Wednesday, February 15, 2012

The Greece Saga

Today will be a D-Day for Greece as EU Finance Ministers will meet to approve or not approve for the release of the 2nd bailout funds to Greece and should it not approve, Greece will default in 20th March 2012.  The outcome will be simple a YES or a NO but the implication of the 2 answers means different to the financial market as a whole.

Should the answer is a YES, Greece will get the 2nd bailout funds and avoid a March 20 default, the news no doubt is a relief to the financial market as it will not see a credit crunch but that doesn't mean it is the end of the problem for Greece and EU debt crisis.  Greece now is at 6% recession and with the austerity measures being required by EU and IMF in order to secure the bailout funds, that will take another 7% contraction in GDP making it probably a 13% contraction in GDP and Greece at the moment is having an unemployment rate of more than 20%.  With the bailout funds, it will avoid a default that question is can Greece turns the corner in its economy recovery given current situation ?  US despite unemployment rate coming down to 8.3% lately, it still yet to fully recover those jobs lost during the 2008 crisis despite 2 round of stimulus program ( QE1 and QE2 ) and how can Greece turns the corner around ?  It will not be a surprised some 6 to 18 months down the road Greece will have to seek a 3rd bailout funds or even 4th or more should it still remain in Euro.  In that event, it will become a long time burden to EU and it is like having a virus that just can't get rid of totally.  So while financial market cheers the approve of the bailout, the underlying truth might be not so bright for the financial market in the long term.

Should the answer be a NO, Greece will default on 20th March 2012.  On the surface the default will create credit crunch to the financial market as private investors and banks have to write off the debt and possible doing assets sale to shore up their capital.  Remember banks have capital reserve requirement and in order to meet those after writing off Greece investment, some way or another they have to raise capital and the best way is to do assets sale.  A Greece default will create short-term bad news for financial market but from a bigger picture and longer time frame, this may turn out to be a good news for Greece and rest of the world.  Firstly, Greece after default can start of anew to restructure their economy and this might have a higher chance to revive its economy as compared to continuously taking bailout funds.  Secondly, Central Bankers around the world after prolong period of the Greece saga in the past have more or less build up aids to tackle the case of if Greece default and prevented further downside or spiraling effect.  In laymen term they have put a stopper to prevent global economy from free falling.  If so why banks still face credit crunch ?  Answer is simple even though Central Bankers provide the liquidity to prevent credit crunch, banks normally will not straight away approach Central Bankers as they will have to adhere to the various conditions by Central Bankers in borrowing money.  Instead, banks will try to do self repair to the damage ( that is assets selling ).  The short-term credit crunch faces by the banks will spread to economy as banks will have to tighten the lending facilities especially to companies and indirectly affecting companies revenue and profit margin.  This could happen within 1 quarter and hence probability of companies revenue and profit margin taking a hit for 2Q of 2012.  Stock markets could face selling pressure when banks trying to sell assets.

For the case of Greece getting the 2nd bailout, stock markets might move up in reaction to that but somewhere down the road when Greece reappears again with the 3rd bailout, stock markets will face the selling pressure again.\

For the case of Greece default on 20th March, stock markets might face selling pressure for next 3 months when banks doing assets sale but that could be the opportunity to slowly accumulate on weakness as after all, Greece default means finally putting Greece issue totally out of the picture.

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