Updated (9:05 AM EST):
Angela Merkel is apparently stepping up measures to prepare for “orderly insolvencies” so as to avoid a repeat of the situation in Greece. I.e., there are no more bailouts. The Euro currency continued to crash and burn overnight and the CDS in all the remaining PIIGS are blowing out. The situation is beginning to take a turn for the worst again as we expected. Is the Euro slowly unraveling? It’s time for the Europeans to wake up to the flaws of the Euro. Defections or widespread recession are looking more and more like the only options.
The market has tested the resolve of the EMU and discovered that they were forced to use all their bullets on likes of Greece. The move towards Spain can now begin in earnest as the sharks begin to circle the other weakened countries in Europe. CDS in all the remaining countries are blowing out with Spain exploding 29 bps. The Germans now have a real problem on their hands. Do they give the Greeks their massive bailout when they can plainly see that the risk of contagion has not only NOT been contained, but has perhaps worsened?
Charles Goodhart, formerly of the Bank of England says the Greek deal could collapse and that it would result in nothing more than “appalling deflation”. From Bloomberg:
“If this financing deal should collapse, and it might for one reason or another, then there would be a question of what the Greeks could possibly do,” Goodhart said in an interview with Bloomberg Television in London today. “Default would be totally disastrous for them and leaving the euro would equally be disastrous.”
“It’s very hard to see how this is going survive this particular test,” he said. “The euro system has either got to have much more integration or parts of it will fall by the wayside.”
“If the current bailout is put in place, it will be enough to meet their immediate financing problems not only this year but for the next year or two,” Goodhart said. “The problem is that it doesn’t meet their adjustment problems. It doesn’t deal with the problem the Greeks, in part from having too large a deficit and too large a debt ratio, are very uncompetitive and if they actually cut back the deficit as fast as is being required they’re just going to go into appalling deflation.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.