Greek Vote; More questions than answers

[errolanderson]

Tomorrow's Greek election results will
have a direct impact on Western Canada
come Monday morning.

1. Could the loonie make a break toward
90 cents should Greece exit?

2. Could WTI oil make a break toward $75
per barrel placing global crude projects
at risk?

3. Will Europe's credit markets seize or
will global 'Peter pay Paul stimulus'
come to the rescue or is this just
another band aid.

4. Where exactly is Italy's (a far
bigger economy) position? Has their
crisis just begun or is there any fix?

5. Could global oil price woes break Cdn
real estate values 10 to 25% depending
on region?

6. Can deflation be turned back to
inflation without further economic harms
or is this a fairy tale?

7. Will the U.S. fiscal cliff hit the
U.S. before their November elections?
Can it be delayed much longer?

8. Are rising interest rate talk just a
pipe dream in a deflationary world?

9. How will Western Cdn livestock prices
fare? Can cattle prices restart?

10. Canola's long-term uptrend broke
this week. Can it be repaired by a
possible drop in the loonie? Or is the
fallout in palm oil and soyoil too
great?

11. Greece or no Greece, how long will
the current global recession/depression
last? less than 5 years / more than 5
years?

Errol

[ASRG]

Thanks for the pretty picture!
It could get pretty ugly.
Hope Stephen Harper has a plan?

[agstar77]

He does, a government job.

[wd9]

That's funny Agstar!!!

It would seem stock traders have sold stocks and need a reason for stocks to go down so they can buy again. Seems to be a repeating cycle last couple years.

Sell, make some bad news, market goes down, buy, migrates up, repeat.

[ajl]

It doesn't matter which way Greeks vote.
Europe is done and the only thing left is
to nail the coffin shut and stick the
corpse in the ground. The world will
enter total depression and we can debate
weather or not it is an inflationary one
or deflationary but it really doesn't
matter. The bottom line is the same.

[sumdumguy]

What is the bottom line?

[ajl]

Bottom line is this either you don't have
any money or the money you do have will
not buy anything. I suspect this time it
will be the later. So you have to
rebuild the economy from the bottom up by
using barter. Living standards will be a
lot lower across the western world as
that is a lot less efficient that being
able to use currency that you can have
some trust as to its purchasing power.

[cottonpicken]

The bank runs going on in greece and now spain is
also a huge issue.

It further weakens already weak banks and if it gets
out of hand you have what is called a bank holiday.

Rumours of it spreading to france today.

[cottonpicken]

By MATTHEW CRAFT
AP Business Writer


AP Photo/Nikolas Giakoumidis
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Violent protests in Greece

NEW YORK (AP) -- The unthinkable suddenly looks
possible.

Bankers, governments and investors are preparing for
Greece to stop using the euro as its currency, a move
that could spread turmoil throughout the global
financial system.

The worst case envisions governments defaulting on
their debts, a run on European banks and a worldwide
credit crunch reminiscent of the financial crisis in the
fall of 2008.

A Greek election on Sunday will determine whether it
happens. Syriza, a party opposed to the restrictions
placed on Greece in exchange for a bailout from
European neighbors, could do well.

If Syriza gains power and rejects the terms of the
bailout, Greece could lose its lifeline, default on its
debt and decide that it must print its own currency,
the drachma, to stay afloat.

No one is sure how that would work because there is
no mechanism in the European Union charter for a
country leaving the euro. In the meantime, banks and
investors have sketched out the ripple effects.

They think the path of a full-blown crisis would start
in Greece, quickly move to the rest of Europe and
then hit the U.S. Stocks and oil would plunge, the
euro would sink against the U.S. dollar, and big banks
would suffer losses on complex trades.

ACT I

What would Greece's exit look like? In the worst case,
it starts off messy.

The government resurrects the drachma, the currency
Greece used before the euro, and says each drachma
equals one euro. But currency markets would treat it
differently. Banks' foreign-exchange experts expect
the drachma would plunge to half the value of the
euro soon after its debut.

For Greeks, that would likely mean surging inflation -
35 percent in the first year, according to some
estimates. The country is a net importer and would
have to pay more for oil, medical equipment and
anything else it imports.

