Sudden Greek Chaos

Posted by Jack Crooks - Black Swan Capital

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Greece Contagion Risk

Source: Bloomberg.  Today, April 17, 2015.  Hat tip to Erwan Mahe, my articulate and observant friend in Paris who emailed me a note this morning..
 
“Central banks in southeastern European countries, in cooperation with ECB’s SSM, have told banking subsidiaries of Greek lenders in their countries to exit all exposure to Greek state bonds and treasury bills, Kathimerini newspaper reports today, without saying how it got the information.”  Credit to Paul Tugwell, the Bloomberg reporter attributed to this story.  This story was filed at about 4 AM, US east coast time .More details are: Exposure exit order also includes deposits in parent Greek banks, loans to Greece-based lenders; Move to protect national banking systems in event of “a Greek accident” and any possible contagion if Greece’s talks with euro-area partners don’t lead to positive result; Order made by central banks of Albania, Bulgaria, Cyprus, Former Yugoslav Republic of Macedonia, Romania, Serbia and Turkey; Greek banks have large market share in Bulgaria, Cyprus, Former Yugoslav Republic and Romania.
 
This is why the market is turning red this morning.  Contagion is an unknown.  The issue is not about the IMF; it is about banking systems melting down.  The most important item to watch is the provision of Emergency Liquidity Assistance (ELA) from the European Central Bank (ECB).  That is the only source of funds to keep Greece alive while the political negotiations continue.  Additional ELA requires approvals from the ECB.  Germany is the largest weight in the ECB according to its capital structure.  France is next, etc.  
 
We are watching drama with high intensity.  We are also, avoiding the direct exposures but maintaining the currency hedged European stock market exposure.  These events mean a certainty that the ECB will continue its policy of negative interest rates for the next year and half.  These events virtually assure that outcome.   Meanwhile, the inflation statistics from Europe suggest that inflation is falling.
 
More will be revealed as the weekend progresses.
 
David R. Kotok, Chairman and Chief Investment Officer
 
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Jack Crooks
Black Swan Capital