydra" - hsssss x 15!

  3. Thanks for all those NUMBERS again, Hell.
    There is one very important item that you left out in your description of Greece.
    It is on the brink of revolution.
    I already brought up the dire prospects for Greek youth, most of whom see small prospects of getting a job in their lifetime, and for who déclassement, falling down the social totempole is an inevitable outcome.
    Who the hell cares about currency exchange rates or currency reserve status when the spectre of revolution looms even larger ?
    I will add that Greek youth have been amazingly patient in the face of so much unemployment.
    French youth are still convinced that there is a magic potion that brings jobs...

  4. Debra said.."who the hell cares.."

    Allow me to punctuate..

    "Who? The Hell, cares."

    But you must read between the lines.


  5. With all due respect, that's not saying much for the Dollar.

    Babyboomers will start collecting Social Security in 2010. What's more, 48 of the 50 states are broke. Unemployment is going up because the U.S. Government's stimulus package is a joke.

    Quite obviously the Syndicate are taking America apart bit-by-bit as a defensive measure against the unfolding oil production bottleneck, known as Peak Oil.

    The Middle Class, or what's left of it in a year's time, should expect to spend the heftier portion of their income on food, energy and transportation. Real Estate will be quite a bit cheaper to compensate. Meanwhile, a good chunk of the Third World will die off.

    Welcome to the great depopulation crisis.

    P.S. I have no pity for the Third World. It's had it coming for years for being lax with population control. Don't cry for it.

  6. Dear Anon,
    Take a guess as to what were the two biggest obstacles to govt population planning programs in the Third World for the past 30 years. You obviously know very little about international development "aid" programs and how much they are influenced by US bullying.

  7. Hey, anon, you're another flagrant example of what I call the "elder brother complex".
    You've had your yum yum dropped into your mouth, and your butt wiped for so long that you've become loathesomely smug about it.
    Don't you believe the Protestant propaganda for ONE minute.
    You CAN be an assisted society with NO welfare state.
    Being assisted is, above all, a STATE OF MIND.
    And most people in the developed countries, regardless of what kind of government they have, are on the gravy train.
    Being assisted by an insurance company that you individually pay to take care of you is STILL..
    being assisted.
    Wake up before it's too late, bro...

  8. reasonable questions for the euro's viability as a global reserve currency.


    The EU nations have no desire to be the world's reserve currency. A GENTLE tossing of Greece under the bus may be in the interests of the core EU nations. Some panic,some fear, a few fires will cause the Euro to lose value, some speculate attain parity with the USD. This would be very beneficial to the EU core as a whole.

  9. Deb re: "French youth are still convinced that there is a magic potion that brings jobs..."

    But there is Deb: cooperation!

    ... Though I admit it too has its zero-sum aspects. And that it further can be tough when some roses smell better than others. ;-)

    re: revolution in Greece

    Hell, I am guessing you have family and friends back there. I truly hope it doesn't happen, that they remain safe and healthy.

    re : "the future is getting extremely dim"

    Depends on whose view you are looking at this issue from. Those who are winning? Those who are losing? Everyone's combined viewpoint?

    For those who are just curious to predict whose moral system will form the building block for the new world wide cooperative singularity fractal, anyone's guess is as good as anyone else's guess- I guess.

    Though I would agree that assuming we all don't kill each other and do come out the other side, asking whose moral system will ultimately win the war does seems to be the real question behind the question.

    But where to get a "hint" as to who those winners might be???

    ... I wonder if you could get a clue from Google by looking at the moral "vectors" people use in their search terms world wide?

    It may be my bias but my gut tells me that when it is all over, Cambodians (and Greeks) may not object to queuing in lines so much- I admit I could judge wrong.

    It is clear that something has to give.

  10. The revolution is already happening, Thai.
    Many of my friends are only working part time, marginally.
    And a few people over here are dumping their high stress, high pay trader lifestyle to go do something else.
    And.. the media are starting to pick up on it, and report it, too.
    People are shifting.
    I'm not sure that the French believe in cooperation all that much though.
    France is a hopelessly individualistic country in the worst sense of the word.
    Little solidarity, little cooperation.
    Political parties that have imploded, so little is the capacity of people to cooperate.
    But... people are still shifting, even here.
    We will see.

  11. Debt, debt, and more debt....then default! Gotta luv the D words!

  12. California -

    Income taxes were down $1.44 billion (-9.3%), and sales taxes were short by $355 million (-3.2%)...this deterioration occurred between the months of August and November. Year-to-date collections for the three major taxes were down $2.20 billion (-7.5%). The State ended last fiscal year with a deficit of $11.9 billion, so the combined current year deficit stands at $24.4 billion (Table 3). Those deficits are being covered with $15.6 billion of internal borrowing and $8.8 billion in external borrowing. California is going in the hole at roughly $3.134 billion per month. Ok if you look at the latest Statement of Cash Receipts and Disbursements for the General Fund pg 3 available here -

    ...You'll see that there remains $4.4 billion Unused Borrowable Resources.....or about 45 days at their current burn rate.