Greece's government and banks currently survive on
international loans, and if it dropped the euro, the
country would probably be locked out of lending
markets, says Athanasios Vamvakidis, foreign-
exchange strategist at Bank of America-Merrill Lynch
in London. So the Greek central bank would need to
print more drachmas to make up for what it could no
longer borrow from abroad.

That's one reason analysts say the switch to a
drachma would lead the country to default on its
government debt, possibly triggering losses for the
European Central Bank and other international
lenders.

Most assume foreign banks would have to write off
loans to Greek businesses, too. Why would Greeks
pay off foreign debts that effectively double when the
drachma drops by half?

Say a small shop owner in Athens has a (EURO)50,000
business loan from a French bank. She also has
(EURO)50,000 in savings in a Greek bank. The Greek
government turns her savings into 50,000 drachma.

If the new currency fell by 50 percent to the euro as
expected, her savings would suddenly be worth
(EURO)25,000. But she would still owe (EURO)50,000
to the French bank.

European banks would take a direct blow. They've
managed to shed much of their Greek debt but still
held $65 billion, mainly in loans to Greek
corporations, at the end of last year, according to an
analysis by Nomura, a financial services company.
French banks have the most to lose.

ACT II

Here's where things get scary.

The European Central Bank and European Union
would have to persuade investors in government
bonds that they will keep Portugal, Spain and Italy
from following Greece out the door. Otherwise,
borrowing costs for those countries would shoot
higher.

The main way European leaders have tried to calm
bond markets is by lending to weaker governments
from two bailout funds. Experts say these two funds,
designed as a financial firewall to stop the crisis from
spreading, need more firepower.

Much of the (EURO)248 billion ($310 billion) left in
one of them, the European Financial Stability Facility,
was pledged by the same countries that may wind up
needing it, Vamvakidis says.

There's also a (EURO)500 billion European Stability
Mechanism that's supposed to be up and running
next month, but Germany has yet to sign off on it.

"If they fail to reassure bond investors, all of the
nightmare scenarios come into play," says Robert
Shapiro, a former U.S. undersecretary of commerce in
the Clinton administration.

The biggest danger is a fast-spreading crisis known
in financial circles as contagion - a term borrowed
from medicine and familiar to anyone who has
watched a disaster movie about killer viruses on the
loose.

"It's like a disease that spreads on contact," says Mark
Blythe, professor of international political economy at
Brown University.

The bond market, where banks, traders and
governments cross paths, provides the setting. If
Greece dropped the euro, traders would become
more suspicious of Spain, Portugal and Italy and sell
those countries' government bonds, pushing their
prices down and driving their interest rates up.

Higher borrowing costs squeeze those countries'
budgets and push them deeper into debt. Plunging
bond prices also would imperil Europe's troubled
banks. The banks are big holders of government
bonds, which they bought when the bonds were
considered safe.

At this point, the risk would be high for a run on
banks throughout Europe. People would worry that
the banks might fail and would rush to withdraw what
they could. Analysts and investors say that's the
biggest fear.

People in Spain, for example, have already seen
what's happened in Greece and have started pulling
euros out of their accounts in fear the country will
switch back to cheaper pesetas.

"People see their banks in trouble," Shapiro says.

In less frantic times, the government would come to
the rescue with cash or take over the banks.
Individual European countries insure bank deposits,
so if one bank fails people can still get their money
out. But all this is happening in the middle of a
government debt crisis, and if the crisis gets worse,
the Spanish or Italian government couldn't raise
enough money in the bond markets to save the day.

"They can't afford to guarantee deposits or money
market balances," Shapiro says. "They don't have the
ability to borrow internationally from bond markets.
Where are they going to get the funds?"

From here, the crisis could get much worse: Banks
could fail, the surviving banks could stop lending to
each other, and a credit freeze could shut down
commerce in Europe as assuredly as a blizzard did
last winter.

One way to stem the contagion would be to create
so-called eurobonds - bonds backed by all 17
countries that use the euro. They could be sold to
raise money to buy the bonds of troubled European
governments. With the backing of 17 countries,
including mighty Germany, eurobonds would have a
yield far lower than the bonds of countries like Spain
and Italy.

