Saturday, 30 January 2010

Greek Bonds and Chinese Whispers

The old Morecombe & Wise gag went, how much is a Greek Urn? Oh about £20 a week. The problem today is that an awful lot of Greeks don't earn anything at all and like many in the UK live on social security. Worse, the Greek budget deficit is 13% of GDP and their current account deficit is even bigger at 15%. The UK government figures are not to dissimilar but at least between us and the Greeks are the Spanish, Portuguese, Italians and the Irish. All except the Irish are in denial. So are we until after the General Election.

On Tuesday I was staggered to read that the Greeks had got a 5 year, 8bn Euro bond away at 5.91% covered 3times! How on earth did they do that. It simply beggared belief. The Greek bund spread contracted by 9 bps and the Greek government congratulated itself as being Olympian. After hubris comes nemesis. On Thursday the truth was revealed that these Greek bonds had been bough on the back of a rumour that the Chinese had bought a fair tranche of these bonds. (The Chinese are trying to diversify away from US dollar denominated treasuries so it there was some superficial backing for the story.) On Thursday both the Chinese and Greek authorities denied this story and the shit hit the fan. Greek bond yields jumped by 40+ basis points to 7.15%, a crippling rate of interest for the Greek economy. Evil speculators were invoked by the Greek government. Gnomes of Zurich?

The German economics minister Rainer Bruderle then put the (jack) boot in by saying "A few European nations are exhibiting dangerous weaknesses that could have fatal consequences for all countries in the Eurozone. He then added that all countries must solve its own problems. The helpful Mr Soros, he who helped Sterling into the ERM disaster, added, "Germany is not in a mood to be the deep pocket for what they consider to be profligate Southern neighbours". The French want a Greek rescue but as always want the Germans to pay for it. Worse for the French the Euro fell heavily against the dollar as a result of these shenanigans.

All is not well on this front in Gordon's disunited kingdom either. The evil PIMCO that employs Balls minor advised against buying UK gilts as they were 'resting on a bed of nitroglycerine'. They added that they saw an 80% chance of a UK debt credit rating downgrade if the Government does not produce a credible plan, as the Irish have, to sharply reduce the UK's £180bn deficit. This we all know is impossible as it would finish Gordon electorally so it looks like we will face a debt spiral with the UK forced to pay higher and higher interest rate on its debts. Corporate UK is in a similar mess. UK rates will rise as soon as QE, aka money printing, stops

The real threat to the EU comes if Spain goes as well. Youth unemployment there is near 50% and the property market is in melt down. Talk to anyone trying to sell their place in the sun. Unemployed youth without hope spells civil unrest not just in Spain and Greece but also Portugal and Italy. These countries all have strong and active Communist parties waiting to capitalise on disaffected youth.

I have warned of this impending EU problem for the last year. It is now hitting the main news bulletins. What plans does Mr Farage/Lord P have to capitalise on this situation? Well none that I have heard. Its a great opportunity for UKIP as the bond market, as Bill Clinton found out, is more powerful than any government. If you have any ideas for Mr F or Lord P please post a comment on this blog.

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