In Greece, cash is king

With the Greek elections between the pro-EU New Democracy party and the anti-bailout party Syriza under way, one can`t stop and think about the critical importance of today`s events. The future of the European Union may well rest on the ballets in this small Mediterranean country that accounts for only 2% of the EU combined GDP. No matter the outcome, Greek households and corporations have switched to cash, stuffing the mattresses with euro bills, just in case the economy reverts to the drachma. Greece has become in the last months a cash economy.

Greece has to stay in!

The Greek may not be the hardest-working fellows in Europe, as they like to think of themselves as, they may not be the tax-loving people that Christine Lagarde wants them to be, they may have one of the biggest average salaries in the European Union, but these are not good enough economic arguments to allow for their eviction from the EU. It is not about Greece anymore, Greece is a symptom of a bigger problem: should the European Union push for more integration ?

The Greek odyssey

Just like the legendary Greek warrior Achilles, at one point Greece seemed invulnerable: the country reported above the European average real GDP growth rates, relatively low budget deficits and stellar growth prospects. The figures ultimately proved deceitful: the budget deficit was adjusted to 12.5% of GDP in October 2009, in a time when the public debt was "only" 90% of GDP. It all went downhill from there.With credit spreads increasing, investors shunned Greek debt, prompting European banks to use cheap ECB credits to purchase more and more Greek bonds.

Is it time to long USD/JPY ?

With the European Union debt deal talks and the US primaries under way, there is little space left for news regarding the second biggest debtor country: Japan. The ugliness contest between the dollar and the euro, seized the news and took the limelight away from the real contestant: the Japanese yen. In the last months the Japanese currency has been slowly appreciating in value against the dollar from 81.11Yen to what is now 76.36Yen. Bank of Japan is most probably going to intervene in the market again, and then traders will be able to fade the intervention again, locking in profits on both ways.

LTRO liquidity tsunami floods back to the ECB with little effect

The so-called Draghi put, more formally named "Long Term Refinancing Operation", through which the European Central Bank is offering almost unlimited liquidity with 3 years maturity at 1% yield, has proven unsuccessful at supporting the sovereign bond market. The big plan was that, by offering massive amounts of low cost financing to banks and financial institutions, they will park some of this excess cash into European debt instruments. Instead of this, it turns out that banks have chosen to deposit the funds back at the ECB and conduct small carry trades at the short end of the yield curves.

Hedge funds prepare to show their middle finger to the European Union and IMF

Besides the risky bet on further quantitative easing, another hedge fund favorite has become purchasing Greek sovereign debt. Some of the hedge funds amassed such large positions of Greek debt, that they may have quite some bargaining power in the upcoming debt restructuring. Because the EU and IMF are going to ask for voluntary write-offs, in order to avoid a formal "bankruptcy", which would trigger the massive CDS market, the idea behind this speculation is to reject any kind of haircuts on their share of debt, and therefore pocket the "defaulted amount".

Europe divided (again)

David Cameron, the Prime Minister of UK managed to stir the markets up a bit yesterday by vetoing the new EU treaty. The accord was meant to turn the European Union into a fiscal union which, in turn, would strengthen the common currency. After 10 hours of negotiation in Brussels, all other 26 member countries agreed to sign the new treaty, but as treaty rules say, in order to amend or change any parts a consensus must be reached.

What does FED's zero interest rate for the foreseable future mean ?

Despite that bond yields in Europe are imploding, and Italy becoming the newest member of the elitist 7% club, among countries like Greece, Portugal, Ireland, all seems to be running well in the US wonderland. The cost of borrowing, as measured by US T-bills, has reached the lowest level since the beginning of the financial crisis. The demand of short term bills, namely 3 weeks, which are yielding 0%, and 13 weeks which are yielding 0.005%, is still extremely high as the bid/cover ratio stood at 3.41 in the most recent Treasury Auction.

Next week's FOREX trading outlook

This week has been a hectic trading week, with most of the FOREX currency pairs behaving like in a bee hive. The global turmoil was enhanced by the two major news: first is the agreed haircut of 50% of the Greek debt and the subsequent leverage of the EFSF and the second one is the systematic dump of US Treasuries by the foreign investors (the latest to join the party is the Norwegian sovereign wealth fund which dumped all US Treasuries and all US mortgage backed securities). What is in store for us next week?