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Beggars Can't be Choosers - Weaker Data, Greece and MF Global Killing Risk

Last updated 11/1/2011 10:05 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

Beggars can't be choosers and the fact that Greece even thinks they have a choice in accepting the EU debt deal is beyond logic. For the past month, European leaders took on the hard challenge of crafting a broad rescue plan for the region and convincing bond holders to voluntary accept a 50% haircut on Greek debt. Everything was going well up until yesterday when Greece decided to throw a big wrench into the EU's rescue efforts by announcing a referendum, sending currencies and equities sharply lower. The problems were escalated by the demise of MF Global, which served as a harsh reminder to investors of how leveraged sovereign bets can go wrong. Manufacturing data from the U.S. and China were also disappointing because they provide evidence of slower global growth. The manufacturing ISM index fell from 51.6 to 50.8 in October, with deterioration in prices, production, employment and inventories. Prices contracted at its fastest pace since May 2009, adding to the case for more stimulus from the Fed. At this point, there are so many factors working against risk appetite that the path of least resistance for euro remains lower while the U.S. dollar and euro remain in demand. MF Global is not the only financial institution to take sovereign bets but hopefully they are the only ones with such sloppy internal controls.

We can leave it to the Greeks to cause more trouble for Europe and the financial markets. Neither Greece or the Eurozone can handle a no vote and the only rational reason for holding the vote would be if the Prime Minister felt certain that his citizens would approve the deal. Unfortunately with 60 percent of people surveyed in a local poll opposing the deal, it has a greater chance of being rejected than accepted. The reason why a referendum has been announced is obvious - the Greek Prime Minister doesn't want to be pushed out of office and wants to appear that he cares about the opinions of the Greeks. But now is not the right time to play political games particularly when a no vote could mean an outright default. 

Although the sell-off in the EUR/USD clearly indicates that risk appetite has taken a sharp U-turn, the widening of Italian-German and French-German 10 year yield spreads shows how serious the concerns have become. Both Italian-German and French-German 10 yr yields spreads have widened to record levels, meaning that investors believe the risk of investing in Italian or French bonds versus German bonds, which are considered the safest fixed income investments in the Eurozone is higher than where it was back in October, when Greece was at the brink of default. By deciding to hold a vote on the EU debt deal, the Greeks have erased months of hard work by EU leaders and restored the market's fears about contagion for Italy and France. This makes this week's G20 meeting all that more eventful. Originally, the G20 Summit was expected to be a nonevent with the EU debt bringing stability to the markets - now that uncertainty is once again at escalated levels, the G20 may be forced to offer support to the markets verbally or physically. 

We have already seen evidence of central bank officials succumbing to the pressure of European uncertainty. The Reserve Bank of Australia cut interest rates by 25bp last night and even though they attributed the cut to the prospect of lower inflation, we are certain that the volatility in the markets have played a role, with the RBA feeling compelled to take an insurance cut. Thousands of investors in Australia have been affected by the destruction of MF Global and the rate cut will help ease some tensions in the local banking sector. The return of volatility could also encourage the European Central Bank and the Federal Reserve to take similar measures to ward off recession.

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Comments (1)

karla zavou

February 14, 2012 at 05:57 AM ET

Beggars surely can’t be choosers. But are you really a beggar if your politicians by the aid, or by an inactive surveillance EU system manages to rob you off your money? Why pay back a debt which has always been in someone else’s pocket?

During the past years both our supreme political parties have strengthen their political powers by distributing jobs in the public sector to their potential voters. Some public sector jobs where openly given to their supporting people, others (especially the underpaid or demanding ones) could get reached by the ASEP exams, but those where so slow that still political powers had to “intervene” and employ people from their own supporters(again). Those who did not strongly belong to the two major parties had no chance to be selected, and if they could pass the threshold of ASEP exams, they would still have to face their powerful co-workers who belonged to the two major political parties.
For instance OPAP, the monopoly public bet organization, has always employed people through the dark political or economic doors. It may not be a coincidence that those lucky employees there are still highly overpaid. Sadly it is a closed club, you can’t dream of ever be given the chance to work there, regardless of qualifications or other favors. If anyone tries to raise any question about OPAP’s improper function, many eyebrows will be raised since it is a “prosperous public organization”. How could it not be? It only sells air, with the mystery help of sinful INTRALOT, a private company which sells to OPAP all of its infrastructure, by secret agreements, of course.
Our country is suffering by many such injustices. OSE, our public railway company for instance, is suffering by such malfunctions, scandals and many more. No Greek politician can now turn against those powerful public work groups, because the Greek Parliament is influenced largely by those groups. A Greek politician who will dare to touch the rights of those closed clubs will lose their carrier (or more). It appears that our Parliament is representing mainly the rights of these strong worker groups and not those of the rest of the society. The non public servant Greeks hope that this ongoing employment of those politically supported will stop, putting an end to our sinking economy and stopping a long corrupted social symbiosis.
Unfortunately for years the Greeks together with the EU loans were imprisoned into financing this unfair system. The taxes for the Greek businesses and free lance workers have for long been unjust and strict and the money paid was obviously going towards private pockets and not in the deteriorating infrastructure of all levels. (Up to today we do neither know how many public servants we have, nor how much they cost us, and only recently did the public hospitals start using technology for their spendings). As a result non- public workers were struggling to find ways to avoid overwhelming taxation and the state was becoming more and more cunning fighting to get more. Le tonneau des danaides or the jar without bottom was continuing in public expenses without any surveillance. Later it appeared that our politicians were not only mocking us, as we long knew and struggled to react, but also their EU partners by intervening illegally in the documents they were providing about the course of our economy.
I am certain that no one actually believes that Greeks are destroying their country because they fail to simply comply with loan terms. The elaborate CV’s of some of the undersigning news analysts leave me absolutely no doubt about that. This is why a description that “beggars can’t be choosers” cannot seriously appear as a lead article in a serious newspaper. We trust English and American newspapers sometimes more than our local ones, but we expect from the newswriters to speak of the background picture rather than describe the surface. We read corrupted journalism every day, so we know its mechanism.
We also believe that EU politicians showed little or no surveillance to where the EU monies were going, not because they are not clever people. Greek politicians maybe now taking the blame for a corrupted and sinking economy, but the European people will also realize that their political representatives should know better about spreading EU monies without any means of surveillance. Maybe they fear exactly this, so they prefer to turn public opinion against “lazy Greeks”? I am confident that international free press will leave them unaided and even expose them. There is no better fate of a glamorous CV than to guide proper and truthful thoughts to people. German political scandal of Siemens is a good example of public monies heavily running into dark private pockets. And many more which we know and others which we will never possibly learn.
Thank you deeply for your interest in our poor country. Severe corruption affects democracy and it is not a local or superficial issue.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.