Eurozone Whack-A-Mole
Research for Online Investors

by John Dalt

9/12/11

Interest rates on Greek debt are at crisis levels as bureaucrats play whack-a-mole with the eurozone monetary union.  One year yields are quoted at 98% and two-years at 55%.  Credit default swaps (CDS) pricing reflects a 91% chance of default in the next five years.

Greece owes close to $500 billion dollars and the government is taxing over 40% of GDP, but the government is running a current budget deficit of over $30 billion dollars.  This is an example of socialist policies we should learn from.  Where do you reach a point of taxing so much you get diminishing returns?

Greece’s GDP declined 8.1% in the first quarter.  Last quarter, their GDP continued to slide down 7.3%.  The Greek government is down to its last $10 billion dollars in foreign reserves, which they say is enough money to cover operations until October.

The days of taking “extraordinary measures” like the U.S. Treasury did this spring and summer are over.  There are no “cubby holes” of liquidity.  Past austerity measures have cut government salaries by 20%.  Where do they turn now?

China is rumored to be ready to buy debt from Greece and Italy.  If Greece avoids default, Italy is the next ugly stepchild to raise its head.  Italy is the world’s third largest sovereign debt borrower with $1.2 trillion dollars owed, seven times what Greece owes.  Italian debt is 120% of GDP.

Credit ratings are our gauge of the ability of a borrower to repay the loan.  For example, your personal FICO score tells a lender about your total indebtedness, past payment history, and ability to repay your loan.

Today, the credit ratings for sovereign debt are a fantasy.  Sure, governments have the ability to raise taxes so they should always be solvent.  The thinking goes that they can just raise taxes on the economy to cover whatever the payments are.  But we have seen Greece at a 40% tax to GDP ratio and not able to raise taxes to collect any more.  Creditors are waking up to the fact that Greece will never be able to repay its debts.

The best they can hope for is to continue making interest payments and rolling over old debt.  How far is Italy behind Greece?  Nobody believes Italy can pay back $1.2 dollars.  Their economy has been stagnating for the last ten years with total growth during that time of about one-half of one percent!

Why is today’s market in turmoil?  Read the above again.  We can rewrite this next month and change the names of the countries.  We will write this sometime in the future, and the U.S. will be featured.

Our oldest daughter was in New York over the weekend.  She walked around the Ground Zero services on Sunday.  Everyone who lost a family member wore a blue ribbon.  She relayed to me how emotional it was.  Everyone wore blue ribbons it seemed.  She talked to a little girl and her mother.  The little girl didn’t remember her dad.

In this photo, President Bush and Barack Obama silently prayed.  My daughter told me the security was very tight, and the streets were full of New Yorkers gathered to remember 911.  My wife and I were worried about her being in New York because of reports of a planned terrorist attack.  With Bush and Obama present for the remembrance ceremony, New York was probably a pretty safe place to be!

I watched the ceremony at the Pennsylvania crash site of Flight 93 on Saturday.  It was riveting and honored the sacrifice made consciously by the passengers.

Member states would be economically better off if they had never joined. European monetary union was generally mis-sold to the population of the Europe.--- Stephane Deo, Paul Donovan, and Larry Hatheway of Swiss banking giant UBS

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