    CB Richard Ellis has a brand new client: the bankrupt state of California, which is now attempting to sell what is the largest office portfolio currently marketed nationwide, at 8.7 million square feet. The California Department of General Services has announced CBG has been retained to sell 17 office buildings. The state is hoping the sale will generate more than $660 million in proceeds to offset cuts in the state budget.

    Sell all the state's office buildings to a buyer to whom they will then turn around and sign a 20 lease contract - i.e. sell the house you own outright only to turn around and agree to rent it for 20 years all in the name of short-term cash vs long-term obligations.

    ...from this article you can see that unemployment borrowing doesn't show up in the General Fund obligations. Even with the Thanksgiving sales boost Sales Tax collections average $71,447,368.42 per day. Meaning, borrowing for current daily average unemployment borrowing is 46.5% of average daily sales tax revenue.

    A couple weeks ago I made this prediction - The next states to go down, based on my analysis, will be Colorado and Georgia in January, Arizona in February, Kansas and Massachusetts in March, Maryland in April, and Vermont in May. The rest, bar in rapid increases in unemployment or borrowing from the state's unemployment fund to satisfy other needs of the state, should last for a year or more.

    Georgia started borrowing from the Fed for unemployment this past Thursday.

  13. Yophat, Abraham Lincoln would be weeping...

  14. On the other hand... think about it.
    Five years ago I was asking myself just what was federating those united states in the absence of any... positive project.
    Now we all know : debt.
    (Yeah, I know, I'm being a little cynical, but it's Christmas and I'm giving myself a little treat...indulging in some of those luscious, negative traits that I try to keep under control the rest of the time...)

  15. Hey, are you interested in exchanging blogroll links?

  16. I certainly don't have the impression that you, Hellasious, are a Trojan Horse.

    However I'm quite sure that the international financial community would very much like to frighten the other member states of the Euro zone, above all (allegedly) rich Germany (my home country), to bailout Greece and, if necessary, also the other PIGS (Portugal, Ireland / Italy, Greece, Spain).

    However, I don't see any danger for the dollar if California, or New York State, default.

    So in my opinion our politicians should not allow themselves to be coaxed into helping out the banking and lending community once again (and, possibly, many more times to come).

    Let Greece default, and you will see: it will have no adverse effects, in the medium to long range, to the Euro.

    Which investor even remembered the Asian Crisis 2 or 3 years later?

  17. "Let Greece default, and you will see: it will have no adverse effects, in the medium to long range, to the Euro."

    That is a bluff I would like to see called. I guess most Germans too, except a weaker € is in their best interest.

  18. Let the creditors to Greece eat their losses. The Greek taxpayer has no interest in paying for their indulgence. The European taxpayer has no interest in bailing out foolish lenders nor borrowers.

    There will be a mad scramble for euros to cover losses once Greece defaults. Expect a sharp appreciation of the euro if and when.

  19. Thanks for making me chuckle, Deb, albeit inadvertently, when you wrote:

    "Being assisted by an insurance company that you individually pay to take care of you is STILL..
    being assisted. Wake up before it's too late, bro..."

    When I think of, AIG, example, I must tell you that I don't exactly feel exactly assisted, but taken to the cleaners.

    Now, having said that, I do agree in general with your comments to a certain smug poster.

  20. From my point of view, the situation in Greece is very dangerous.

    Greece is not Dubai, and it is not a far east country as well. Please write this on your blackboard a thousand times, that is Greece is not a brand new state raised in the desert or a newborn Asian tiger. It is part of EU union since the first EU group was formed.

    A Greek default will question the very concept of Euro currency and will probably trigger a default chain that will invole the weaker link of the union, Ireland, Spain, Italy.

    I believe that in case of a default threat to avoid contagion the ECB will of course come at rescue, but will demand the Greek government to surrender its fiscal and welfare autonomy, much as the IMF would.

  21. ". I guess most Germans too, except a weaker € is in their best interest."

    The high Euro is killing the export oriented German economy. I would expect that after much political manuvering Germany & France will bailout Greece. Of course that will send the wrong signal to other deadbeats like Irland, Spain, etc.
    In the end only the relatively stable countries like France, Germany and Benelux might be left in the Euro zone.
    Truth is NOBODY wants a strong currency. A strong currency is a liability.


    Happy New Year!

  23. Nationwide:

    Average daily increase in state borrowing from the Fed to fund unemployment claims from November 3rd through December 2nd - $69,596,132.41

    Average daily increase in state borrowing from December 2nd to December 17th - $137,219,392.59

    OK that is 97% increase in daily borrowing in the 1st half of December vs November.

  24. China: Becoming harder for the world to buy U.S. treasuries

  25. For info, you guys, the European Constitution, the one that Ireland said no to, that France's people said a rather resounding NO to (and then got shoved down their throat backstage...) is a 600p legalese document that "one" can get a grip on just by looking at the first and last chapters (for the basic ideology).
    The ideology is that... what is federating the European Union is MONEY MONEY MONEY, and the neoliberal religion. The idea that what makes us move, tick, think, act, is MONEY. That TRADE is a consummately CIVILIZING force in our psychological makeup. (LOL. It does SOME civilizing, but...)
    Tsss Tsss, as I say.
    This kind of federation is rather... INCONVENIENT, shall I say ?, in current circumstances.
    If/when Greece goes down as a sovereign state, the Emperor will have NO MORE CLOTHES.
    You HAVE to look beyond the... financial consequences of certain circumstances to see the ideological ones.
    Lots of older French people saw/see the European Union as a form of.. insurance against the barbary that gained Europe in the 1930's-40's.
    They think that the Union will protect us against NEW barbary.
    Are they right ?
    Personally, I don't think that a Union that federates us around our money/financial INTEREST will protect us from barbary.
    I may be wrong...

