Heta Senior Bonds Plunge as Austria Cuts Off Aid to Bad Bank

Well, it wasn’t Greece that was the most interesting/potentially dangerous country yesterday – it was Austria, where its so -called “bad bank”, Hypo Alpe Adria, effectively went bankrupt. The Austrian government has closed it down, with the discovery that around €8.5bn is “missing”.  As in Cyprus, bondholders – senior creditors – will be forced to accept a severe haircut – a bailin, in other words. You might not see this as too significant, but overall, it’s another nail in the euro coffin, although for the moment, the markets don’t appear to see it like that, with EURUSD still around 1.118 as I write. I expect it to fall over the next day or two, perhaps to 1.105.

And despite the last few days of “calm” as related to Greece, as I have suggested often enough, the problem hasn’t somehow gone away, and it won’t be going away any time soon. Yanis Varoufakis – the finance minister of what he himself calls “a bankrupt country” has been giving radio interviews over the past couple of days, insisting that “whatever it takes”, Greece will repay the IMF the €1.5bn that’s due over the coming few weeks – €300m of it being due this Friday. The economy minister is saying there will be “no problem”, since (quote) “We have €3bn or €4bn in the central bank.” Now I have to suggest that an economy minister who allows a roughly 30% margin for error in his calculations, has absolutely no idea at all as to how much money actually remains in the central bank! In any event, that’s money earmarked for social benefits, such as pensions payments. If it’s used to repay the IMF instead, what will happen then? Does Syriza believe its voters will continue to stand by the government? Several MPs have openly broken ranks already, and one has written an excellent piece in the UK’s Guardian newspaper, suggesting that “To break free from austerity, Greece must break free from the Euro.” And of course, breaking free from the Euro is the only viable solution, no matter what might be the short term pain of so doing. It was interesting to note that Spain’s finance minister is saying that a third Greek bailout is “imminent”, at a cost of €30bn to €50bn, and that his country will be expected to contribute 14% thereof – not something the people of Spain really want to hear.

Elsewhere, Australia’s Reserve Bank surprised us all, when it didn’t reduce interest rates. “The market” was expecting a reduction of at least 0.25%, if not even 0.5%, but didn’t get it. As a result, AUDUSD recovered from around 0.777 to 0.784, but it’s starting to lose traction again. With 35% of all Australian exports destined for a contracting Chinese market, traders are still pretty bearish that currency pair – with good reason in my view.

In the USA, the yield on ten year T Bills has broken above 2%, and looks to be heading quite a distance higher, while the tech – heavy Nasdaq Composite index has broken above the psychologically important 5000 figure. The “irrational exuberance” words of former Fed Chairman Alan Greenspan come to mind… (Regarding the Nasdaq, not T Bills – where rising yields mean falling capital value.)

Finally, in Europe, French factory orders have now fallen for nine consecutive months, as overseas demand dries up. That’s a trend likely to continue. France of course has never been able to adhere to Eurogroup deficit limits – it’s pretty unlikely they’ll have much of a fresh story to tell when they supposedly put forward proposals to deal with that, later this month! But unlike Greece, they are far too big to be bullied.

Another day when Greece isn’t in the headlines

Another day when Greece isn’t in the headlines – I wonder how long it will be before Mr Varoufakis and co take centre stage again? Today however, it’s Mario Draghi, head of the ECB who’s in the spotlight. His QE announcement yesterday afternnon – along with his fanciful claim that EZ inflation is growing – saw the euro recover somewhat from its recent downward spiral, but the effect of his words didn’t last long, and as I write, EURUSD is trading below the psychologically significant 1.10 number, and heading perhaps for the even more significant round number of 1.00. Draghi has published the list of “assets” his (alleged) €60bn per month “big bazooka” will be able to buy. It doesn’t really make happy reading as regards providing any kind of reassurance that it will work out well. For example, he won’t be able to buy any short – dated German bonds, because their yield is below the cutoff figure stipulated by the programme. He’s just moving money (aka debt!) around in a game of musical chairs – he says the ECB will buy bonds from the European Financial Stability Fund for example – not to mention the European Stability Mechanism and the Euro Investment Bank, among others. The famous definition of insanity – attributed to Albert Einstein – was “To do the same thing over and over again, while expecting different results”. And for sure, Eurozone QE falls into that category! It hasn’t worked in the USA, nor in Japan, and the QE – lite undertaken these past eight years, hasn’t worked in the Eurozone either. Ah, but this time things will be different……Mr Draghi is either a total idiot (unlikely) or he has another (hidden) agenda altogether….

Speaking of Japan’s QE, a member of the BoJ’s management committee has just broken ranks to suggest that the idea of achieving 2% inflation by the middle of next year, is “a fairy tale”. How true – and going back to Draghi for a moment, he too seems to be in a world of his own when he claims EZ inflation will reach around 1.8% a year by 2017. I don’t believe there is the remotest chance of that becoming the case. The point is that for QE to work, the money created needs to reach the “real economy”, and for that to happen, people need to be willing to spend, so that companies that supply the demand, feel able to borrow in order to expand, and hire more workers. At present, that’s simply not the case. The only companies that seek to borrow, are those not creditworthy enough to attract a lender. So all this QE (and I very much doubt if Draghi will get near the headline €60bn a month) will go to prop up equity prices, and make the richest 1%, even richer. For a time.

Finally – to mention Greece briefly again, Varoufakis, the finmin, is saying (in defiance of his Brussels masters) that the 393 cleaners of government offices, who were sacked as part of the previous government’s austerity measures, “will be rehired”. He’s not giving them a date however….. And Angela Merkel and Juncker, the EZ president, claim that a third Greek bailout “is not being discussed”. “It’s too early to talk about it” says Juncker – which of course means that it most definitely hasn’t been ruled out. And it’s 100% certain that if Greece is to be kept in the eurozone, a third bailout – and maybe even a thirty – third bailout, will be needed!