Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stop Believing The 'Economy' Is The Same As The Stock Market - 12th Jul 20
Spotify Recealed as The “Next Netflix” - 12th Jul 20
Getting Ahead of the Game: What Determines the Prices of Oil? - 12th Jul 20
The Big Short 2020 – World Pushes Credit/Investments Into Risk Again - 11th Jul 20
The Bearish Combination of Soaring Silver and Lagging GDX Miners - 11th Jul 20
Stock Market: "Relevant Waves Vs. Irrelevant News" - 10th Jul 20
Prepare for the global impact of US COVID-19 resurgence - 10th Jul 20
Golds quick price move increases the odds of a correction - 10th Jul 20
Declaring Your Independence from Currency Debasement - 10th Jul 20
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Euro Crisis, Greek Bonds Crashing and Capital Flight as Default Risks Soar

Currencies / Euro Apr 11, 2010 - 09:56 AM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleIt’s been two weeks since the bailout speculation surrounding the Achilles’ heel of the euro zone, Greece, has had some closure.

European officials kept the balls in the air as long as they could in an attempt to distract speculators … to manage fears of a Greek and euro-zone crisis. It was a carefully orchestrated game of confusion.


The objective of the game: Tamp down negative sentiment toward Greece’s debt problems and the potential knock-on effect of other weak euro nations, and the resulting selling pressure against the shared currency of those nations — the euro.

As I discussed in my Money and Markets column last week, this game culminated when the political weaponry had been exhausted. The final answer given to the markets: An alleged safety-net for Greece, to be provided in coordination between the euro-zone countries and the IMF.

No surprise, the plan got an obligatory vote of confidence from the heavy hitter politicos in Europe.

Now, for the more meaningful votes, let’s take a look at how the global investment community is receiving this plan …

So far the price activity is sending three, clear warning signals for Greece, for euro-zone countries and for the euro currency. As a result, more impetus is being given to believe the sovereign debt contagion is building.

Warning Signal #1: Greek Bonds Plunging

Greece tested the waters just days after the announced EU/IMF plan, by offering 5 billion euros worth of new bonds to investors. Of course, the Greek government can’t be too deliberate. They have until May 19 to satisfy funding requirements to refinance about 11 billion euros in government bonds. And they need to raise roughly another 20 billion euros by the end of the year.

That precarious position explains why the risk premium for owning Greek debt didn’t subside following the proposed backstop of EU/IMF funds … it rose! And it’s risen sharply since …

Just weeks later the interest rate on 10-year Greek government debt now stands over a full percentage point higher, widening the spread between Greek and German yields to levels not seen since the days Greece was entering the currency union ten years ago.

German and Green 10 Year Yields

It’s clear in the chart above that market participants find no security whatsoever in the proposed Emu safety net. Consequently, they’re demanding far higher interest rates to compensate for the risk of owning Greek debt.

And those who were willing to dip their toes in the water and buy Greek debt on March 29, have lost 8 percent in just 12 days.

Warning Signal #2: Capital Fleeing

Last week, Moody’s downgraded the five biggest Greek banks. Since then both the banking sector and the general stock market in Greece have taken it on the chin. In fact, the Greek bank stocks index is down 18 percent and the Greek stock market has fallen 12 percent since March 25, the day of the announced rescue plan.

And given the downtrend in Greek bank deposits from the most recent available data through 2009 (the chart below), it’s a safe bet that deposits have turned sharply negative in 2010 … i.e. capital is moving out of Greece.

Total Deposits Held at Greek Financial Institutions

Perhaps that’s why Greek banks are said to be turning back to the government for more bailout money earmarked from the 2008 global credit crisis.

Warning Signal #3: Periphery Risk Rising

Now, take a look at this next chart. It shows the market’s perception of sovereign default risk for the weak euro-zone countries. The red line denotes the day the euro zone and IMF announced a rescue plan for Greece.

Default Risk Rising Again

As you can see, global investors weren’t impressed …

The market activity to the right of the red line shows how markets have responded — pricing in considerably more risk of a default in Greece and a contagion throughout the other problem-laden euro countries since the plan’s announcement.

Rescuer of Last Resort …

Euro-zone officials have continually claimed that Greece is equipped to handle its problems itself. Of course, underplaying the probability that their support could be summoned was likely the spirit of the plan anyway. It’s fair to say, though, that Germany had little interest in being called to action to save Greece from default.

In fact, based on the few details of the plan that have been released, it’s possible that when the official request for capital comes from Greece, the assistance will be vetoed. After all, all sixteen members of the euro-area have to approve a capital injection into Greece.

Germany has insisted that Greece must pay market interest rates for any bailout loans.
Germany has insisted that Greece must pay market interest rates for any bailout loans.

And Germany has been insistent that if that injection is made, it be made at prevailing market interest rates. As we know those current market rates are already being pushed up to perhaps prohibitively expensive levels for the Greek government.

In short, with Greek’s deadline approaching to roll-over maturing debt, expect the validity of the rescue plan to get tested sooner rather than later.

The Impact on the Euro …

Following suit with the bond market’s vote of no confidence, the currency markets are voting as well. As a result, the euro has resumed its decline following weeks of consolidation.

With the political posturing settled and given the above three warning signals by global markets, it seems likely that the euro is entering the next leg down.

How low can it go?

Technically, the euro has three critical levels ahead: A long-term trendline support just above 1.30, the 2008 low of 1.233, and the 61.8 percent Fibonacci retracement of the euro’s historical high to the historical low — which lies just above 1.12 to the dollar.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules