Europe

What a mess - this is the result you get after a €110 billion bail-out of Greece? 3 days later we are 5 big figures lower in €/$ (after the pop on Sunday night following the bail-out). Greek and Portuguese CDS spreads are hitting all-time highs, Spain’s prime minister is calling it madness that his country could be compared to Greece........!

Sadly the first casualties of the demonstrations in Greece have been incurred with 3 dead in Athens - and it does not look like it is about to stop.

Martin Wolf has a great piece in the FT today explaining both why Greece has no real option but to accept the austerity measures required, because the alternative is even worse, in at least the short term, but also that he doesn’t believe it will ultimately work.

The German professors are launching their lawsuit against German participation in the bail-out of Greece on Friday - the outcome from the constitutional court is always uncertain - so there is also plenty of political risk.

While Rome is burning politicians are arguing, thinking they have all the time in the world - they obviously didn’t learn a thing from having dithered all through Q1 with the Greek aid package, which may have been capped at €30 billion had the money been available immediately. Now even €110 billion is not enough and Portugal looks increasingly like they will also be in need of a bail-out. 

Even more interesting is reading that Portugal, Ireland, Italy and Spain are all contributing, and not in small amounts, Italy has been out announcing that their potential €15 billion commitment would not be financed through new issuance of BTPS, but rather drawn at the treasury - if they could just print the money I’m sure they would, which brings me to the point that the only thing that could stop the fire right now is a massive QE program from the ECB, focused on the countries in need of support i.e. The PIIGS. 

When it is obvious that the bail-out package only last so long and the country in question is effectively shut out of the capital markets (Greek 2 year debt at 15%) - the purchase of these bonds by the ECB would help in more ways than one, but it won’t happen any time soon, as the ECB doesn’t like the idea and the Germans probably like it even less......so wait and maybe the program will have to be €500 bill instead of lets say €250 bill today. 

It doesn’t pay to wait!!!!!!!

The € would take a bath, not that it isn’t already, but maybe it would help the European economies to have €/$ back to parity or even below. The ‘fantastic’ German retail sales -2.6% y/y and new car sales -32% y/y could surely do with being more competitive in the rest of the world, even if everyone is looking for an export led recovery.

However, a double-dip looks more and more likely - something that historians of the future will have field day analyzing and dissecting the causes of - political error?