Cats, Debts and ancient Greece

May 25, 2011

FOREX, Global Macro

After a close call the day before markets really didn’t bounce that far overnight, which in the context of the current uncertainty isn’t surprising really. It’s what we market types call a “dead cat bounce” – which is just our way of saying things didn’t really bounce that hard. The Dow was up at 5am when I first looked but ended the day slightly lower but the USD’s weakness helped buoy commodities with Oil particulalry up.

So the cat bounced, just not that hard.

The most interesting thing for me however overnight was the juxtaposition of the outlook for corporations and sovereign debt. With Chrysler repaying the US and Canadian Governments 6 years early but Greece staying as the clear and present danger to markets.

On Greece Bloomberg reported that ECB Governing Council member Christian Noyer ruled out a restructuring of Greek debt calling it a “horror story” – no disagreement from us here.  But continuing to show the disconnect between policy makers and the population he focussed once again on the burden being bourne through austerity saying this was the only solution.

No, its the only one that policy makers want.

The latest twists in this modern Greek tragedy are that last night we heard of assets sales and more spending cuts and a reiteration that the ECB suspending the minimum credit-rating requirement on Greek Debt so it can continue to be used in vital repo-transactions which seems aimed at protecting the European Banking system and the more than EUR 250 bln in hand/bailouts to Greece, which of course are reasonable goals. Bloomberg reported Noyer’s ominous comments on this as well:

The ECB “accepted temporarily to reduce our minimum level of collateral to BBB,” Noyer said. “If the program is no longer respected, if a country is found off track, immediately our assumption of BBB disappears. If it goes out of the EU program, the collateral is ineligible.”

But, thecookie jar is getting bare – its seems a matter not of if, but when Greece runs out of options.

I think that at some point a Greek, Irish or Portugeuse politician will find that popular opinion is behind he or she in repudiating their debt burden once and for all. I extrapolated this thought process into a piece overnight at sister site MacroBusiness titled Solon’s Ghost”. It is a piece that I am particularly proud of even though the thought process and potential outcomes that flow from same leave me really worried about the outlook for the global economy and financial system at a time of precariousness. A rational nation would default whatever the potential or threatened consequences – its in their own self interest.

This is a topic no serious investor or student of economies and markets can ignore. It is the elphant in the room which policy makers are trying to pretend will go away in time. But all it does is drive uncertainty and that means short term trading and instability.

So back to the point of the blog, it’s interesting to look at how the positions of corporations and governments have flipped over the past 3-4 years. Corporations, having taken the Government support, have in many instances rebuild themselves and re-vamped their products, process and strategy. Capitalism at its best – even if life support was needed to get them through.

Government’s on the other hand remain moribundly constrained by a lack of vision and fiscal space to be able to grow their economies out of debt. History tells us there is going to be defaults and the economy tells us it needs to cleanse.

Importantly for investors at home here in Australia we saw the ASX 200 bounce of really important support that stretches back to the 2009 low. It’s down a little this morning which could lead to that pullback to 4473 we talked about earlier in the week.

Likewise the AUD’s bounce petered out overnight and I still think it looks like a test toward 1.0350 and then 1.02 seems on the cards over the next few weeks.

Markets seem right to be cautious – last night’s dead cat bounce is appropriate.

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