Germany, which has the strongest economy of the
euro countries, has slowly warmed to the idea but
wants weak governments to fix their finances first.
"Germany's strength is not infinite," Chancellor
Angela Merkel said Thursday.

Cash-strapped European governments should be able
to turn to the International Monetary Fund for help,
but the IMF's money comes from 188 member
countries. Peter Tchir, who runs the TF Market
Advisors hedge fund, says the U.S. and other
countries may balk if the IMF asks for help supporting
Europe.

He worries that the IMF may take a loss on the
roughly $28 billion it has already loaned to Greece.

"People are happy to put money in if they think they
won't lose it," Tchir says. "In this case, the IMF loses
money, then everybody gets scared."

ACT III

A full-blown crisis would cross the Atlantic through
the dense web of contracts, loans and other financial
transactions that tie European banks to those in the
U.S., experts say.

Blythe, the professor at Brown, believes credit default
swaps, the complex financial instruments made
infamous by the 2008 financial crisis, would provide
the path.

Banks created the swaps to sell as insurance for
loans. After lending money to a business or
government, investors can turn to a bank and take
out protection on the amount they lent. If the
borrower runs into trouble and can't pay - say, the
government of Spain defaults - the banks that sold
the insurance cover the loss.

A $2 billion trading loss that JPMorgan Chase
revealed in May, traced to a hedge against the Europe
crisis, shows just how easy it is for even the safest
and savviest of banks to slip up.

And it doesn't even take a default for a credit default
swap to go bad.

If traders think other countries will follow Greece,
they'll drive up borrowing rates by selling government
bonds, which also pushes up the cost of insuring
their debt. That's similar to how your neighborhood
insurance agent handles a teenage driver.

In the derivatives market, where credit default swaps
are traded, there's a twist. When markets treat Spain
like a bad credit risk, those who took out insurance
on Spanish debt to protect against a default can force
the banks that sold the insurance to prove they can
make good on the claim.

To do that, banks cash out something else - U.S.
government debt, gold, or anything easy to sell. In
normal times, it's no big deal. In a crisis, it can lead
to a cascade of selling, spreading trouble from one
market to another.

Another problem: It's not clear how much U.S. banks
have at risk to Europe through credit default swaps
because regulations let banks keep that information a
secret.

"You could have American banks up to their necks in
CDS liabilities," Blythe says. "We don't even know."

There are other paths the turmoil could take into the
U.S.

Money market mutual funds, which hold more than
$2.5 trillion, have an estimated 15 percent of their
investments in Europe. European banks are also large
buyers of U.S. mortgage bonds. If they're forced to
sell them, mortgage rates could jump, imperiling the
U.S. housing market. Frightened banks in Europe and
the U.S. might also pull the credit lines companies
depend on for global trade.

So what's the good news? It's hard to find anybody
who believes the crisis will get that far.

The bankers planning for a Greek exit from the euro
say they think European leaders will get scared into
action. The Federal Reserve and other central banks
learned from the financial crisis in 2008, they believe,
and will jump in to stop the nightmare scenario from
unfolding.

Just in case the worst comes to pass, analysts at
Barclay's have attempted to estimate the fallout. They
say it would be like the days after the investment
bank Lehman Brothers collapsed in September 2008.
This time, they project that oil would fall to $50 a
barrel, stock markets outside of Europe would plunge
30 percent, and the dollar would soar to trade nearly
even with the euro.

Blythe is skeptical that it will get that bad because he
hopes the previous financial crisis has left
governments and central banks prepared.

However the Greek story ends, Blythe believes it's
bound to be ugly. Putting 17 countries together to
share a common currency worked well when Europe
prospered. Now that they're struggling, "all the
design flaws are becoming apparent," he says. And
every solution that's supposed to fix a problem
creates another problem.

The proposed $125 billion loan to save Spanish
banks, for instance, will add to the debt burden of
Spain. That sent Spain's borrowing costs higher this
week and will put a tighter squeeze on its budget.

"The euro itself," Blythe says, "is a bloody doomsday
machine."

[Choice2U]

So in other words..Yuk...lol