As I wrote yesterday the market would be quick to deliver its verdict on the EU/IMF Greek aid package and it was a resounding raspberry. As I write Reuters report the death of three people in a petrol bombed bank today and riots in Athens. Who can forget the TV footage yesterday of a Greek riot policeman desperately trying to put out the flames engulfing his trousers. We are now in the second day of a Greek national strike. I expect more of the same in the coming weeks leading to a disintegration of the Greek government and probable military rule.
The Euro is now trading at 1.294 against the dollar, its lowest for more than a year. The FTSE, DAX and CAC40 are all down again as were the Asian markets. Bund interest rates are down, a flight to quality, and the spread of Portugese, Spanish and Irish bonds to bunds continues to widen. If I were trading I would certainly now be shorting Portugese bonds. Yields on the 10 year Greek bond are now over 9% showing the markets disregard for the rescue package.
Whilst it remains in the Eurozone Greece has no way out. Its only salvation is to default on its debt and leave the Eurozone. That would mean the end of EMU something Brussels cannot countenance. The ECB have already started to tear up their Maastricht rule book with Trichet's decision to accept Greek zombie bonds as repo collateral come what may. Next stop is Quantitative Easing also known as the Robert Mugabe money printing solution. It would finish the Euro as a reserve currency and with it the ambition of the EU to one day rival the mighty US dollar.
Dr Frau Merkel has heaped petrol on the flames by saying that banks and other creditors should be forced to share the pain if further rescues were ever needed. Pension funds, insurers etc with holdings of non Greek PIG bonds would be well advised to get some CDS quick. It was an insane thing to say and will lead to a huge flight of capital from Club Med.
Letting Greece default and leave the Euro will be far cheaper in the long run than this ill conceived Greek rescue.