Another night of tension in the Eurozone. The Euro continues to head south and once again markets were down. The probability of a Greek default grew once again and doesn’t have far to go to reach 100 percent:
Greece’s chance of default in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to reassure international investors that his country can survive the euro-region crisis.
“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”
It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance Sept. 9, according to CMA.
Overnight the 1 yr Greek bond yield hit 117.2% with the 2yr at 69.55% . The “softening up” of the world for a Greek default continues with even more announcements that an orderly default by Greece is a possibility and something Germany would support if necessary:
Officials from German Chancellor Angela Merkel’s coalition sent a tough message to Greece on Monday that it might have to leave the euro zone if it fails to meet conditions for its bailout package.
A top Merkel aide signalled the chancellor’s support for the leaders of her two centre-right coalition partners, after they spoke publicly on the option of Greece departing from the currency bloc or carrying out an orderly bankruptcy.
Economy Minister Philipp Roesler, who leads junior coalition party the Free Democrats said in an article for daily Die Welt that to stabilise the euro there could “no longer be any taboos.”
“That includes, if necessary, an orderly bankruptcy of Greece, if the necessary instruments are available,” Roesler, who is also deputy chancellor, added.
Merkel spokesman Steffen Seibert said this was also the government’s view.
One would hope there is a resolution shortly because a new bailout is the only way Greece is going to fend of default in the short term and they are fast running out of money:
Debt-laden Greece has cash to operate until next month, the country’s deputy finance minister said on Monday, highlighting the country’s need to qualify for the next tranche out of its ongoing EU/IMF bailout.
Filippos Sachinidis’s statements confirm previous comments by Greek officials, made on condition of anonymity, that the country had cash for only a few more weeks.
“We have definitely maneuvering space within October,” Sachinidis said in an interview on television channel Mega, responding to questions how much longer the government will be able to pay wages and pensions.
“We are trying to make sure the state can continue to operate without problems,” he added.
With all the focus on Greece at the moment you would have been forgiven for forgetting that it is just a small piece in a much broader macroeconomic problem that no one is actually addressing. Luckily the ratings agencies are still around to remind everyone that Greece is just one of the many problems facing Europe:
Moody’s has warned that Spain’s regions will not meet deficit-cutting targets despite asset sales and new government measures to boost home sales. Most of the powerful regions missed deficit targets for the first half of 2011, latest figures showed last week.
The overall budget deficit for the 17 semi-autonomous regions amounted to 1.2 per cent of gross domestic product in six months – already nearly at the full-year target of 1.3 per cent.
‘Such poor results at the year’s halfway mark reflect the regional governments’ inability to rein in spending aggressively enough to address their structural deficits,’ Moody’s Investors Service said in a report on Monday.
This follows on from recent announcements by Portugal that their economy is also slowing with more austerity to come:
Portugal’s economic activity contracted further in the second quarter of the year when compared to the same period in 2010, while stabilising in the month-on-month comparison, according to data released by the National Institute of Statistics (INE).
INE said the gross domestic product fell 0.9% on the year and was flat on the month. In the first quarter, Portugal’s economy contracted 0.5% from the year before and 0.6% from the fourth quarter in 2010, which placed it in a technical recession.
The numbers confirm a flash estimate published in mid-August, where it was already evident that a retreat in internal demand and investment would hamper Portugal’s economy. Internal demand fell 5.2% from a year ago and investment was 12.5% lower.
Portugal is undergoing an adjustment period related to the €78bn bailout loan it received from the European Union and the International Monetary Fund, which includes measures that are affecting Portuguese consumers and companies and dragging the country’s economic production lower.
However, exports are slightly offsetting the negative performance, rising 8.4% in the second quarter from the same period a year ago, the same rate registered in the previous three months.
The Ministry of Finance has said the country’s economy will contract 2.3% this year
French banks remain under pressure with the impending downgrade by rating agencies. Last night we saw announcements that SocGen is selling assets:
Societe Generale said it would cut costs and sell assets to free up 4 billion euros in fresh capital on Monday, although the surprise move failed to stem a sell-off in French bank shares, driven by fears of a Greek debt default.
A rapid decline in French bank stock prices since the beginning of the summer has led to speculation that the French state may have to intervene and recapitalize its banks, in the same way as the British and other governments were forced to during the first wave of the financial crisis.
The status of the European banking sector is not being helped by the IMF. Ms Lagarde previously stated that European banks need re-capitalisation however she is now adding to the confusion by disputing the numbers that her own agency has produced in regards to the level of re-capitalisation actually required:
IMF chief Christine Lagarde said that reports of a draft IMF document showing a $273.2 billlion shortfall in European banks’ capital were misleading and the lender was still finalizing its study.
“There has been misreporting about the 200 billion euros, this number is tentative,” Lagarde told a news conference after G7 and G8 finance talks in the southern French city of Marseille.
“This is not a stress test that the IMF conducts nor is it the global capital need for European banking institutions, that it is not, and we are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September.”
All up, it was yet another messy 24 hours for Europe. There was some short-lived good news when yet another rumour about China buying European bonds circulated the markets giving them a bit of a kick up. Unfortunately that rumour didn’t last long.