Imminent Greek Exit Positive for the Euro

The drive for ever more "austerity" in Greece is having the opposite results. It is pushing the Greek economy further into recession, reducing tax revenues, worsening the country's fiscal deficit and debt load, and thus only necessitating further belt-tightening. It is a vicious cycle with no way out. Even the IMF has acknowledged that and it is now becoming clear that the only choice is bankruptcy or a Euro exit. An option that was politically inconceivable 6 months ago is currently on the table. (See Greek Euro Exit Weighed By German Lawmakers on Bloomberg.)

From the beginning it has been somewhat ill-defined notions of contagion, exacerbated by forced "voluntary" debt forgiveness that has lead the crisis to spread into Spain and Italy. So much so that even the troubles in non-Eurozone Hungary lead panicked investors to dump EU government bonds and the currency (see previous WhatIf post).

With Greece out, the situation would appear manageable and in retrospect Fitch's warning of "cataclysmic' collapse of the common currency would likely mark the low for the Euro against other G-7 currencies. At the time the panic was running so high that investors were willing to pay to lend their money to safe-haven Germany (see prior WhatIf post on negative German yields). Time is running out for Greece and it will likely reintroduce the drachma, putting an end to this chapter of the Euro crisis and giving a major boost to the Euro.

Negative Yield on German Bills Indicates Maximum Level of Panic

Today's auction of German 6 month bills resulted in investors paying a negative yield (see Reuters article). Of course this does not make sense logically, but it has happened before - 3m US Treasury bills were in such high demand in the middle of the financial crisis in late 2008 that the winning bids were so high that yields went negative. In both cases investors are afraid to keep their money in the bank in case it goes bankrupt and would rather pay a fraction of a percentage point for the peace of mind. So either the Eurozone is coming to an end sometime very soon or the panic has reached such proportions that a bounce (in the Euro, as well as Eurozone sovereigns) is coming very soon. I would be tempted to bet on the latter.

Rating Agencies Are Probably Overdoing It

Recently there has been a veritable onslaught on core European sovereigns by the major rating agencies, with S&P warning of a major wave of downgrades in Europe 2 weeks ago, then Moody's lowering Belgium by 2 notches on Friday and finally Fitch changing France's outlook to negative. The timing of the announcements is like a rush to the exit, with no one wanting to be left behind just in case. Rating agencies were considerably behind the curve during the 2008 financial crisis. They badly mispriced the correlation of  subprime mortgages and rated "senior" tranches of CDO's triple-A. Those same tranches ended up worth close to zero. Also they infamously rated Lehman double-A up to the moment it filed for bankruptcy. The painful experience 3 years ago and the ensuing investor and regulatory backlash has left the rating agencies quite trigger-happy with the downgrade button - possibly more than justified in some individual cases.