If you thought Greece would make it through this without defaulting, your hopes should have been utterly shattered this morning. Greece’s deficit problem just magnified after committing to austerity.
Think about that. Greece is already taking a hatchet to its budget, yet the crisis is getting worse for them. What does that say to you?
What it says to me is that the investors who bought Greek bonds are never getting their money back. It was a bad investment, a malinvestment, and that’s the way it ends.
There are two key possibilities at work here, and both lead down the same road.
It’s possible that Greece was just vastly understating its liabilities, and now they’re coming clean. But if they’ve been lying this whole time, what do you think the reaction of their saviors is going to be? I would expect outrage is going to meet the Greek government if they suddenly say they’ve been lying to everyone about how much they really owe.
And the second possible cause of their new deficit is just as bad. What if the potential gains from austerity are seriously inelastic? If Greece is making their economy worse by committing to austerity, then they may not actually be able to get things balanced by getting within their revenues.
I mean, think of it like this. Greece has a natural mean level of taxes, within context of growth. People invested in Greece thinking their tax structure could support X in payments. Now, however, it looks like Greece’s real mean tax level is X-Y, because most of the original X was artificially being created by Greece’s borrowings.
So suddenly, the ability of Greece to even continue meeting interest is in question. If Greece is forced to admit it’s significantly smaller than what they’ve been pretending, then it doesn’t matter how much of their budget they trim.
The real problem here isn’t that Greece won’t cut their budget enough. The problem isn’t that foreign nations aren’t bailing them out enough. Just like the real problem with the housing bubble wasn’t CDS agreements. Or that the real problems with the Tech bubble were businesses that couldn’t turn revenue.
No, altogether, the real problem here is that people invested where they shouldn’t have. Each of the underlying nuances, whether they be volatile products or low tax receipts, or even a surge of bankruptcies, is by itself not critical. We have those things every day.
The problem is that some people are still desperate to admit they didn’t throw their money into a hole. Pretty soon, they’re going to have to face the music.
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I had practically doubled my short in UCO on September 27, for a cost average of $31.06. I covered those shares this morning for $26.58, locking in a quick 15% gain.
We will probably get a bounce, but I’m holding all my other hedges just in case. On a bounce, I will look to trim some fat, and probably redouble my UCO short, while adding to my MGM short.
Perhaps Greece should suspend interest payments and announce a plan of repaying principal on bonds at 70% or whatever they can afford. Sorta like a Chapter 11 bankruptcy. It could be good for financial markets giving some assurance of a settled situation. The euro banks would at least have something to count on.
Just as I type that there’s a report on the TeeVee they have already agreed to a 21% haircut, but may have to take up to 50% haircut.
it’s a good idea. It beats nothing, which is basically what the creditors will get if Greece doesn’t get some give here.
makes it more tuff for them to buy goods from other countries,they would only do c.o.d if the trust in greece is what it is now. all of it just hurts the people.