A few weeks ago we wrote that we are optimistic that another deep crisis will be avoided and that the Euro will survive. Recent developments and scenarios are unfolding that seem to confirm that optimism. However, we remain cautious for the next couple of months, while that optimism is rising.
First and foremost, we are of the opinion that no single EU nation will be dropped from the Euro. The consequences of such an unthinkable scenario will be dire for the whole EU land. Hence, we disagree with Bloomerg’s news report (published yesterday) that Ireland and Greece will be forced to drop the Euro.
Second, the latest news from the EU front shows that the demand for the bonds issued by the European Financial Stability Fund (EFSF) far exceeded the supply (demand of 43 billion vs. an issue of 5 billion). Irrespective of the source of such high demand, the conclusion is that the EFSF, if enhanced as expected, will become a source of stability, which is a prerequisite for growth.
Third, Germany seems to be becoming more elastic and has started exhibiting greater flexibility regarding the issuance of the joint Eurobonds that will ultimately lead to greater fiscal integration within the EU.
Fourth, while the Vienna Insurance Group voluntarily gave a haircut of 25% in its Greek bond holdings last Tuesday (January 25) – possibly leading the way for a more unofficial haircut initiated by Greek bond holders – we believe that the solution that will be implemented will be threefold: First, an increase in the authority and capital of the EFSF. Second, a buy-back of the problematic bonds by the nations who issued them- funded by loans provided through EFSF, the IMF, and other institutional players. Third, an agreement could soon be reached where the maturity of the bonds will be extended by at least five years. We understand that while the latter is an effective haircut, the institutional investors will be able to keep the face value of the bonds on their books, and thus “save face” in the nominal sense that they will not record losses in their bond portfolios.
Assuming that the above steps materialize within the next three-four months, then the banking system will become more stable and given the commitment of liquidity of central banks, the foundations for temporary stability (sought after since summer of 2007) will be viable. {We emphasize temporary, given that the global credit vessel is still missing an anchor}.
The recent economic developments in the US are uplifting confidence and expectations and thus, if things unfold as projected above, we would not be surprised if we see significant growth in the US (especially in the second half of 2011) which in turn will lead to an unemployment rate of less than 8% by summer 2012. It seems that the US is getting ready to exit the hospital and with it, we would not be surprised if during the last quarter of 2011, even Greece reports positive economic growth.
Ode to exits!
We continue to maintain our precious metal positions as a core holding even with the latest volatility. We have initiated large cap science and technology positions as technology continues to generate higher levels of efficiency for corporate America. We are keeping tight stops on the above until we see where we end up with the US debt ceiling issue. We continue to hold our oil and gas positions and believe they will continue to perform well in any recovery scenario. More on our current holdings in later issues.
European Debt Scenarios and Prospects for Growth
Author : John E. Charalambakis
Date : January 26, 2011
A few weeks ago we wrote that we are optimistic that another deep crisis will be avoided and that the Euro will survive. Recent developments and scenarios are unfolding that seem to confirm that optimism. However, we remain cautious for the next couple of months, while that optimism is rising.
First and foremost, we are of the opinion that no single EU nation will be dropped from the Euro. The consequences of such an unthinkable scenario will be dire for the whole EU land. Hence, we disagree with Bloomerg’s news report (published yesterday) that Ireland and Greece will be forced to drop the Euro.
Second, the latest news from the EU front shows that the demand for the bonds issued by the European Financial Stability Fund (EFSF) far exceeded the supply (demand of 43 billion vs. an issue of 5 billion). Irrespective of the source of such high demand, the conclusion is that the EFSF, if enhanced as expected, will become a source of stability, which is a prerequisite for growth.
Third, Germany seems to be becoming more elastic and has started exhibiting greater flexibility regarding the issuance of the joint Eurobonds that will ultimately lead to greater fiscal integration within the EU.
Fourth, while the Vienna Insurance Group voluntarily gave a haircut of 25% in its Greek bond holdings last Tuesday (January 25) – possibly leading the way for a more unofficial haircut initiated by Greek bond holders – we believe that the solution that will be implemented will be threefold: First, an increase in the authority and capital of the EFSF. Second, a buy-back of the problematic bonds by the nations who issued them- funded by loans provided through EFSF, the IMF, and other institutional players. Third, an agreement could soon be reached where the maturity of the bonds will be extended by at least five years. We understand that while the latter is an effective haircut, the institutional investors will be able to keep the face value of the bonds on their books, and thus “save face” in the nominal sense that they will not record losses in their bond portfolios.
Assuming that the above steps materialize within the next three-four months, then the banking system will become more stable and given the commitment of liquidity of central banks, the foundations for temporary stability (sought after since summer of 2007) will be viable. {We emphasize temporary, given that the global credit vessel is still missing an anchor}.
The recent economic developments in the US are uplifting confidence and expectations and thus, if things unfold as projected above, we would not be surprised if we see significant growth in the US (especially in the second half of 2011) which in turn will lead to an unemployment rate of less than 8% by summer 2012. It seems that the US is getting ready to exit the hospital and with it, we would not be surprised if during the last quarter of 2011, even Greece reports positive economic growth.
Ode to exits!
We continue to maintain our precious metal positions as a core holding even with the latest volatility. We have initiated large cap science and technology positions as technology continues to generate higher levels of efficiency for corporate America. We are keeping tight stops on the above until we see where we end up with the US debt ceiling issue. We continue to hold our oil and gas positions and believe they will continue to perform well in any recovery scenario. More on our current holdings in later issues.