Before I begin, allow me to invite you to a special event on Sunday, March 7 at 5:30 pm EST. At that time, I will be holding a free session of my online trade room for all who might wish to attend. Sundays are usually fun (and profitable) as we go over what’s happening in the markets and look to take advantage of the opening gap in prices. All you need do to attend is click here to reserve your seat.
German officials are apparently in no hurry whatsoever to cobble up an aid package to fellow EU member Greece. Both political and economic considerations back their thinking, but the bottom line is that Germany has probably calculated that with or without a common currency of even an EU, Germany will do just fine.
From a political viewpoint, bailing out profligate spenders is bound to raise the level of bile among German voters. And this is made even worse by the fact that Greece basically falsified their financial records and participated in currency swaps (with the aid of Goldman Sachs and other investment banks) in order to hide the real size of its deficit.
From an economic viewpoint, Greece is just a tiny country with just $345 billion of GDP. Even if it were to default, it would make no difference to the global economy except in the sense that investors will grow concerned about the prospects for other EU members like Spain, Portugal, Italy and Ireland.
Germany is actually reaping a huge benefit from the euro’s decline over the past several months. As the world’s 3rd largest exporter, its cars, high-tech machines, software and chemicals are becoming even more competitive as the global economy heats up. And just as importantly, German firms will of course reap the benefits of added profits upon repatriation of profits made overseas.
Germany isn’t without problems of its own either. The economy is still growing anemically and their own debt-to-GDP ratio is now running over 7%, which means they need to grow quickly themselves in order to avoid spiraling into an even worse situation.
Meanwhile, the EU keeps trying to talk a good game in terms of the plans they’re “developing” but the fact of the matter is that after even all this time, nothing concrete seems to be forthcoming. All we have so far are rumors involving German and French state-owned banks along with ECB president Trichet’s apparent fear and disdain for seeing Greece turn to the IMF, which they are threatening to do.
The fact that Greece was able to successfully sell about $10 billion in new bonds on Thursday doesn’t really help all that much, because they are paying a very high (6.3%) on the debt. Yes, investors bought them up, but all that does is just allow for the issuance of new Credit Default Swaps (CDS) which Hedge Funds and other sophisticated investors game. CDS are where the real profits are made anyway in this market.
Still, Germany may relent and actually come up with a package of loans and/or loan guarantees. But if that happens, the euro will snap back into the upper 1.40’s in a matter of weeks as traders reverse their bets and as the Federal Reserve keeps hammering home the point that interest rates will be staying low for an “extended period.”
But if Germany does pull the plug on the cradle of democracy, the fall of the euro is all but assured.