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Roast the PIIGS, and End the Euro Debt Crisis

Interest-Rates / Global Debt Crisis May 02, 2010 - 04:37 AM GMT

By: Sol_Palha


Best Financial Markets Analysis Article"Mankind differs from the animals only by a little and most people throw that away." ~ Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

The last meltdown was caused by the financial crisis in the United States, which was triggered by the onset of the housing and mortgage crisis. We now have the potential for a full blown currency crisis to unfold. Greek debt has been reduced to junk status and both Spain and Portugal have had their ratings lowered.

This is going to make it much harder and more expensive for these 3 nations to borrow money, especially Greece and rightly so. The next in line could be Ireland or Italy. The UK is also another time bomb waiting to explode. If Spain runs into the same problems that are now facing Greece, the fall out could be extreme. The amount of money necessary to bail out Spain would be significantly larger and the EU block might not have the capital or the stomach to fund such a huge bailout. Thus it is imperative that they take a stand now and send a strong message to other stragglers; fix your house or burn.

The PIIGS share a common trait with many States in the US, especially California, New York and New Jersey; they all continue to borrow more money than they earn and no one at the top has suffered any consequences pursuant to these actions, at least not yet. There is also one big difference; all US States must balance their budget every year. This is done by raiding some funds or cutting benefits, cutting work hours, or firing workers, etc. Whatever is necessary is done; though in the long run you cannot put your house in order by spending more and cutting programs. Eventually there will be nothing left to cut, and you move from the fat, to the muscle and finally to the bone.

The Greeks took things one step further, they blatantly lied about their finances and continued to spend like billionaires, when, in fact they were not even millionaires. Living like a king on a soldier's salary is a recipe for disaster. The simple solution would be to let them fix the problem on their own or allow them to default and fling them out of the EU. Short term this will be very painful but long term it will strengthen the Euro and send a strong message to the other laggards; get your house in order or risk the same treatment.

While everyone assumes all is well here in the U.S, pay attention to the fact that the world is connected and that even though it might appear that the US is starting to move ahead, a crisis in Europe could derail everything. Not too long ago, the US was the brunt of all the jokes as everything appeared to be well in the Euro zone, now the opposite is occurring. Things are not much better in the US; they just appear to be so because Europe's problems are more severe. Think of Europe and the US as two ships with large holes; just because one is sinking faster than the other does not mean it's in better shape.

From a mass psychology perspective, the sentiment against the Euro is building up in intensity and so from a long term perspective the Euro could hit an extreme inflection point over the next few months where the worst case scenario will already be priced in. The worst case scenario would be a default by one of the PIIGS. Ironical, it almost sounds like PIGS; perhaps this was an early warning signal of what was to unfold in the future.

The negativity on the Euro has not hit the extreme of extreme points yet; we will do our best to spot this moment, so that traders can shift out of US dollars into Euro's as it could make for a great play in the next few years.

We are at a stage where the trend is pushed to the limit and so the euro will probably go through the same hell that the Dollar went through before it mounted a turn around. We will have a lot of false starts at the beginning of the turnaround. This play could be particularly beneficial to individuals with US dollars because the dollar is projected to put in a series of new all time lows before a long term bottom takes hold.


The Greeks want to live LA Vida Loca without putting in the extra work; in essence, live beyond their means on borrowed Euros. The party has to end and when it does the hangover is usually very painful.

They borrowed more money than they could ever pay back; they knew this day of reckoning would come and so lied to everyone about their true state of affairs to push this day out as far as possible.

Goldman's dirty tracks have appeared again and this time in Greece, so there is a good chance that something illegal was done. Goldman is accused of helping and encouraging the Greeks to cook their books in order to hide a large part of their debt.

Goldman Sachs has been the most important of more than a dozen banks used by the Greek government to manage its national debt using derivatives. The bank's traders created a number of financial deals that allowed the country to raise money to cut its budget deficit now, in return for repayments over time or at a later date.

In one deal, Goldman channelled $1bn of funding to the government in 2002, in a transaction called a cross-currency swap. There is no suggestion of any wrong-doing by Goldman Sachs. Such deals are an expensive way of raising money, but they have the advantage of not having to be accounted for as debt. Full Story.

We now learn - from Der Spiegel last week and today's NYT - that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November. When the data are all lies, the outcomes are all bad - see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank - remember the case of Barings. But a single rogue bank can bring down the world's financial system. Goldman will dismiss this as "business as usual" and, to be sure, a few phone calls around Washington will help ensure that Goldman's primary supervisor - now the Fed - looks the other way. Full Story

The other problem is one does not know what data one can trust, for if they cooked the books, then they are capable of cooking the data everywhere. Thus one can understand why German citizens are up in arms about providing any loans to the Greeks.

They may have once been the cradle of civilization; today they are better known as the cradle of over indulgence. They should be flung from the frying pan into the fire; short term it will be painful but long term it will bring about stability for the message will be clear live within your means or risk being roasted alive.

Gold has rallied to new highs in the Euro, and it continues to defy the dollar; instead of pulling back it continues to put in higher lows, a very long term bullish pattern. It has also just closed above $1175 on a weekly basis and has thus set the base for a test of its old highs. The entire precious metal's sector appears to be sensing some sort of future disaster for it simply refuses to correct strongly even in the face of a very strong dollar. If you have no position in the precious metal's sector, use pull backs to open up a position. If you already have positions, then use strong pull backs to add to them. A major currency crisis is going to strike, it's just a matter of time; precious metals thrive under such conditions.

"Man who stands on hill with mouth open will wait long time for roast duck to drop in." ~ Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

by Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at

© 2010 Copyright Sol Palha   - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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