Posted on Friday, March 9th, 2012 | In Current Market News, Exchange Traded Funds
Greece successfully concluded its debt swap but more trouble could lie ahead
No sooner had Greece successfully concluded its bond swap than Fitch Ratings downgraded the country’s long term rating to “RD” which means “Restricted Default” after Greece forced some of its private creditors into accepting the terms of the deal through the collective action clauses which makes this a “distressed debt exchange” situation.
So now Greece can get its second round of bailout money but even before the ink dries on this deal, talk is springing up of a need for a third bailout due to deteriorating economic conditions in the country.
Over 85% of Greece’s private creditors agreed to the deal that will see their bond holdings slashed in value in the biggest bailout of a nation’s debt in history. Their GDP is in severe contraction, down 7% while unemployment is above 20% and so more hard times obviously lie ahead. Today’s deal took care of private debt, for now, but Greek public debt could become a problem and without solid growth, the debt/GDP ratio goals might easily be missed.
But for today, the European Finance Ministers say that Greece has met its obligations and so this round of bailout money will be disbursed in time for the March 20th deadline when Greek debt comes due.
The big negative in today’s deal was that Greece didn’t get enough voluntary participation and so had to trigger the so-called “collective action clauses” to force the holdouts to participate.
What this means is that the International Swaps and Derivatives Association will meet today to consider whether or not this is a “credit event” that would trigger the credit default swaps, insurance, on Greek debt that could total $3 billion.
While leaders from Angela Merkel to Christine Lagarde and the Greek political establishment all hailed the deal as a great success, European ETFs in the United States today paint a different story in mid-day Friday trading.
Europe ETFs at mid-day Eastern time on Friday:
iShares MSCI Germany ETF: (NYSEARCA:EWG) -0.70%
Vanguard MSCI Europe ETF (NYSEARCA:VGK) -0.70%
iShares MSCI Spain Index ETF (NYSEARCA:EWP) -1.2%
CurrencyShares Euro Trust (NYSEARCA:FXE) -1.2%
iShares MSCI Italy Index ETF (NYSEARCA:EWI) -2.2%
Bottom line: Amidst the euphoria, troubling signs emerge as Europe ETFs and the Euro dollar are in decline, which can only be seen as a vote of no confidence in the terms of today’s deal.
About John Nyaradi (http://www.wallstreetsectorselector.com)
John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.