Farrell: Greece's Risky Business
Chief Investment Officer, Soleil Securities
Evidently an Air Force can call in sick.
The Greek Air Force had hundreds of pilots do just that yesterday. Reuters and Bloomberg news both reported the news and added that Greek Defense Minister Evangelos Venizelos was "profoundly disappointed" by the pilots decision. The public transportation workers in Athens also started a work stoppage on Tuesday raising market fears that further austerity measures won't be tolerated by the populace. Germany has demanded a longer term austerity program before it will think of sending money to bail the country out of its fiscal woes. German Chancellor, Angela Merkel, has "Said for weeks that Greece must do its homework first. We're not doing a rescue because Greece needs help. We're doing it because we're interested in the euro's stability. We can't stand idly by when our currency comes under attack." So if abandoning a rescue of Greece would, in her opinion, be good for the euro then Greece is thrown overboard.
This deal isn't done yet.
Five year credit default swaps on Greek debt rose to 833 basis points (it would cost 833,000 Euros a year for five years to insure 10 million face value of Greek bonds against default). That is a record high. Just yesterday they were closer to 700 basis points. Only Venezuela and Argentina are at higher spreads among the 50 largest nations quoted on a regular basis.
Also at a record high is the spread between yields on German bonds and Greek bonds, rising the other day to 669 basis points.
If German debt was at 3% (roughly where it is) then a spread of 669 would put Greek debt at 9.69%.
The market is highly skeptical about a rescue which was only emphasized by Standard and Poors downgrading the rating on Greece to "junk."
Wow guys, way to be timely.
Not to be left totally behind, Portugal's credit default swaps hit a new record high of 316 basis points. One of Portugal's issues is they are export dependent, says an article in Tuesday's Wall Street Journal. If that country is to reduce its deficit from 9.4% of GDP in 2009 to 3% by 2013 they need an export pickup. But 75% of its exports go to the Euro zone with 25% to Spain. Growth in these markets, says the Journal, "will likely be sluggish." Staying on top of the situation Standard and Poors lowered the rating on Portugal to A- from A+. Moreover, Spain has to sell a total of 150 billion Euros in debt this year and has only done about 25% of that amount, the lowest percentage of any euro zone country.
Other credit default swaps of note are Goldman Sachs which is at 166 basis points.
That's up 75 basis points since the SEC lawsuit was registered.
JP Morgan's swaps, one of the strongest of the banks with a "fortress like balance sheet", trade at 88 basis points. Morgan Stanley's are at 182, Merrill 191, Bank of America 160, and Citi at 185.
The US Treasury is in the midst of selling another record amount of weekly debt. Monday's auction of five year TIPS (Treasury Inflation Protected Bonds) did not go as well as hoped. Only 23% went to "indirect" buyers. Indirect is a proxy for foreign central banks and other foreign buyers. Lately, more like 39% has gone indirect on TIPS auctions. And Tuesday's auction of 2 year bonds were well covered at 3 bonds bid for every one offered, but the indirect was 31% versus a 10 auction average of 45%. It's too early to draw conclusions but evidence is emerging that foreigners are starting to avoid our debt.
The US Treasury has gotten away for quite some time with selling short term debt to finance the government. The average maturity of US debt outstanding is just under five years. Greece's average maturity is just over five years, and the UK's is fourteen years. The Treasury paid $383 billion in interest on its debt in fiscal 2009 which ended in September. That was down from $451 billion the year before according to Treasury. It is 3.2% of GDP, down from 4.6% a decade earlier. (As an aside, one of the fears regarding Greece is that before long 10% of its GDP will be required to service its debt.) The obvious danger for the US beyond the large financing need to fund the deficits, is the risk interest rates go up. They will someday and the results will be painful for a mountain of debt coming due in rapid sequence.
I'll be traveling again and will miss a note usually written Wednesday for Thursday. The Fed will have made its announcement following its two day meeting. I expect no change in the language regarding interest rates. The Fed will say they will keep rates exceptionally low for an extended period. There is a school of thought espoused by some very smart people that the Fed will change the language to prepare us for a hike in interest rates. The thesis is that since retail sales, "core" capital goods orders, and housing starts are advancing the Fed should act pre-emptively and raise rates. The counter would be that all of the above is true but these are advancing but off of very low bases. There are still low rates of resource utilization, subdued inflation trends (the core PPI was up only .9% year over year) , and there are very stable inflation expectations. The Fed might change its statement regarding growth, but not regarding rates.
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.