"The Titanic is SINKING!" ledes John Mauldin's latest newsletter. Greek bonds shot to super-junk levels at 18%. The Euro has continued to freefall, now below $1.32. It was above $1.50 just last Dec. Breakfast with Dave notes that the cost of the bailout for Greece has risen to €90B, and with Portugal (€40B) and Spain (€350B) next, the cost has become an astounding €480B! The IMF can only cobble together €200B.
John summarizes why the Euro-tanic is sinking:
In order to get financing, Greece must willingly put itself into a multi-year depression. And borrowing more money when it cannot afford to pay back what it has will not solve the problem. 61% of Greeks now favor leaving the euro. How has Greece responded? By banning short selling on its stock market for the next two months. That should make things better. Greeks are responding by rioting and going on strike. But you truly know when a country is dysfunctional when its AIR FORCE goes on strike. Yesterday Reuters reported that hundreds of Greek pilots called in sick in protest. The response from government? The Minister of Defense said he was "profoundly disappointed." Now that had to make the pilots feel bad.
The S&P cut Greece's bond rating to junk status (BB+), and cut Portugal two steps (from A+ to A-). Spain is the next PIIGS to step into poo. An inadvertent leak shows Spanish unemployment is now above 20%, making it that much harder for Spain to live within any sort of workout plan. The S&P cut Spain's credit rating one notch today, to AA.
A deal with the IMF seems likely this weekend, possibly as much as €135B, but it won't do much more than kick the can down the road. What complicates the rescue is that the PIIGS are not suffering a liquidity crisis, which could be solved by a flood of central bank money, but a deep structural crisis from too much borrowing relative to income. Simply put, a solvency problem, not a liquidity one.
Gold is soaring in Euros. Gold is not so much a hedge against inflation as a hedge against bad government policies. The barbarous relic is benefitting from all the problems.
I posted last weekend about how it looks more like history will repeat. On May 11, 1931, the Creditanstalt bank went bankrupt, and the Austrian government rushed in to save it. The run on the bank accelerated as creditors saw a chance to get whole. A month later, reserves exhausted, the Austrian government fell, the first of a series of domino defaults across Europe. This spawned the second wave down of the Great Depression, after a period in which optimism ruled and we thought some sort of recovery was on. Sound familiar?
The Greek deadline is May 19, when a bond issue needs to roll forward. The rescue deadline seems to be May 9, when the Germans have elections, although wouldn't it have been better to wait until after? The bailout is very unpopular in Germany. In any event, these dates bracket the Creditanstalt date.
Already we see a run on Greek banks. The bailout this weekend, if it occurs, runs a huge risk that the run on Greece accelerates as creditors rush for the doors. Greek bondholders could lose as much as €200B in a default, well beyond the €135B of the rescue. Total Greek debt is touching €300B. First ones out may stay whole ...
Take a look at these charts, showing how near the end the bonds go parabolic - the signature of an impending default. These charts cover Greece, Portugal and Spain.
Charts courtesy Greg Weldon from Mauldin's newsletter.