Flight from money market funds exposed to EU banks
By Michael Mackenzie and Nicole Bullock in New York
Investors are withdrawing cash from money market funds heavily exposed to short-term debt issued by European banks out of fear that a Greek default could spark contagion across the region’s financial sector.
At the same time there is increasing reluctance among US banks to lend to their European counterparts in the past two weeks because of growing worries over Greece, according to brokers and bank traders.
This could lead to short term liquidity crisis for European banks perceived to be weakened by a Greek debt default and the domino effects. Many of these stocks have fallen sharply in the last week. David Merkel has a good blog article about this and it makes me quite nervous. He writes, “Prime money market funds in the US have been investing 50% of their assets in the Commercial Paper [CP] of Core Eurozone Banks. Well guess what? If the Greeks and other fringe members of the Eurozone default, and the core governments don’t bail the situation out, those holding CP of core Eurozone banks may take a loss. And this is at a time where French and German Banks are facing liquidity issues. Take time to review your money market funds.”
One of the obvious late to the party ideas would be to short these very banks. It’s unlikely they would fail as the ECB or IMF combined would inject capital much like in 2008. If so there is the possibility of them becoming wards of the state, essentially privatized and there would be lots of equity lost. They would go to pretty much $1 type penny stocks aka National Bank of Greece (NBG) France’s top three banks — BNP Paribas , Credit Agricole and Societe Generale. Germany’s top banks are Commerze Bank and Deutsche Bank. Deutsche Bank is the only one with an ADR you can short. Action idea Short DB, supposedly US banks are pretty insulated but in this globally connected shoot first take prisoners later world, it will all come down. No doubt if the Greek Parliment caves into the street next week, the global markets will sell off. When the Greeks stare into the abyss, then they will make the cuts and choices they need to do to survive. Just as the United States will one day have to do.
New York Times As Greece Ponders Default, Lessons From Argentina
By CHARLES NEWBERY and ALEXEI BARRIONUEVO
Published: June 23, 2011
BUENOS AIRES — A decade ago, as Argentina slid toward financial collapse, banks barricaded themselves behind sheet metal to keep out protesters demanding access to their life savings. The article goes on to state, “And yet — buoyed by its ability to devalue its currency back during the crisis — Argentina’s economy is growing.”
There is something to be said for leaving the Euro in my opinion. If Greece were to default they would be most likely opt out of the Euro and print some of their own money. Paying back debts later with cheaply printed Drachma would prove to be horribly inflationary for the people in Greece but at the same time would give them a wage and export competitive gain vis a vis their Euro counterparts. It’s very easy to see the entire structure of the Euro collapsing. I’ve written about this before. The most obvious ways to play this is to short the FXE Currency Shares Euro Trust. Strangely enough the FXE has only gotten stronger all year, now up about 8% on the year. I don’t really know how to square that up with the market’s reactions except to say, real money doesn’t think the Euro will collapse and if anything it will become a stronger currency if weaker countries bail. But if the contagion spreads as it must, then will the Euro still stay strong? I find that really hard to believe. Unfortunately the put options are quite expensive. Action idea Short FXE if you can borrow it. If not consider buy puts on the VIX or FXE itself. Remember though premiums are very expensive and you will need a major drop to break even.
One has to have a sense of history to trade the markets. Just the fact that Greece is being compared freely to Argentina is telling. Greece is a very small economy, the size of the state of Alabama. A financial meltdown there although initially very painful to the global markets will ultimately be contained. As it was in Argentina. And before Argentina it was most of Latin American and the Brady Bonds that provided liquidity to keep the global financial system from becoming unglued. There was the Cold War and the Cuban Missile crisis. And after that Long Term Capital, the Russian defaults, 9-11, the financial meltdown of 2008, and so on. All of these things proved to be enormous buying opportunities. And this will be the same. As the sage of Omaha is fond of saying, ” The time to be greedy is when others are fearful and the time to be fearful is when everyone is greedy.”