  26. Hi guys.
    I am George from Greece working in a giant fund.
    Dont forget that the mature Euro economies found it very lucrative to sell to the emerging markets (see Greece).
    So their politicians (Kohl, Mitterand etc) pushed Greece and others in EU.
    The sales of Euro cars exploded in Greece. Why? lower interest rates forced the greeks to borrow more,buy more cars, so the germans can benefit by selling products the Greeks did not really need in such quantities and speed in the first place.
    The debt is mostly held by foreigners. So, i say: lets default and see what happens to the European banks.

  27. " It is part of EU union since the first EU group was formed.
    No greece is in EU since 1981, CEE exists since 1957.
    Greece doesn't matter for EU economy.
    It's 2,5% of eurozone economy.

    And the main reason for no bailout for Greece is that there is no will in Greece to solve any problem.

    Greece is seen as a not very serious, not serious at all country, and even if we give money to them, two years later, they will have the same problem.

  28. OUUUUH, last anon, something tells me that you are operating under Protestant work ethic assumptions and the people who know me on this blog KNOW what I think of Protestant work ethic assumptions.
    I presume that YOU are a hit and run driver here, so I won't BOTHER telling you just how much I HATE the Protestant holier than thou attitude toward work and money..

  29. "...lower interest rates forced the greeks to borrow more,..."
    That is utter nonsense! Nobody forced anybody to borrow anything.
    "The debt is mostly held by foreigners. So, i say: lets default and see what happens to the European banks."
    The banks will, as usual, get a government bailout for making stupid loans. However, if you take that thought one step further, nobody in their right mind will ever loan Greece (or countries in a similar position) any more money. Similar to sub-prime borrowers in the US. What do you think that will do to the various economies in the EU zone?
    ...and yes Debra, certain countries have a history of financial difficulties. Some learned from past experiences, others didn't. Greece clearly belongs to the latter.

  30. Banks don't make loans unless there is an incentive to do so.

    Regulation or lack there of creates incentives.

    Banks would be all over the sub prime market again if there was an incentive to do so. Think subprime was bad...just wait till the option arm fireworks are over...

  31. Yoski, amen

    ... though I might comment that if the other governments of Europe bail their respective banks out for Greek loses, the citizens of these countries would still be in a chicken wire canoe without a paddle.

  32. "Banks don't make loans unless there is an incentive to do so."
    ...or they know there's absolutely no risk involved since they will get bailed out for each and every stupid descision they make.

  33. Banks are currently making record profits (GS, Deutsche Bank, etc.). You think they make those profit by making prudent loans to industry or private individuals? There's no way they could make anywhere close to that by sticking with the business they were designed to do. No, the casino is open for business again, bigger and grander than it ever was. Rest assured, the next bailout will get to an economy near you sooner than you can afford. The big question is, how will our corrupt and incompetent politicians react this time around? Will they hand over the keys to the treasury again or will they do what desperately needs to be done?

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  35. Yophat, what do you think would happen if the US government defaulted?

    I really don't know so I am curious to get your sense.

  36. Well Thai that is a tough question....especially since that event really isn't on my radar...or at least not in that framework.

    The Fed (banksters) and The Fed (US gov) are so tightly interwoven that I find great difficulty seeing one default on the other.

    What I find much more likely is the collapse in the base of the pyramid. Or in other words the default by the people on the government (national, state, & local). Ultimately though I think this is what you are referring to...please correct me if I'm wrong in that assumption.

    Despite ultra low interest rates people are borrowing less, banks are lending less, defaults are increasing (of all flavors), the economy is contracting, social safety net costs are increasing, taxes are increasing, medical costs are increasing, food costs are increasing, etc etc.

    We have hit our collective tipping point in the ability to accumulate additional debt and service our current captured by Karl here -

    The machinations of the Fed (both parties) only extend the horizon and temporarily delay the inevitable...while deepening the impact.

    So enough of the cause and back to the question at hand....default on obligations. Brings to mind two questions - Who is the debt owed to?; and What corresponding action will be taken by the creditor?

    I think if you answer one then you have a good guess at the other.

  37. It's amazing to see governments in debt just as people are. However, it is the people who feel the effects of debt the most. When governments fall into debt and the economy takes a turn for the worst, it is the people who truly suffer. They lose their jobs and unfortunately are in debt themselves with loans, credit cards and more. There are daunting statistics here

    Quick stats and debt

  38. Yes hit the nail on the head!

    POOP always runs downhill!

    BUT if the shovelers get overwhelmed and the long-run.....everyone will take a bath....nature of the pyramid system!