- Greek bonds dropped, sending the yield premium over German debt to the widest since the euro’s inception, and stocks tumbled on speculation that the bailout of Europe’s most indebted nation will unravel.
Quotable – On Greek debt
“No folly is more costly than the folly of intolerant idealism”
FX Trading – Can you say “contagion” boys and girls? Sure, I knew you could!
Okay, this morning I am going to present a series of charts. Let’s play: Guess that country? Here is a hint: It is not China.
Exports EU 27 Countries: Tank!
Private Consumption – Year on Year Percentage Change
Production Manufacturing Index
Gross Domestic Product Year on Year Percentage Change
If you said Latvia, you win. You win an all expense paid trip to beautiful Latvia, financed by the International Monetary Fund (IMF). In addition to touring the Baltic beauty, you will also have an opportunity to tour those other states in Europe that once collectively formed what historians refer to as the European Monetary Union.
Hopefully by the time the IMF has enough money to actually buy you a plane ticket, there will be a nice monument erected by some committee in Brussels extolling the virtues of the European Monetary Union, may it rest in peace. Though flawlessly conceived and perfectly implemented by the bureaucrats throughout the Eurozone, our collective dream of altruism was viciously snatched from us thanks to the US cowboy mentality and incalculable irresponsibility of the US credit system and its evil profiteers. I think the inscription will read something like that.
Here is the contagion part: As the European banking systems scrambles to cover its MASSIVE exposure to Greek debt, and that of Spain, Portugal, Italy, etc., once Popendreau and company finally wave the white flag of surrender and sovereign default, said European banking institutions will quickly pull any credit from the periphery countries—such as Latvia—as they scramble to save themselves. And as you can see by the ugly pictures in the prior pages, Latvia is no condition to lose its desperately needed credit lines.
I draw your attention to an excellent piece in today’s Financial Times, by University of Missouri economics professor Michael Hudson, “Eastern Europe won’t pay what it can’t pay,” here is an excerpt:
“Some 87 percent of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. These governments have been borrowing not to finance a budget deficit, as in Greece, but to support their exchange rates and thereby prevent a private-sector default to foreign banks.
“…Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that cannot (or will not) pay may be their problem, not that of their debtors.
“…The question is, who will bear the loss? Keeping debts denominated in euros would bankrupt much local business. Conversely, re-denominating those debts in local depreciated currencies would wipe out the capital of many euro-based banks. But these are foreigners, after all—and in the end, governments must represent their own home electorates. Foreign banks do not vote.”
So boys and girls, there is nothing like the smell of contagion in the morning to give you confidence to run from the euro et al.