Coming Week Market Movers: Packed Calendar, Sovereign Debt Jitters, How to Play Them
by: Cliff Wachtel July 3, 2011 | about:
BNZ, CYB, DIA, EUFN, FXA, FXB, FXC, FXE, FXF, FXY, GLD, QQQ,SPY, UDN, UUP
NB: For analysis of prior week’s key market drivers and their lessons for the current week see
here.
COMING WEEK MARKET MOVERS
Sovereign Debt Concerns Could Still Dominate Markets
Greece
Potential complications over the coming weeks include:
While Greece is due to receive further bailout funds again in September, in theory if it hasn’t progressed in implementing its Medium-Term Fiscal Strategy and privatizations program then the Troika ( EU/ IMF/ECB) could threaten to withhold funds once again.
Beyond September, Greece still needs to negotiate a second bailout of about €120 billion.
Even if the ratings agencies somehow accept that the the proposed extension of Greek bond maturities is actually voluntary and thus not a restructure (aka default), EU officials still need to find more private investors who are willing to voluntarily extend the maturity of their Greek debt holdings. So far French and German banks have pledged to do this, though German banks are only willing to extend €3 bln of their holdings, out of the €30 bln target.
Greece may have to pay higher rates of interest on the new, rolled over bonds to entice more investors to follow suit, currently it stands at 5.5 per cent, far below Greece’s 10-year yield, which is currently trading at 16.3%.
Of course the past weeks have shown this threat to be empty unless somehow a bank bailout plan is already in place that could maintain confidence in European and global banking stability.
Ireland And Portugal And Spain, Oh My!
Of course, regardless of how rating agencies respond, any perceived breaks to Greece will be demanded by Portugal and Ireland, each of which present at least the same contagion risk . For example, Spain is more exposed to Portugal than Greece, and the EU cannot afford to bail out Spain with its current reserves for bailouts.
If the fiscal consolidation plans of any of these disappoint, their borrowing costs could rise beyond their means, forcing them to seek aid. Spain continues to uncover new hidden local debt which at some point could re-ignite serious concern about this too-big-to-bail-or-fail debt beast.
Ireland To ECB: You Can Take This Bank And Shove It
The ECB already has about €100 bln of Greek, Irish, and Portuguese debt alone on its books, before even considering other dubious bond holdings. It has about €10 bln total capital, making it another dead man walking.
The state of Irish banks has become so dire that author and advisor John Mauldin recently wrote that, in the near future, Ireland could well walk away from its own guarantees of €60 bln in ECB loans to Irish banks and just give the ECB the banks. This alone would render the ECB insolvent, even before considering what losses it could take from the other PIIGS bonds.
Italy Getting Sucked In
Until this past week Italy had escaped concern about its own debt, however Italian bank exposure to Greece has raised alarms and brought threats of credit downgrades. Ongoing trouble in the other PIIGS nations risks further sucking Italy into the debt crisis vortex. The Italian economy is larger than Spain’s, and presents a similarly fatal threat to the EZ’s survival.
Don’t Forget US, Other Exposure To The EU
As noted in prior weeks, US institutions have roughly equal exposure to the PIIGS as do banks of France and Germany via CDS writing and money market paper. China has said it will be increasing its EZ exposure.
Ongoing Global Slowdown Theme
While concerns certainly have eased for the moment regarding the EU,
global economic data continues to point to slowing growth, at best, in every major economy. The past week showed slowing manufacturing in every major economy besides the US, which surprised a bit to the upside.
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