Countdown for Greece
Research for Online Investors

6/13/12

We are into the countdown to the Greek vote on Sunday.  Interest rates moved higher for Spain after the country agreed to a $125 billion bailout for the country’s banks.  Yield on Spanish 10-year bonds hit 6.83% in the secondary market yesterday.  Italian debt wasn’t far behind as their debt value fell to yield 6.15% on 10-year’s.  Italy sold one-year notes at a 3.972% interest rate.  This was a much higher rate, sold with a lower coverage ratio.

There was an unconfirmed rumor yesterday the ECB entered the market to “buy down” the rate on Spanish bonds.  The ECB has not used its “Securities Market Program” to buy sovereign debt for several weeks.  Fitch downgraded 18 Spanish banks citing their exposure to bad real estate loans.

The market is reacting to the additional debt Spain is taking on in the bailout package.  It is unclear at this point if the bailout funds will be senior to other debt held by private parties.  This uncertainty has alerted the bond vigilantes to increased risk in Spanish debt.

A banking analyst with Daiwa Securities told CNN “It now goes without saying that the challenges faced by the sovereign and the banks in Spain are intrinsically linked.”  Another uncertainty is how the money will be applied to the Spanish banks.  Will it be a loan or will the Spanish government take equity in each bank?  Taking equity (like the U.S. and AIG) increases the strength of the bank’s balance sheet and allows them to access the ECB window.  More loans simply leave them with more liabilities.

If the bailout money comes from the European Stability Mechanism (ESM) it would be classified at preferred debt and other private creditors would be subordinate to the bailout funds.  Any funds through the EFSF have to be approved by all governments supplying bailout funds.  The eurozone is following a two-track approach.  They are working to get approval from governments to use the EFSF before the ESM is available in July.

The Dutch parliament is looking favorably on the Spanish bank bailout according to the Guardian.  They quote the Labour MP, Ronald Plasterk, telling colleagues “I want to see pain.  It cannot be the case that banks are restructured and people walk out whistling.  I want shareholders to bleed.  I want a ban on bonuses.”  While politicians may be favorable, this demonstrates the problem with the EFSF.  Each country may attach conditions when approving their country’s commitment.

The EU’s Competition Commissioner, Joaquin Almunia, said three Spanish banks may be liquidated by the government rather than be recapitalized.  Cyprus Popular Bank appears to be in trouble.  They had to write down the Greek loans on their books in the deal cut with private creditors earlier this spring.  The bank needs $2.25 billion by the end of the month.  The Cyprus government says it needs as much as $5 billion to recapitalize the county’s banks.

Cyprus hopes to raise the money privately rather than request funds through the European Commission.

Greece is in the heat of an election battle on whether the government will honor commitments made to receive the $170 billion dollars earlier this spring and private creditor write-downs.  A source in Brussels told Market News International that Greece will need adjustments to the bailout program.  Bureaucrats are working on a two year extension for Greece to bring their structural deficit down to 3.0% by 2016.  This would also involve additional bailout monies being made available to cover deficits during this extension.

Greek voters are described as now being controlled by fear of leaving the eurozone rather than anger at the austerity measures imposed under the bailouts from the eurozone.  SYRIZA is seeking to reassure voters that Greece will be fine even if bailout funding is withdrawn. SYRIZA garnered 17% of the vote in May but it appears the New Democracy (conservative) party is gaining the upper hand going into Sunday.  New Democracy supports the bailout but has committed to seek renegotiations on some of the terms.

Citizens have pulled $5 billion dollars out of Greek banks in the last two weeks for a total of $30 billion withdrawn since the last election.  George Zanias is the current Greek Finance Minister.  He told the Guardian the country has enough money to last until July 15, and then they will not be able to pay their bills.

At this point, we suggest you organize your portfolio to be “flat” going into the weekend.  That is to have shorts and longs balanced as much as possible or have covered calls sold against positions.  Depending on the Greek election on Sunday, the market will be up or down…and the move may be dramatic.

The mailbag:
I think you had three too many zero’s for trillion.---subscriber D.M.

John’s reply:  You are right.  I had it right until putting in the decimal for the $4.136 trillion.  Thanks for the heads-up.  It has been corrected.

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