David McWilliams – Greece To Default This Week

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Irish economist David McWilliams has indicated that he expects Greece to more than likely default this week.

It looks like Greece will be kicked out of the eurozone – perhaps as early as this week. Indeed, it is more likely, for the sake of optics, that the Greeks will choose to leave at some stage. If it doesn’t happen this week because there is a deal stitched together, it is likely to happen when the next funding crisis emerges.

Ultimately, the world knows that austerity isn’t working in Greece and is clearly making things worse.

Half of Greek men under the age of 30 are unemployed. The budget deficit is still 10 per cent of GDP, as is the current account deficit. This means that Greece has to borrow 10 per cent of its total income just to pay for imports. The banking system is bust and there is no prospect of recovery. And yet the EU advocates ‘more of the same’ in terms of austerity policy.

As we hear from EU leaders weekly, that a Greek default will not be a huge problem because banks are well capitalised due to LTRO etc, McWilliams sees otherwise. He believes the knock on effect is being spun in much the same way as was spun in Ireland when the property market was about to crash.

If the Greeks leave the euro, then what will happen? We will see a massive bank run in all of peripheral Europe because, if this can happen in Greece, it can happen anywhere.

That is the nature of a crisis. It is never controlled. The world moves quickly and the paradigm shifts. Remember the soft landing spoofers in Ireland? When property started falling first, their story was, initially, that ‘this is a buying opportunity’.

Then the falls continued and the story was ‘it will only fall in Roscommon and Leitrim’. As prices fell, the story changed to ‘prime property will hold its value’ and then, when prime property collapsed, it changed again. That’s what happens – once a crisis starts, all bets are off.

Remember, this crisis was caused by over-lending as well as over-borrowing.

Lets take a look at the change in attitude to Greece by the EU leaders and the real reason for the LTRO.

The shift in the EU attitude towards Greece – if they don’t ‘shape up’, then Europe will not pay up again – is 100 per cent related to the shift at the ECB.

The ECB is operating a massive operation of injecting liquidity into the banking system, and this could be a central factor in the Greek euro exit. Up to now, the big fear was that, if Greece went, it would prompt yet another credit crisis in Europe. This would cause bank failures and these bank failures would beget yet more economic chaos. This has all changed now.

The ECB will, by the end of the month, have injected €1 trillion of cheap money into Europe’s banks by this new operation, whereby it lends to banks for three years. I can’t stress enough how important this is. It is a giant, monumental ‘cash for trash’ scheme, which is giving banks real cash for brutal collateral at 1 per cent.

This is Europe’s answer to quantitative easing, and it means that, whatever the European banks need, they will get.

There are many ramifications of this which we will come back to in later articles. However, for this week, let us satisfy ourselves that this operation makes the Germans feel that a Greek euro exit could be managed. Why else do you think the Dutch EU Commissioner stated last Tuesday that the eurozone could handle a Greek exit from the currency?

Make no mistake, the elite in Europe are preparing for a Greek exit. They feel they have now enough liquidity in the banking system to handle the shock because, if the Greek exit causes losses in the banks holding Greek bonds, the ECB will at least give them the liquidity to handle the short-term crisis.

Obviously they will take a capital hit, but – as far as the politicians are concerned – this is tomorrow’s worry. We could be in for a huge week.


Moodys Downgrades Most Of Europe

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Moodys announced a large downgrade of European countries including France and the UK. The following got hit.

– Austria: outlook on Aaa rating changed to negative

– France: outlook on Aaa rating changed to negative

– Italy: downgraded to A3 from A2, negative outlook

– Malta: downgraded to A3 from A2, negative outlook

– Portugal: downgraded to Ba3 from Ba2, negative outlook

– Slovakia: downgraded to A2 from A1, negative outlook

– Slovenia: downgraded to A2 from A1, negative outlook

– Spain: downgraded to A3 from A1, negative outlook

– United Kingdom: outlook on Aaa rating changed to negative

And the main reasons why

  • The uncertainty over (i) the euro area’s prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.
  • Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.
  • The impact that Moody’s believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

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