It took a slow 18 months and a long 10 hour marathon negotiation last night, ending at 4AM, but Europe has done it! Of course, they have not solved all their problems, but they have taken a huge step toward fiscal integration. The hook is set, and there is no getting away.
Basically, the banks have agreed to take a 50% haircut on their Greek bonds and raise their capital to 9% by next Spring. In addition, the EFSF will be leveraged to provide the bazooka needed to quell the crisis or $1.4 trillion.
This is without the IMF, China, or Brazil; all of whom have strongly hinted additional help will be available.
The interesting thing to me is that the haircut will be called voluntary in order to avoid triggering the credit default swaps. The haircut only applies to Greek bonds held by banks. If you are a pension fund holding Greek bonds thinking you are safely protected by the credit default swaps you purchased, you are not happy this morning. While your bonds are now somewhat less likely to default, because Greece can more readily service the reduced debt held by the banks, you still must be wondering why you paid good money for the swap originally?
If you are a free-market purist, you are not happy. If you are an investor, you are probably happy today.
I've estimated the chance of a double-dip recession in the U.S. at one-in-three, depending on Europe. Now, I expect it is one-in-five. The GDP growth rate for the third quarter will be released this morning. Q1 was 0.4%. Q2 was 1.4%. Q3 is expected to be 2.3%. I like the trend . . .
The European markets are up strongly, almost 4% on the news. Dow futures indicate the market will open up about 190 points. There should be a strong relief rally. Then, the devilish details of any deal will pull it back, probably Monday. The level of risk in the economy has decreased modestly. The level of risk in the market has decreased significantly. I'll probably start deploying cash again on Monday.
On the horizon, however, don't forget the traumatic cuts in government discretionary spending (preserving all entitlements) scheduled for January 1st, if Congress doesn't approve whatever agreement comes out of the SuperCommittee now meeting. Several members of Congress have already proposed a new bill preventing the arbitrary cuts in discretionary spending at year-end. I cannot imagine even the intransigent Tea Party taking the blame for shutting down the government, including Defense.
The European debt crisis has been caught and will take several years to reel it in, of course. But, it has been caught! Enjoy the relief rally today and then get to work!
Basically, the banks have agreed to take a 50% haircut on their Greek bonds and raise their capital to 9% by next Spring. In addition, the EFSF will be leveraged to provide the bazooka needed to quell the crisis or $1.4 trillion.
This is without the IMF, China, or Brazil; all of whom have strongly hinted additional help will be available.
The interesting thing to me is that the haircut will be called voluntary in order to avoid triggering the credit default swaps. The haircut only applies to Greek bonds held by banks. If you are a pension fund holding Greek bonds thinking you are safely protected by the credit default swaps you purchased, you are not happy this morning. While your bonds are now somewhat less likely to default, because Greece can more readily service the reduced debt held by the banks, you still must be wondering why you paid good money for the swap originally?
If you are a free-market purist, you are not happy. If you are an investor, you are probably happy today.
I've estimated the chance of a double-dip recession in the U.S. at one-in-three, depending on Europe. Now, I expect it is one-in-five. The GDP growth rate for the third quarter will be released this morning. Q1 was 0.4%. Q2 was 1.4%. Q3 is expected to be 2.3%. I like the trend . . .
The European markets are up strongly, almost 4% on the news. Dow futures indicate the market will open up about 190 points. There should be a strong relief rally. Then, the devilish details of any deal will pull it back, probably Monday. The level of risk in the economy has decreased modestly. The level of risk in the market has decreased significantly. I'll probably start deploying cash again on Monday.
On the horizon, however, don't forget the traumatic cuts in government discretionary spending (preserving all entitlements) scheduled for January 1st, if Congress doesn't approve whatever agreement comes out of the SuperCommittee now meeting. Several members of Congress have already proposed a new bill preventing the arbitrary cuts in discretionary spending at year-end. I cannot imagine even the intransigent Tea Party taking the blame for shutting down the government, including Defense.
The European debt crisis has been caught and will take several years to reel it in, of course. But, it has been caught! Enjoy the relief rally today and then get to work!
