“Capital is going on strike,” our foreign expert Ralph warned us late last week when he swung by the Sound Of Cannons East Tower offices for a quick update on the crisis. Ralph was early… and right on the money with his analysis of the event.
Opening the virtual papers this morning… et voila, the physical manifestation of the idea:
Depicted here, a general strike, as the mob fears austerity measures the government will introduce as part of a deal to borrow an additional $146 billion from the EU and IMF.
Assuming EU approval, the bailout will clock in as the largest sovereign bailout in history.
Soon Greek citizens will see their taxes at record highs and public pensions and benefits cut to the bare minimum. One analysis this morning projects the deal will put Greece in recession until 2017.
“This is going to be the biggest story in financial markets this year,” Ralph continues. “When the Greek government cuts expenditures and raises taxes, it will suck cash flow out of the private sector. Houses and firms will not have as much cash flow. That means the existing debt load to the private sector will be harder to service. So we’re not going to see just public debt distress -- which investors understand now -- but private debt distress as well. Some of these countries, like Spain, have very highly leveraged private sectors -- even more leveraged than their governments.
“What this means is that banks that have exposures in terms of private loans to households and in the eurozone periphery are going to find their loan losses going up. And then investors are going to start asking questions about their capital adequacy. And then, how can they raise capital in such an environment?
“I think many of the eurozone banks could be wonderful shorts.”
Opening the virtual papers this morning… et voila, the physical manifestation of the idea:
Depicted here, a general strike, as the mob fears austerity measures the government will introduce as part of a deal to borrow an additional $146 billion from the EU and IMF.
Assuming EU approval, the bailout will clock in as the largest sovereign bailout in history.
Soon Greek citizens will see their taxes at record highs and public pensions and benefits cut to the bare minimum. One analysis this morning projects the deal will put Greece in recession until 2017.
“This is going to be the biggest story in financial markets this year,” Ralph continues. “When the Greek government cuts expenditures and raises taxes, it will suck cash flow out of the private sector. Houses and firms will not have as much cash flow. That means the existing debt load to the private sector will be harder to service. So we’re not going to see just public debt distress -- which investors understand now -- but private debt distress as well. Some of these countries, like Spain, have very highly leveraged private sectors -- even more leveraged than their governments.
“What this means is that banks that have exposures in terms of private loans to households and in the eurozone periphery are going to find their loan losses going up. And then investors are going to start asking questions about their capital adequacy. And then, how can they raise capital in such an environment?
“I think many of the eurozone banks could be wonderful shorts.”
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