Another Trillion Dollar Venture

Ahh, this Greek debt drama just seems to go on and on and on… Almost half a year ago, Greece’s deficit problems began to surface as their government’s debt swelled to €300 billion. Soon enough, Greek debt woes proved to be just the tip of the iceberg when its neighbors, such as Spain and Portugal, also suffered downgrades on their sovereign debt. In efforts to defuse what analysts dubbed as a “ticking time bomb,” the EU, ECB, and IMF drew up a bailout plan for Greece.

It turns out the combined rescue funds from the EU and the IMF, along with the ECB’s loosened bond rating requirements, weren’t enough to soothe fears of a debt contagion. Because of that, the EU decided to pull a few more strings and unveil the “Bailout Plan of the Century”, giving Uncle Sam’s stimulus package from last year a run for its money – figuratively speaking, of course!

Under this newly proposed financial stabilization package, euro zone nations would now have to shell out a total of €440 billion in loans while the EU and the IMF would provide €60 billion and €220 billion respectively. This amounts to a grand total of €720 billion, or roughly, $1 trillion! Aside from that, the ECB announced that it would intervene in the bond market in order to boost liquidity.

Sure… It’s easy to jump in the happy bandwagon and be all sunshiny and optimistic, but let me warn you, this bailout plan comes at a serious cost.

For one, remember that the US funds a very significant portion of the IMF. This means that a fifth of the European rescue fund comes from…. Wait for it… American taxpayers! So, once again, the US government takes another huge blow in its finances, adding to its already inflated public debt.

And let’s not forget that debt will always be debt. Paying off a loan with another loan just sounds preposterous to me! The skeptic in me thinks that the rescue package will only buy time and not really solve the crisis. At the end of it all, Greece, along with any euro zone nation that’ll use funds from the massive rescue package, will have to pay their liabilities.

As traders, we have to think about what this rescue package will do to the euro. Will it finally halt the euro’s free fall? Some might be more optimistic, now that the EU and IMF are finally going to try and nip this debt contagion problem in the bud. However, as Pip Diddy pointed out recently, increased risk appetite hasn’t appeared to have carried over onto the currency markets.

PoD Chart

After gapping up 150 pips and hitting a high of 1.3094, the pair has proceeded to drop, and is now hovering just above the 1.2700 handle. That’s over a 350-pip drop in TWO days. Obviously, the dust hasn’t cleared yet and traders remain unsure about the euro.

One thing that’d I’d like to point out however, is that the COT report is now showing that large speculators are now short euro futures at an all-time high of 103,402 contracts as of last week. Are there any sellers left to push the euro any lower? We could be in for a retracement soon, as the pair may now be finding support at a long term trend line and 2009′s low. If traders do become more optimistic, we may see them bring price back up to meet the falling trend line.

Then again, if risk aversion continues to dominate the markets, we might just be shouting “Parity!” a few months from now!

  • istone10

    Paying a loan with another loan
    is not so preposterous when we
    consider the massive interest
    the banks behind the Fed and
    IMF will earn.

    Between the USD and Euro, it’s
    now a race to the bottom.

  • istone10

    Paying a loan with another loan
    is not so preposterous when we
    consider the massive interest
    the banks behind the Fed and
    IMF will earn.

    Between the USD and Euro, it’s
    now a race to the bottom.

  • Elroch

    In a sense all loans are paid off with other loans. In the simplest sense, money is created by borrowing from central banks, the monopoly suppliers. As all such loans need to be repaid with interest, clearly this can only be achieved by borrowing more. What gives this some foundation is that the loans are generally based on some real assets, typically property or a business. The value of these assets tends to grow over time, and the amount of money borrowed tends to grow also.

  • Elroch

    In a sense all loans are paid off with other loans. In the simplest sense, money is created by borrowing from central banks, the monopoly suppliers. As all such loans need to be repaid with interest, clearly this can only be achieved by borrowing more. What gives this some foundation is that the loans are generally based on some real assets, typically property or a business. The value of these assets tends to grow over time, and the amount of money borrowed tends to grow also.