Permission to Default, Granted

–It sure looks like mum and dad investors are about to get screwed again by the global financial elite. Australian stocks are down this morning. Friday’s relief rally didn’t last long. But why haven’t more people seen the Greek default coming?

–Part of the investor confusion stems from the big news late last week. The heads of the five organised financial crime families – the Federal Reserve, the Bank of England, the European Central Bank, and the Swiss National Bank – announced they would offer three-month loans in US dollars to pretty much any European bank that needed it.

–This was a liquidity move to give European banks dollars. They need those dollars to repay previous dollar-denominated loans and to make new ones. Trouble is, US money market funds, with over $700 billion in cash, have stopped lending Europe short-term money. So the Fed stepped in to the rescue.

–This was how the story played out in the press. But as we wrote to Australian Wealth Gameplan readers on Friday, you could make a good argument that flooding Europe’s banks with dollars (or the guarantee of dollars if needed) was a clear signal that Europe is ready to let Greece default. It’s almost certain to happen now, and maybe as soon as this week.

–It probably should have happened sooner. But the European Central Bank (ECB) needed time to make sure the biggest French and German banks would not be wiped out by losses on Greek government bonds. And now, the whole system has ample dollar supplies on hand for any emergency capitalisations made necessary by Greece’s default.

–You can tell how unstable a system is by how long its periods of equilibrium last. The Five Families news last week was good for 24 hours of higher stock prices. But our view is that this was just covering fire for anyone in-the-know to sell stocks before the crisis was stage-managed to the next phase.

–The next phase is the ECB, the European Union, and the International Monetary Fund making demands of Greece that will result in the failure of the Greek government and/or Greece saying “enough!” The triumvirate of monetary dictators from Europe have threatened to withhold the next disbursement of Greece’s bailout fund unless the government fires at least 25,000 public servants and collects more taxes.

–Greece should probably do both. But it certainly won’t. And the demands being made of it now serve only three real purposes. First, the ruling German coalition can tell German voters it got tough with Greece. Second, the ruling Greek coalition can tell Greek voters it got tough with voters. Third, Greece can be allowed to default and leave the Euro in a way that doesn’t cause more panic in other government bond markets. At least not yet.

–Our analysis could be wrong. But the nature of all the moves in the last four days has been to ensure adequate liquidity in credit markets. Greece’s fundamental insolvency hasn’t changed. Europe isn’t trying to fix what’s broke. It’s trying to break off the most broken parts in order to avoid collapsing the whole project.

–We’ll see how that goes. In the meantime, any “surprise” Greek bankruptcy is going to catch stock market investors flat footed. But the bankers and policy makers are not worried about share market values at the moment. They’re worried about saving their Byzantine, debt-backed, hopelessly complex financial system.

–This brings us back to last week’s currency pyramid. We invited you to tell us the currency in which you’d prefer to hold most of your wealth in the coming years. There are only two observations worth passing on. Only about 10 people replied. And all of them said the silver coin. “I’ll take the silver coin. The others are backed only by the honesty and integrity of politicians!,” said Roly Mulvay.

–Precious metals are bouncing up and down this morning. As fearful as investors are, they know that intervention by the powers-that-be usually hits gold and silver the hardest. The Fed meets this week. Its interventions – buying long-term bonds, buying other assets, introducing new maturities – destabilise markets because they make long-term planning dangerous.

–But it is what it is. We have to live (for now) with the Fed and the ECB and their dogged determination to persist living in an alternate monetary reality. To be sure, the markets have already spoken about Europe’s financial and monetary reality. Greek default is almost 100% certain according to credit default swap markets. And the fact that US money market funds won’t lend to European banks at the moment is another market reality.

–Yet Europe and the Fed keep doubling down on the basic premise that more debt is the solution to a solvency problem. We reckon they have two more chances to recapture the confidence of the market. If they don’t, they will have to borrow money from China and post central bank gold as collateral.

–Or the monetary system is in for more shocks between now and the end of 2011. One of them is bound to be fatal. If we were a betting man, we’d bet that the Euro is going to monetary Hell. And “risk assets”, which include the Aussie dollar and Aussie stocks, are going to be collateral damage. Whatever you do, don’t get caught believing the theatrics. Have your own financial survival strategy. And stick with it.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "Permission to Default, Granted"

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Wow, spooky timing today. I got handed back a little gold coin by the teller at the bank and was told it wasn’t a $2 coin as tendered (Don’t shoot the messenger, i was just the carrier for our works banking on the day)

Yep, had to hand over my own $2 and got handed back a similar looking Euro20c. guess I’ll have to put it in a jar and keep it for posterity, unless you want to swap it for that silver one you have??????


Unfortunately Dan, you are the harbinger of bad news, but as said previously it is to be expected. I have a substantial amount of Euro dollars, and can’t move them, damn government’s again. I suppose i shall have to wait this thing out. Any thoughts of the outcome in the next one to two years re. the euro?. As Rob said it seems we are in for a spooky time.

Patrick Donnelly

AUD is one of the best investments! The pullback is due to sell off by investors that need capital to throw good after bad! Gold has been declining in AUD terms faster than USD. Until China falls over……. then look out below!!!

Geoff Bryce

So, when (not if?) Greece, with Italy to follow? gets the flick from the Euro community, do you think the market will be happy now a decision has been made, or more fears and further eroding of the ASX. Seems amazing to me Europe and the US have so little financial impact on us down here in Aus with our “robust economy”, yet the ASX is dying of a thousand cuts every time some one sneezes.

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