Euro Hot Water
Research for Online Investors

by John Dalt

9/15/11

The situation in Europe is starting to boil.  Will the Frog jump out, or die in the hot water?  For the last eighteen months we have been covering the eurozone credit mess.  Lately, it seems that is all we write about.  Here we go again.  The market is acting like nothing is wrong.  Don’t buy into it.  There is just an absence of news headlines to scare the be-jesus out of traders and light up the computer trading programs.

Turbo Tim Geithner is going to Poland this weekend to a meeting of eurozone finance officials.  What would the U.S. suggest to eurozone finance ministers?  Print money.  If a little won’t do the trick, print more money.  Our Treasury Secretary is going to suggest they apply leverage to the European Financial Stability Fund (EFSF).

The fire is not big enough, so he wants them to add some gasoline.  Reuters quoted a eurozone official saying, “Geithner will probably insist on the importance of leverage to have more funds to ring fence the big Europeans, Italy and Spain, and to find a solution for Greece.”  Another unnamed eurozone minister said, “One of the difficulties is that leverage may be seen as a potential liability.”  And I thought British comedians were masters of understatement!

The Guardian described the eurozone efforts to save Greece from bankruptcy as “descended into confusion.”  The reason Geithner wants the finance ministers to lever the approved EFSF funds is because additional funds must be approved unanimously by all 17 eurozone member countries. That is not going to happen in time to save Greece.  They will run out of money next month.

Austria’s parliament has delayed a vote on the proposal.  Slovakia’s parliamentary speaker, Richard Sulik, says he will work to thwart the plan, believing that Greece should be allowed to go bankrupt.  Sulik believes the bailout fund is a bigger threat to the euro than Greece.  He told an Austrian radio station’s audience, “It has often happened that a city within a country goes bankrupt, and that does not have consequences for the currency. We must let Greece go into bankruptcy.  The rescue plan tries to overcome the debt crisis with new debt. We are saying that this is equally a threat to the euro.”

Mark Rutte, the Dutch prime minister, formally proposed rules to expel countries from the eurozone if they do not follow agreed upon fiscal constraints.  He said “…they have taken too long and have not yet been fully delivered.”

Finland wants collateral for any loans they make to Greece.  When Greece agreed to this, other eurozone countries demanding collateral on their loans.  Does this sound like a settled issue?

Moody’s downgraded French banks Credit Agricole and Societe Generale and kept BNP Paribas on review for a downgrade on Tuesday.  The problem is not in France; these French banks have too much exposure to Greek, Italian and Spanish debt.

BNP Paribas has already written down their Greek holdings 21%.  This is optimistic; credit default swaps (CDS) estimate a 60% loss on existing Greek debt.  Yesterday, one-year Greek notes were yielding 130%!

In other words, the current market for a $1,000,000 one-year Greek note paying 1% is $439,130.43  Sorry, but I am not in the market.

The market rallied on Monday’s rumor that China was negotiating to buy Italian debt.  I questioned the timing of this “rumor” as it happened in the middle of the night in China, but just in time to turn the U.S. market around.  It turns out there was some truth to the rumor.  According to an unnamed Italian official, meetings took place last week, and the Chinese “are interested in buying real stuff…this is completely different from their approach in the U.S. which was to invest in treasuries.”

China Strings on Eurozone for Sovereign Debt Purchases

China has a different attitude on deploying their money.  They use their foreign reserve investments to further their goals.  China’s premier Wen Jiabao said “"European countries are facing sovereign debt problems and we've expressed our willingness to give a helping hand many times. We will continue to expand our investment there.  Based on WTO rules, China's full market economy status will be recognized by 2016. If EU nations can demonstrate their sincerity several years earlier, it would be the way a friend treats a friend."

What does that mean?  When the eurozone grants China full WTO “market economy” status…China will start investing in sovereign debt from eurozone countries.  They are also interested in buying Italian and Greek government assets that must be sold as part of the “privatization” agreements with the ECB and IMF.

Of course all parties say there is no linkage whatsoever, but a European Commission spokeswoman said commission officials were working “intensively” on the market economy negotiations.

The eurozone-China trade deficit hit $120 billion last year.  The eurozone had 55 anti-dumping measures against China as of June 2011.  If China is granted “market economy” status these anti-dumping tariffs would most likely end and any new market defenses against Chinese imports would be much more difficult to enact.

How do you spell bribery?

Quote:
It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.--- Deutsche Bank CEO Josef Ackerman

Mailbag:
Maybe the PPT (Plunge Protection team) has been consistently at work these last few days to disguise how bad things really really are!—subscriber T.M.

John’s reply: Rumors of rescues now qualify for market enthusiasm!  A few large trades placed at the correct time can change the market.

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.

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