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Wednesday, April 28, 2010

Things in Europe Are Very Unstable - Scary Times Ahead?

As Simon Johnson reports:
This is not now about Greece (with 2 year yields reported around 20 percent today) or Portugal (up 7 basis points) or even Spain (2 year yields up 27 basis points; wake up please) or even Italy (up 6 basis points). This is no longer about an IMF package for Greece or even ring fencing other weaker eurozone economies.
This is about the fundamental structure of the eurozone, about the ability and willingness of the international community to restructure government debt in an orderly manner, about the need for currency depreciation within (or across) the eurozone. It is presumably also about shared fiscal authority within the eurozone – i.e., who will support whom and on what basis?
The drama continues following S&P’s slice to Greece’s debt rating (to junk status of BB+, a three-notch decline, which prompted a surge in 2-year bond yields to a Zeus-like 15%) and the two-notch decline to Portugal’s rating, to A- from A+. The Euro has bounced back this morning and the flight to higher quality German and French bonds has partly reversed course as the markets are swirling with speculation that the IMF is about to announce a stepped-up aid package (yet again!) and the ECB’s Trichet (“Mr. Euro” himself) is set to make a trip to Berlin to meet with German parliamentarians today.

It's Official: Greek Bailout Expanded To €100-€120 billion over three years (40 billion a year) according to Strauss-Khan, which would eliminate Greek funding needs for the next 3 years via a primed DIP funded by Europe and the US. German contribution to be no less than €25 billion. IMF role will likely be at least €25 billion if not more. At about 20% US contribution to the IMF, the US taxpayers just got hit with a $7 billion bailout fee to make sure French and German banks don't have to Mark-to-Bankruptcy their Greek exposure. This is definitely not a done deal: Germany's SPD says they will not vote for the aid, which according to preliminary rumors will make all eurozone member states subordinate creditors to the new "DIP" facility. All those buying this rally are assuming that Germans will go quietly with the new proposal even though they threw up all over the old "only" €10 billion demand. Oh, and wait until Greeks realize what the "austerity" terms of the new IMF package are.

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