Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

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