Thursday, April 15, 2010

Another month, another Greece bailout

On February 11th:

“In theory, we will help Greece. But they haven’t asked for any money (wink-wink). Go about your business, quit speculating against Greece and let us get back to our bureaucratic plans to form a true European nation ”

Eventually, the market realized that this is just talk.

March 25th:

OK, OK, we have a mechanism to bail out Greece and the IMF is involved, but we’re not giving you the EU taxpayer any details. And anyway, they haven’t asked for any money. There, that should end the matter!

April 11th:

Alright then, you leave us no choice. Here are some details. We will sort of gloss over the fact that all EU members must approve this aid, and that it might even be illegal according to the EU charter.

That means that the German, Italian, Irish, Spanish and Dutch parliament (among others) must pass this aid BEFORE it gets disbursed. The IMF could lend without approval (meaning Canadian taxpayers are going to be involved) so perhaps the IMF would do the initial bailout and then the EU would kick in the rest. However, given my admittedly weak knowledge of the history of Germany, I have my doubts as to whether it would pass. What about the Irish parliament? They have taken draconian steps to balance their budget without a cent from the EU. Are their suffering taxpayers going to send money to the notoriously inefficient Greek taxpayer? All it takes is one government to reject the aid (think Meech Lake).

Greece said on April 11th:
The package “sends a clear message that nobody can play with our common currency and our common fate,”

Economic and Monetary Affairs Commissioner Olli Rehn:"There will be no default."

When Greece defaults, what will they say?

At this does is send a clear message that the EU, especially Germany, does not want to set a precedent here by bailing out Greece. It may have to, but it is scared. The IMF can do what it wants.

I believe that Greece will default and get an IMF (not EU) bailout. It needs to restructure its debt and then decide whether it stays in the Euro or goes back to the drachma.

Then the saga moves to Portugal…I am sticking with my
1.15-1.25 2010 target established back in December for the Euro. So far, the US dollar carry tread (negative S&P/USD correlation) has busted in 2010. Let's see if it continues if the Euro continues to sink.

Ironically, if Greece and other Club Med members left the Euro, one day (far, far away though) perhaps the Euro would actually be stronger.

Disclosure: Position in HSD.TO, SDS, EUO, US & Cdn cash