After yesterday’s meeting with European Finance Ministers, they are finally facing the reality that the July 21st agreement where Greek bondholders would face just a 21% cut to the value of their bond holdings was just not enough. Said early this morning, Juncker, the European FM head, said “As far as PSI (private sector involvement) is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21. These are technical revisions we are discussing.” What he calls ‘technical revisions’ is a nice way of saying a bigger haircut is going to be demanded, something hopefully on the order of 50%+. While bondholders (European banks included) won’t like it because of a harsher mark, the bonds are already trading at distressed levels. The 8/12/12 Greek note is trading 48/52, the 8/20/13 maturity is priced at 44/46 and a bond maturing in June ’20 is priced at 40.25/42.25. Thus, the market has done the work, the only thing left is for them to be properly marked and reserved for on bank balance sheets. That is where the EFSF comes in for those banks who don’t have those reserves. Juncker doesn’t want to use the ECB for the leveraging of it and said they are looking at other ways. The beginning of the end is hopefully here for this Greek drama and what it means for the EU and euro. With respect to the next EU payment to Greece, Oct 13th is no longer the date of sign off and the Greek’s will have to wait until the end of the month as they are being asked for more measures to be taken in addition to Greece finally firing public sector workers who make up a huge chunk of their economy. Belgium bank Dexia is down another 17% after a 10% drop yesterday as the French and Belgium govt’s said they will again come to the rescue. In Sept ’08 Dexia 1st got bailed out. The collateral damage of slowing economic growth due to all of the above, in addition to other factors, has Asian markets down sharply again. In particular, the Hang Seng index has fallen 15% in 2 weeks. While markets likely have further to fall, we are already well into a mini crash around the world

Category: MacroNotes

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