Brussels appears to have caved in on a Greek bailout even though the concessions that the Greek government has exacted from public employee unions are slight, I said last night on Larry Kudlow’s show. That augurs poorly for control of future crises: if the Greeks got a bailout by threatening to default, everyone else will do the same. A series of bumps are ahead of us.
Some other points:
1) Steer clear of the financials and watch the asset-backed securities market. The Fed’s Term Asset Lending Facility (TALF) which financed investor holdings of asset-backeds is set to expire next month. China’s sponsorship of the non-agency sector has been withdrawn, and the market may retrace its spectacular tightening of 2009. That is very bad for banks.
2) European banks own most of the $1.4 trillion in Eastern European foreign debt. Late in 2009, Austria (which has perhaps $300 billion in bank exposure to Eastern Europe) organized the “Vienna Initiative" to maintain loan exposure to Eastern Europe. If Greece were to default, the weaker sovereigns would go down like dominos. That may explain why the EC Commission offered a bailout with so little in exchange.
3) US unemployment remains the major worry. January unemployment before seasonal adjustment was 10.7%, As I said last Friday after the employment report appeared, seasonal adjustment to reflect loss of jobs after a Christmas hiring boom makes no sense at all when there was no hiring boom to begin with.
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