A Game of Chicken
Research for Online Investors

by John Dalt

5/09/11

Are you asking yourself, “Why are the markets up this morning?”  Commodities are higher, crude oil, gold and silver.  Did anybody read that COMEX is increasing the margin requirements on silver at close of business today?  Margin requirements have also been increased for crude oil, cotton, ethanol, corn and cocoa. Did anyone see the headlines over the weekend, “Greece may Drop the Euro.”

There is a game of chicken going on in eurozone land.  Never trust a debtor!  Words like apocalypse are murmured over the rumor that Greece may drop out of the European currency and begin printing their own money again.  The International Monetary Fund (IMF) and Eurozone experts are in Greece to check on the country’s compliance with commitments made to gain the first rescue.

Guess what?  They are not.  The austerity measures and tax increases are not having the desired effect.  The Greek economy is shrinking and tax revenues are going down.  According to USA Today, Greece will come up $44 billion short in tax receipts this year.

Greece received $160 billion in rescue loans last year.  These loans are good through 2013.  If the government could bring spending under control and increase revenues, they would be able to borrow money from investors in the "open market" by that time.

The so-called ‘bond vigilantes’ see a problem on the horizon.  Over a week ago we told you about a Citigroup analyst emailing his clients they should expect a “liability management exercise” in Greek debt.  Greece wanted him prosecuted for breaking a law...any law.

Today, European officials concede that Greece will need more money and an easing of their credit terms.  Easing credit terms means extending loans, and/or writing down the principal due on them.  This is exactly what the Citigroup analyst was conveying to his customers.

Standard & Poor’s cut Greece’s debt to junk status this morning.  Market rates for Greek debt stand at 15.62% for ten year bonds and 25% for two year notes.  A pretty good rate for the lender, a terrible rate for the borrower…one that does not anticipate return of all principal.

The eurozone requires unanimous approval for any financial stability action.  This is becoming more difficult with the strong showing of the “True Finns” party in Finland.  The True Finns are ‘Euro skeptics’ and want bailouts to stop.  Angela Merkel’s party has lost seats and local elections over Germany’s participation in previous bailouts.

The political climate for extending future bailouts is becoming very difficult.  The money spent so far in Greece should be considered lost.  The bailouts to Ireland and Portugal may go the same way.  Barring an economic recovery to lift these economies, the eurozone credit crisis appears to be on a death spiral.

We cannot see a scenario where this can play out without damaging investor confidence and equity valuations in Europe and worldwide.

The mailbag:
I try to follow U.S. politics, as they are more interesting than those we have in Canada.  We just had a national election and the results were known the same day we voted. We certainly do not have the intrigue of the Republican and Democrat machinations.  I try to understand what is going on but miss some of the nuance you point out.---subscriber P.S.

John’s reply:  I am not unbiased.  A good friend of mine is President Bush's cousin.  I read his book "Decision Points."  I didn't agree with everything President Bush did, but understood why he did it.  From Iraq to the prescription drug bill that some of my readers in the N.E. United States always point out.  By all accounts President Bush is a gentleman of impeccable courtesy and an engaging person.  I have more than a few stories of his kindness, but will stop here.  Thank you for subscribing to our services.  P.S.  Congratulations to Canada.  You have voted for fiscal restraint.  I only hope they do not disappoint you.  Please share your views with us from time to time.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top