Spain & Greece

SPAIN:

A bit old and the Spanish banking regulator has started to force banks to BEGIN to address the issue. However, the situation remains extremely serioussssss, guys.

Once again, WATCH OUT FOR SPAIN.

The new administration has inherited a can of worms from the previous Government. It will be forced to reduce GDP growth forecasts, whilst increasing expected budget deficits. Unemployment continues to rise – under 25’s now OVER 50% – yep that OVER 50%.

In Ireland, average home sale prices are some 50% less than their peak valuation – and that’s if you can find a buyer. Spain suggests it’s just 15% !!!!!!, in spite of the fact that it has a much, much larger unsold housing inventory, combined with rising unemployment.

GREECE:

Yesterday, Mr Junker, PM of Luxembourg and Head of the EcoFin (Euro Zone Finance Ministers) warned that discussions relating to PSI on Greek debt were “ultra difficult”. Mr Junker is notorious for having stated, in effect, “that it was OK for politicians to lie, if they needed to” !!!! – my words/summary of his actual statement. Mr Junker’s view was contradicted, shortly thereafter, by Mr Rehn, who said that he expected a deal  in respect of PSI imminently. Both these reports impacted the Euro, by the way.

The Greeks keep on promising. Don’t they understand the concept of UNDER PROMISE and OVER DELIVER.

Germany seems to be getting fed up with Greece and I get the impression that Germany (as is the case with other Euro Zone countries) would quite like Greece to exit the Euro. The key is to avoid contagion, the 1st target clearly being Portugal. I am reliably informed that Germany is sympathetic towards Portugal (together with Ireland, Italy – now that Berlusconi has gone – and, in addition, they understand the legacy left by the previous Spanish administration as well), who they believe have been trying, unlike Greece. In any event, the Euro Zone/ECB will have to stop any threat of contagion by defending Portugal, or else the game is up for the Euro Zone/Euro, as contagion effects spread like wildfire.

Look, I am not aware of the current state of negotiations between the private sector creditors and Greece re PSI. Clearly, the private sector creditors and the IMF want the ECB to participate (to the extent that they have bought Greek bonds at a discount). However, Germany and the ECB are opposed. Schaeuble rejected the idea of “official sector involvement” (being promoted by the IMF – Lagarde)  yesterday, though there is extreme pressure being exerted on the ECB/Germany to cave in. Furthermore, intriguingly, Mr Schaeuble stated when asked, that “he hoped” that  ALL 17 countries would remain within the Euro Zone by the year end – not a particularly ringing endorsement of Greece.

Mr Papademos, the acting Greek PM, has lost control. He is to call a meeting of the main political parties for either today or the weekend at the latest. The Euro Zone/Troika wants a commitment from ALL the Greek political parties that they will abide by the terms of any new fiscal programme agreed with the Troika – indeed they want a letter signed by all the parties confirming this. Even if they get such a commitment, we all know that Greece will not deliver.

I remain of the view that a hard default re Greece is inevitable. However, I also believe that after an initial sell off, markets will calm down and faster than most believe. A Greek default will hardly be a surprise after all, though I appreciate that the actual event will cause “serious concern”, if not more.

However, if Greece exits the Euro, more resources can be targeted to the other peripheral countries.

The recent 3 year ECB LTRO is a GAME CHANGER, as I keep banging on and the ECB and the Euro Zone can employ a number of other policies, which I have set out in previous notes.

Quite frankly, I believe that the German view (I’m almost certain that senior German politicians/officials share this view) that an exit of Greece from the Euro Zone is inevitable and (recently) beneficial, is right. Greece is a complete waste of time, effort and money.

I would like to STRESS that’s the above is a (potentially seriously dangerous) judgement call on my behalf and one  very few (if any) would agree with – indeed, I am aware that every report that I have read would disagree with my view in the strongest terms possible. As a result, please consider this matter carefully and consult others.

Best

Kiron