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 ?

Risk off as EU summit talks dissapoint

The risk markets sold off today as a reaction to the news that UK rejected the European fiscal and budgetary constraints, followed by Intel's 1 billion revenue slash. Ratings agencies Moody's, Standard and Poor's and Fitch were again late at the party in expressing their worries about the long term sustainability of the rescue plan. Fitch declared that last week's summit did little to address the regions sovereign debt crisis and predicted a "significant economic downturn" across the region. Standard and Poor's added that European officials might need another financial shock to get it moving. Gold sold off today as well, in what is a more and more obvious correlation with equity markets. The precious metal is losing its safe haven status.

My 2 Cents about the future of EU

Nowadays news are full of reports on the financial difficulties that European countries are facing: rising interest rates, high rates of unemployment, political turmoil, economic malaise, but once you look for the real source of these systemic risks, you realise that this is window-dressing for something bigger. The fact that the European Union is under a process of fiscal and budgetary unification followed by the political unification and it is using the financial and economic news-bombs as excuses for the loss of sovereignty of some less fortunate EU members.

And surprise: German 1 year yield turns negative

Prost! or Cheers! from Germany as it becomes the European liquidity sponge. After the Chinese have lowered the reserve ratio requirements and the FED lowered the swap interest rates, thereby setting loose more easy money, German 1 year yields have reached the all-time, mind puzzling value of -0.068%. Yes that is a negative yield and it means that investors are preferring to store their money in the relative safety (and probably tax advantaged) German Treasuries even if it means that they have to pay for such a right. Although a temporary situation, it still comes to show that large institutional investors are bidding the German bund into negative territory.

Like a boss: about the upcomming Euro-bonds

When mentioning the possibility of a joint euro-bond a few years ago the audience would have almost instantly burst into laughter and the one bringing it into discussion would probably have realised what a fool he suddenly looked like. Not anymore, peeps, as the French President Sarkozy is pressing for allowing the European Central Bank to issue joint bonds in order to stop the "stampede against European debt". This move comes after yesterday, Germany has failed to auction 10 year Bunds (considered the most safest debt instruments in the entire Eurozone) with a bid/cover rate of only 1.07 and an actual bid of 65% of the 6 billion asked. The rest of 35% had to be covered by the German Bundesbank. As Germany is finding it harder and harder to borrow at such low yields, the only way to stop the bloodbath will definitely be to monetize through the European Central Bank.

German Banks showing signs of weakness

The German financial sectors has been hit hard by the European debt crisis and rumors are now emerging of more and more financial institutions that lack the capital to withstand more pain. Even if they are not in the top 4 banks by Italian and Greek debt holdings (the bonds that were hit by far by the recent debacle), Deutsche Bank, through its North American Taunus Group and Commerzbank are maintaining toxic Euro-debt at a very thin capitalization. I am talking here about contagion at the very core of the European Union.

Who is still holding toxic Italian debt ?

The Italian yields have cooled-off a bit, revolving around the 6.50%-7.00% area, partially due to the ECB rather frequent interventions and on the news that Mario Monti, a former European Commisioner, will lead the Italian government.  Spanish yields on the 10y benchmark are still high up there at 6.31% after recent weak macroeconomic news and French 10 year bonds rose today to 3.72%. The most solid European country, Germany, which reported today a 0.5% quarterly increase in GDP and its 10 year yields stand at 1.81%. Who is taking this loss ?

When the EU tsunami clears out the US debt crisis tidal wave will emerge

Nowadays the media are painting a bleak picture of the European Union debt crisis. The EFSF has been leveraged, the proposed "hair-cut" on Greek debt has been twisted and turned on all sides, without any visible conclusion. Contagion from the perypheral countries (PIGS) may spread out to the more stable countries: Germany and France (which is already on a credit downgrade outlook from Moody's). Meanwhile the US debt crisis tidal wave is closing by without anyone noticing.

While Greek yields skyrocket, the US continues its road to serfdom

The European Union may have done a very costly mistake by banning naked CDS shorts, because traders will now retort to outright shorting the underlying bonds. And short they will: Greek yields reached a staggering 188% for a 1yr note and they don't show any signs of cooling off. With Angela Merkel and  Nicolas Sarkozy still undecided about the European Rescue Fund, things can only get worse. Meanwhile America continues its slow road to serfdom.

Germany fails to auction 10y Bunds on EFSF concerns

Growing concerns regarding the leveraging of the European Financial Stability Facility (EFSF) are weakening the core EU financial markets. Yesterday, Spain has been downgraded by the rating agency Moody's, two notches to AA1 level and France looks to be the next to lose its triple A rating.

All these concerns have started to spill out at the core of the European Union: Germany, France and the United Kingdom. Does EU really have a firm response for the upcoming debt crisis ?