• 3 hours Inflation Wipes Out Wage Growth
  • 1 day Turks Flock To Safe Haven Assets As Lira Plummets
  • 2 days Did North Korean Hackers Just Steal $13M From Global ATMs?
  • 2 days Asian Tech Stocks Rebound After A Tough Week
  • 2 days Switzerland Bans New Audi, Mercedes, Porsche Imports
  • 2 days Sealing Off The North Korea Smuggling Loophole
  • 2 days This Tech Giant Is Pushing For Blockchain Adoption
  • 2 days Venezuela’s Gold Reserves Are Reaching Critical Levels
  • 3 days Brexit Woes Weigh On The British Pound
  • 3 days Forget Turkey, This Is The Biggest Threat To European Finance
  • 3 days There’s No Hiding From Google
  • 3 days Turkish Lira Bounces Back After Qatar Bailout Pledge
  • 3 days What Happens If Tesla Goes Private?
  • 3 days China's Most Powerful Weapon In The Trade War
  • 3 days Can The S&P 500 Shake Off Negative Sentiment?
  • 4 days Standards Go Out The Window As Employers Struggle To Fill Jobs
  • 4 days The Two Trillion Dollar Markets Amazon Hasn’t Conquered
  • 4 days Digital Supermodels Outperform Humans
  • 4 days France Could Lose Billions In EU Trade Route Redirection
  • 4 days Beer Giants Are Striking Out With Millennials
Time To Buy A Lada? Russian Auto Sales Are Booming

Time To Buy A Lada? Russian Auto Sales Are Booming

Russia’s flagship carmaker was once…

U.S.-Turkey Tensions Take A Dangerous Turn

U.S.-Turkey Tensions Take A Dangerous Turn

U.S.-Turkey tensions have reached a…

Axel Merk

Axel Merk

Merk Funds

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority…

Contact Author

  1. Home
  2. Markets
  3. Other

Life/Euro Beyond Greece - Crystal Clear

Focus at today's European Central Bank (ECB) press conference was on the continued tremors rattling Greece. A couple of key points:

  • The ECB refinancing collateral framework will introduce a gradual scale of "haircuts" starting 1/1/2011. We recently called for such a framework to provide an ECB mechanism to reward fiscal discipline. The framework continues to rely on ratings by rating agencies (our proposal called for haircuts based on a scoring system based on adherence to the stability and growth pact).
  • ECB head Trichet clarified European Monetary Union rules that Greece shall not receive aid below market rates does not refer to Greece's market rates, but to the refinancing costs of those countries providing aid.
  • There were many questions on what would trigger a rescue package. Trichet was very clear that it is up to Greece's judgment to ask for help. It's a question for political leaders, not for the ECB.

Many questions focused on the perceived confusion on why credit default swaps (CDS) for Greece are high and climbing; and why Greece's costs of borrowing continues to be much higher (with spreads widening) than that of other eurozone member countries.

Using a term that was used extensively during the press conference, to us, the situation is "crystal clear". It seems to us that many market participants are not aware that:

  • Should aid be provided to Greece and the IMF be involved, loans granted by the IMF tend to be senior to outstanding government debt. It is absolutely justified by the market to demand a higher premium on outstanding debt given the prospect of IMF involvement.
  • Further, while it is not known at this stage, IMF involvement typically includes a) austerity measures, b) currency revaluation and c) debt restructuring. Austerity measures have been announced and may or may not be expanded; a currency revaluation is not an option for Greece; but debt restructuring is. With IMF involvement, there's a high probability that existing debt may be restructured. Policy makers don't like to call debt restructuring a default, but it is a partial default that may trigger payment under CDS rules. As a result, it is perfectly appropriate for credit default swaps to rise.

Towards the end of the press conference, Trichet said the market is always right. We agree with Trichet - the pricing of Greek bonds and CDS is rational.

However, the market does need to learn that Greece comprises just over 2% of the eurozone GDP. As such, at some point, we believe, the market will need to get used to Greece's woes. There's life beyond Greece; as a result, we are positive on the long-term outlook of the euro.

 

Back to homepage

Leave a comment

Leave a comment