Notwithstanding the Eurogroup’s assistance to Greece, Fitch’s ratings agency cut that country’s sovereign debt rating to “C” and stressed that the odds of a default remain “highly likely in the near term.” Fitch’s is most preoccupied by the idea that private creditors of Greece could be forced to settle for a debt swap with the country – a situation which could, de facto, be termed as a technical default, even though it would wear the label of a “distressed debt exchange.” One of Germany’s top economists, Hans-Werner Sinn, has characterized the Greek rescue as “illusory” as it imposes a nasty deflationary paradigm on the country.
This forced acceptance, or subordination of private investors is what prompted Marketwatch’s contributor Todd Harrison to conclude that “Investors presumably choose fixed-income strategies in an effort to guarantee safety in exchange for upside gains. If that safety is deemed arbitrary — if a central bank is able to subordinate other investors of that very same security — then that, my friends, is a default regardless of snazzy semantics or promises that it’s an isolated situation. You don’t need a law degree to understand this; you only need to have an unbiased lens.”
At the end of the day, many observers correctly view the Greek rescue deal as not one that actually sends euros in the direction of Athens at all, but, rather, into the coffers of the European banks that threw caution to the wind back when they loaded up on more Greek debt than was possibly advisable when considering that country’s repayment capabilities. Thus, the seven-month-in-the-making ‘sigh’ of relief heard on Tuesday may be no more than the initial salvo of real troubles yet to come in Europe. Lost in the news flows or recent weeks was any mention of Italy, Spain or Portugal and their debt predicaments. As of this morning, Italian bonds are already under ‘pressure’ and their yields are edging higher…
And, yet, none of the above should yet be construed as the beginning of the end of the euro. As Chancellor Merkel has repeatedly pointed out over the past seven months, the ‘stakes’ are too high. As billionaire investor and philanthropist George Soros see it “the euro cannot fall apart because, if it did, the consequences would be catastrophic, because financial assets are intermingled based on a common currency. And if they became separated and had different values, you wouldn’t know whether your counter-party was bankrupt or not. So it would be a dislocation that would be out of control.”
Something else that edged higher was the gauge of Chinese manufacturing activity for this month. Good as that news might sound at first blush, the reality is that China’s flash PMI (provided by HSBC) remains under the pivotal 50 mark on the scale and continues to indicate contraction. As such, the number may only reflect the re-starting of factory operations following the Lunar New Year festivities and it might not be reason enough to begin cheering yet. The Beijing government’s official figures on manufacturing PMI levels will be released on March 1.
Still seeking safety? Do not let it come as a shock to learn that the safest banking sector in the world (sorry Switzerland) continues to be located in…Canada. Yup. The Great White North can really boast about this one. “Canada’s banks were named the soundest in the world for the fourth consecutive year in 2011 by the World Economic Forum, and Bank of Canada Governor Mark Carney was chosen in November by leaders of the Group of 20 nations to head the Financial Stability Board. The board is charged with overseeing efforts to write new rules for international finance to help avoid another global credit crunch.”
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America