Greek Default Triggers Euro Weakness
Good day. Well, the ISDA people did determine that what Greece did last week — invoking the CACs (remember, collective action clauses) — meant that Greece was in default, so it triggered the credit default swaps (CDSs) to be executed. Now, I find this to be very interesting in that ISDA is a group of banks and financial firms, the same ones that wrote the CDS contracts. And you may remember me talking about the writers of these CDS contracts a few months ago.
A very large percentage of the writers are US-based financial institutions, but not all are US-based, so not only do the European financial institutions have to take losses on their current Greek holdings — as a part of the bond swap term — but now they have to figure out what kind of hit it will be for them insurance-wise.
The hit to the US-based institutions will be massive, but I do believe that they’ve been aware that this was going to happen for some time now, and that they have built up war chests, or let’s hope they did, anyway. We’ll know soon enough what kind of hit they took to earning, when they announce first-quarter earnings next month.
But besides all that, isn’t this sad? That a country has gotten so far out of whack with reality that they have been brought to their knees, begging other countries to help them? The thing that I still, to this day, can’t get my arms around is the size of Greece, just 2.4% of the eurozone’s GDP, and all the attention this has gotten. Let’s hope that on March 19, when all these insurance contracts (CDSs) get settled, and on March 20, when Greece will receive the next tranche of bailout money, that the dust settles on this for a while, because I’m really tired of talking about it, reading about it, watching news shows on it. I feel compelled to write about it myself.
I’m sure that the markets are now going to shift their focus to Portugal or Ireland, the other two countries that had also gotten out of whack with reality and had to be bailed out. I saw that my longtime friend John Mauldin wrote in his weekly letter this past Friday that “There will be contagion.” So according to John, the focus will shift, and we’ll have to play this out somewhere else very soon. UGH!
I don’t know why Greece is going through all this. They should just take their bat and ball and go home! Leave the euro (EUR), go back to the drachma, default and inflate and start over again. It will take years, but what’s the trade-off? If they stick to the euro and their current debt, they are going to be at 120% of GDP in 10 years! And they call 120% debt to GDP “sustainable”? We’ve all become comfortably numb with these numbers, folks.
So what affect did this news on Friday have on the markets? Well, it sure turned gold around! Gold, which was down $17 when the announcement was made, quickly turned that to a positive figure! And that makes abundant sense to me. Why wouldn’t people rush to the uncertainty hedge? Gold is off about $7 this morning, so profit-taking looks like the order of the day so far.
Longtime readers know of my respect for well-known analyst David Rosenberg. He’s a lot like me in that he tells it like it is and doesn’t pull punches. In a recent article, Rosenberg said that the “best currency to own right now is gold.”
The euro lost some ground with the announcement on Friday by ISDA, but the selling wasn’t of the “get the heck out of Dodge” stuff. So the euro remains above 1.31. The eurozone leaders have bent over backward for Greece, and the eurozone leaders have stretched their necks on the political guillotine. And to me, it doesn’t do any good for the euro to continue to have Greece hanging over it like the Sword of Damocles.
But here we are in the US watching this going on in Greece, and most Americans say, “Well, that can’t happen here.” So they don’t care that the US debt to GDP just hit 100% and will continue to grow from here. They don’t care that the dollar has been weak for over 10 years now. And they don’t care that in the grandkids’ time, the US will be doing their version of Greece, and not the one with Olivia Newton-John and John Travolta!
We may not be paying much attention to all this going on in the U.S with debt (not you, dear Pfennig reader!), but other countries are paying attention. I’ve told you for over a year now about China’s plans to remove the dollar as the reserve currency of the world. Well, this past week, the Chinese announced yet another plan to gain a wider distribution for their renminbi (CNY) currency. The Chinese announced that they would begin to make loans to the BRICS countries (remember, the “S” was added to BRIC when South Africa was added to the mix). These loans will be in renminbi, so now the countries of Brazil, Russia, India and South Africa will have renminbi as a currency in their reserves. It’s happening, folks. First the Chinese became the world’s financier, and then they took dollars out of terms of trade. Now they’re gaining a wide distribution of their currency.
But China isn’t the only country that is backing away from the dollar. It was reported this weekend that the Persian Gulf nations plan to have a common currency by 2015. Now, what they peg the common currency to is still a question, but my guess is that they will choose a basket of currencies, and not a strict link to the dollar.
