I came all too close to crashing my bike this morning.
This was all Greece’s fault of course.
I’ll explain… I was deep in thought over the Greek election as I rode my bike into work. After the last two years, I’ve got a bad case of ‘Greece fatigue’. Frankly, I’ve reached the point where I’d rather watch a 24-hour cooking/dancing/home-renovation reality-TV marathon instead of the latest comings and goings in Greece.
So as my mind wandered in search of what to say about Greece this morning, I almost cycled straight into the back of another cyclist.
A screech of tyres and a swerve, and I averted disaster (note to other rider – cycling at 5kph is slower than walking).
But while I managed to avoid the other cyclist, there’s no avoiding Greece…
This morning the ASX200 is up 60 points on the news that New Democracy (the good guys) pipped Syriza (the bad guys) to the post – 128 seats to 72 seats. Here’s the breakdown:
New Democracy received 29.53% of the vote, equivalent to 128 seats.
Syriza received 27.12% – 72 seats.
Pasok received 12.2% – 23 seats.
Independent Greeks received 7.56% – 20 seats.
Golden Dawn received 6.95% – 18 seats.
Democratic Left received 6.23% – 17 seats.
Greek Communist Party received 4.47% – 12 seats
But the bad news is that New Democracy now has just three days to negotiate a coalition if they want to have a workable majority. And seeing as all these parties loathe each other to the core, they’ve got their work cut out for them. You’d get more chance of consensus from a playground full of five year olds. And to think Greece was the birthplace of democracy…
The result?
Yet another week of market uncertainty thanks to the endless saga of Greece.
But my point this morning is this: it may be getting all the headlines, but Greece is really just a side show.
The market may have a misplaced rally on New Democracy’s ‘win’, but this is just a distraction.
The main event is taking place in the economies of Spain and Italy.
Spanish economic growth has stalled. Its unemployment is 24.4%, which is even higher than Greece’s at 22.6%.
The difference is that Spain is Europe’s 4th largest economy. Spain is to Greece, what Australia is to Victoria.
And Spain is unravelling before your eyes. The 100 billion euros offered by the European Central Bank last week calmed the market for all of five minutes. Spanish 10-year bond yields are close to 7% again. If 6% is ‘code red’, then 7% is ‘code brown’.
As for Italy, according to the government everything is just peachy. They deny there is anything to worry about. But in the words of the character James Hacker, in the TV show Yes Minister, ‘Never believe anything until it’s officially denied’.
So, you know Italy will soon need a bailout when Prime Minister, Mario Monti, ‘forcefully denied’ the comments by Austria’s Finance Minister that Italy is next in line for a bailout. To then seal the deal, the Italian industry minister denied it as well.
The Italian 10-year yields are also well on their way to ‘code brown’ territory.
This is the world’s third biggest bond market (after the US’ and Japan’s). So a rising Italian yield is a big deal.
But it’s not just the bond yield telling us Italy is up the creek without a paddle. We just have to remind ourselves which country’s banks took up most of the 1 trillion euros of Long Term Financing Option (LTRO) loans earlier this year. Italy gobbled up all it could get, totalling more than 270 billion euros in total.
Is that the action of a confident banking sector..?
According to Magellan Asset Management, ‘Italy and Spain total sovereign funding is estimated at €421 billion for 2012 and €345 billion for 2013.
‘And Italy and Spain have funded around 41% of their 2012 requirement.’
These two countries are not even halfway to funding themselves for this year.
So while the news may be good for Greece, you can forget about it. Instead, keep an eye on the Spanish and Italian economies, which are rapidly heading for the mincer.
Instead of denying there are any problems, the Italian Prime Minister should be quoting Bon Jovi:
‘Whooah, we’re half way there
Livin on a prayer
Take my hand and we’ll make it – I swear
Livin on a prayer’
But don’t take my word for it, or Bon Jovi’s for that matter.
Look at the bond yields for other countries: the so-called safe havens of the US, German and French bonds. Recently they hit the following multi-century lows.
The US 10-year bond yield hit a 200-year low.
The German 10-year yield reached a 200-year low.
The French 10-year set a 260-year low.
These are incredible statistics. But the Dutch bond market takes the cake.
The Dutch 10-year yield got to a 500-year low!
When bonds start hitting half-millennium records, you know that all is not well…
These bonds are hitting record lows because some serious amounts of cash are being moved around the markets to prepare for Europe to unravel in the coming months.
But now these ‘lifeboats’ are full and there’s nowhere else for investors to go for safety. Or is there? More on that tomorrow.
Dr. Alex Cowie
Editor, Diggers & Drillers
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