Saturday, October 29, 2011

The euro crisis is not over yet--By Shan Saeed

Though pleased by the size of the haircut for Greek bondholders, but the deal isn't enough to save Europe, and the problem is likely to come back to haunt investors in the near term. This is my blunt prediction
The size of the haircut for Greek bondholders was much higher than I had expected. Never in a million years did I expect them to impose a haircut of 50 percent, this shows at least somebody is starting to accept reality. Europe is in MESS

European leaders' agreement on a 50 percent haircut on Greek bonds may create an event of default if investors accept it. The 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency[ rating people] as a default event under its Distressed Debt Exchange criteria. While the accord is "a necessary step to put the Greek sovereign's public finances on a more sustainable footing," Greece will face "significant challenges" including ratios of government debt to gross domestic product at "well over 100 percent even in a positive scenario. Politician have yet again delayed the debt issue, sending markets in a shivering mode

It will come back in a few weeks or a few months and the world will still have the same problem, but this time only worse because the European Central Bank and other countries will be in deeper in debt. Furthermore, widespread haircuts across Europe are necessary to truly resolve the crisis. However, Greece is bankrupt, but others are too, and these haircuts will have to come back and be wider. I must tell you. The global stock market rally had the potential to last for a while as it sees some improvement in the debt talks.

There has been a major overhang, so I will see the easing of some pressure going forward, but the problem will come back because the Western world still has not dealt with its debt. Most European countries are increasing their debt rather than decreasing their debt. Until that changes, the problems are going to continue, just as they will in the U.S.

The European Union’s agreement shared with investors says that with banks for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered. Lets see how the global markets behave in the next 6-months. I see a lot of blood in the market.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK

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