And I already told you about Iran and India trading oil for gold, it’s happening all over the world, folks.
And when we no longer have the reserve currency of the world, things will be quite different around here. We won’t be able to get loans cheaper, or commodities, so things get more expensive than they already are because of the loss of purchasing power as a result of the weak dollar, and the list goes on and on. It won’t be pretty, but the good news is that this won’t happen overnight — in fact, I’m thinking by the end of the decade. The other good news is that if there was political will, this process could all be stopped.
The currencies are weaker this morning, as the US Jobs Jamboree for February showed job creation of 227,000, with the unemployment rate remaining at 8.3%. That really pushed the “go” button for the dollar on Friday. But here’s Chuck once again popping the bubble on the champagne that was flowing at the Jobs Jamboree: 91,000 jobs were added to the report by the BLS (Bureau of Labor Statistics) in their birth/ model (I’ve explained that one many times in the past).
The US trade balance for January was an eye-popping $52.6 billion, $2.2 billion more than December’s revised $50.4 billion deficit. I talked last week about the US consumer credit expansion, and now this. Of course, a large piece of this is the high price of oil. Still, the US consumer is spending again. Oh, and this was the largest monthly trade deficit since October 2008.
Today, we’ll see the latest monthly budget statement, which in recent years is always a deficit, and as I told you Friday, it is expected to print at a $229 billion deficit. OUCH!
The Fed Reserve meets this week. Nothing will change with regard to rates or their outlook, and I doubt that Big Ben Bernanke says a word about the Fed’s latest idea that’s getting kicked around, and that is to print money to buy bonds, but sterilize the printing of the money by then writing loans to themselves. Sound fuzzy? It is, and that’s why I don’t think Big Ben will talk about that today.
The Australian dollar (AUD) is weaker this morning in reaction to the news this past weekend from China. The Chinese trade deficit in February was four times the previous largest deficit, printing at $31.5 billion! And after seeing that the Chinese weakened the daily fixing of the renminbi by the most since August 2010.
But again, these knee-jerk reactions to Chinese data aren’t necessary, for this isn’t the end of the world for the Chinese. It’s simply a moderation of their previous off-the-wall and through-the-roof economy.
The Canadian dollar/loonie is stronger this morning, by a small bit, on news that they expect to have a free trade agreement with Europe completed by the end of this year. The agreement for Canada sure looks good, as it will create 80,000 new jobs and add C$12 billion to the economy! When Canada finalizes this agreement with Europe, they will become the only country in the world that has deals with both the US and Europe, the two largest economies in the world!
We will see central bank meetings in the US, Switzerland and Japan this week all will be nonevents. And retail sales for February here in the US tomorrow. With all the expansion of credit, and the trade deficit soaring, I would have to think the retail sales number will be good. The BHI (Butler Household Index) tells me that the number will be really good!
From The Washington Post:
“US families increasingly are talking to lawyers about filing for bankruptcy because they are under financial pressure from student loans, according to a survey by the National Association of Consumer Bankruptcy Attorneys. ‘This could very well be the next debt bomb for the US economy,’ said association chief William Brewer. Brewer went on to say that ‘Obviously, in the short term, student loan defaults are not going to have the same ripple effect through the economy as the mortgage defaults did. My concern is that the long-term effect may be even graver, because people who need student loans to get a higher education will be unwilling to run the risk of taking out a student loan.”
The amount of student borrowing skyrocketed from $100 billion in 2010 to $867 billion last year, which happens to be more than the $704 billion in outstanding credit card debt, $85 billion is currently in arrears, with no payments being made on the balance. So it’s already happening!
And yes, I’m sure some people are going think I’ve lost it, talking about student loan defaults, just like they thought I was crazy when in 2004 when I talked about a housing bubble the first time.
To recap: The ISDA group determined that Greece’s invoking of CACs created a credit event, which, in other words, is a default that will require that credit default swaps get executed. All this settles on March 19, so we’ll soon see who had to book losses from the CDS exposure. The euro sold off on Friday, but I think it had more to do with the strong Jobs Jamboree in the US than the ISDA decision. John Mauldin believes there will be contagion, which means this is going to go on and on I’m hoping that Greece just throws in the towel and calls it quits.