Charade Continues
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8/14/12

Germany reported 0.3% growth in GDP for the second quarter this morning.  This helped pull the eurozone’s loss to only 0.2%, which was better than expected.  This small lift was not enough to stop the speculation, is the eurozone in recession?

A recession is defined as two consecutive quarters of shrinking GDP.  GDP for the first quarter in the eurozone was a zero.  Technically, not a negative number but not positive either.

The New York Times calls it a shift ‘from stagnation to decline.’  France’s economy had its third quarter without growth.  Germany’s Federal Statistical Office said business investment fell during the quarter that saw exports and consumer spending increase.

Spain’s GDP lost 0.4% and Italy’s fell 0.7%.  Italy is the eurozone’s third largest economy in the eurozone behind Germany and France.  Spain is the fourth largest.  Nicholas Spiro, an investment manager in London told Reuters “It shows just how dire things have become in the single currency area when the markets take comfort from figures that show the French and German economies are pretty much flat on their backs.”

The Greek economy shrank 6.2% in the second quarter.  Not to be slowed down by a little bad economic news (and the fact they have not met austerity measures required to receive more emergency bailout money) Greece sold a record amount of short term debt this morning.

Greece has a problem.  The troika representatives left last week without any endorsement of government actions to close the gap between promises and actions.  They are running out of money.

Greece cannot expect another tranche of bailout funds until a report recommends disbursement.  The representatives are going to visit Greece again at the beginning of September.  The eurozone finance ministers are not meeting again until September.

What is a country to do?  The answer lies with Mario Draghi.  The European Central Bank (ECB) has cut off Greek banks from borrowing money directly.  The ECB still makes funds available to the Greek Central Bank under the Emergency Liquidity Assistance (ELA) plan.

Greek banks buy Greek bonds, and then pledge them to the Greek Central Bank for cash.  The Greek Central Bank then pledges the Greek bonds to the ECB for “Emergency” loans.  The ECB now owns them, even though Greek banks are barred from doing business with the ECB.  Germany, Finland and the Netherlands just endorsed the ECB taking Greek bonds as collateral that are worthless.

If this is confusing to you, forget-about-it.  You didn’t see ‘nothin.’  Greece sold $5 billion dollars in 13-week notes yielding 4.43%  The coverage ratio was 1.36  This means there were few bidders for the paper.  We would describe it as the gun to the head of the bankers.

‘Buy these bonds, or we will organize a protest at your headquarters with some fire bombs!’  Nobody said it, but that is the implication.  Better to give the country more money than watch it circle the drain and fall apart in civil unrest.  The Wall Street Journal has the details Greece Completes Largest Debt Sale in Two Years.

The end result of Greece’s debt auction is to further weaken their banking system.  If Greece doesn’t qualify for more bailout funding, the government cannot pay back the bonds.  The banks will go bankrupt.  Eventually it reaches the ECB that has taken the dodgy debt as collateral.  The politicians will blame the bankers.  Sound familiar?

The market is trying to rally this morning on acceptable GDP numbers out of the eurozone and stalling off financial turmoil in Greece.

The charade continues.

Mailbag:
Thinking about you, friend. We cried for three days when we took our daughter to college. I thought I was Mr. Cool. No way. But there will be future moments to love as well. Hang in there.---SwingTrader subscriber J.S.

John’s reply:  Thanks to everyone for the nice emails like J.S.’s above.  I sent our girls a text this morning we hoped they were having a good day and we missed them.  There was no one to wake Mom and I up last night when we fell asleep on the couch!

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