September 6, 2011
Chemicals (and bailout wizards) Uncharged
The Euro crisis is only few months away from reaching 2-years old (unofficially, the crisis started with a Greek debt downgrade in December 2009). Along the way we have seen a couple of basic bailout attempts and the creation of the European Financial Stability Facility. But we have not seen is some form of default. If yesterday’s market action is any indication, that may be about to change:
Presently, the Greek debt/GDP ratio is 144%, and is likely to reach 180% by year-end. It was only in June that we observed (see Greek Yields - Certain Default But Not Yet ), "At the point that a near-term default becomes likely, we would expect to see one-year yields spiking toward 40% and 3-month yields pushing past 100% at an annual rate (essentially pricing near-term bills toward the anticipated recovery rate)." To see the one-year yield leaping suddenly to 67% is an indication that we should brace for a very serious turn of events almost immediately. Hussman
Adding insult to Greece’s injured bond market is the realization that there is no consensus with regards to how to deal with the Euro crisis at this stage. To be sure, some are calling for the issuance of eurobonds, some are arguing for a dramatic expansion of the EFSF, some want a large-scale recapitalisation of European banks, some want the IMF or G20 to step in, and still others, including incoming ECB president Mario Dragh, are offering vague ‘economic integration’ ideas. That as the euro crisis rages all the above is being talked about is, to say the least, surprising. More surprising still is when the ongoing crisis (at least the ‘crisis’ threatening to spread in the financial markets) is completely ignored in favor of offering something that itself would ignite a crisis:
“There is a proposal led by France and Germany that eurozone countries should be required to balance their budgets.”
The sole conclusion, at least for the moment, is that should the current situation hold, Greece will default/restructure/leave the eurozone very soon…
As if the euro crisis were not enough, there is the growing prospect of a U.S./Global recession. And while last week’s pitiful U.S. jobs report may be catching all the headlines, the real story that may be starting to develop can be seen in the collapse in a company like Clariant. Down by 16% after it downgraded its outlook, Clariant, a chemicals company, was the worst performing stock in the Stoxx600. Beyond the strengthening Swiss franc, the euro crisis has nothing to do with Clariant’s price collapse this year. Rather, the stalled global recovery does.