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Greece Contagion Risk

  • Written by Syndicated Publisher No Comments Comments
    April 19, 2015

    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.

    About The Author

    Images: Flickr (licence details)

    About the Author

    David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a masters in philosophy from the University of Pennsylvania.

    Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a participant in Bloomberg radio programs.  He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange. He co-authored the book Invest in Europe Now!

    Mr. Kotok currently serves as a Director and Program Chairman of the Global Interdependence Center (GIC) (www.interdependence.org), whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. Mr. Kotok chairs its Central Banking Series, and organized a five-continent dialogue held in Philadelphia, Paris, Zambia (Livingstone), Hanoi, Singapore, Prague, Capetown, Shanghai, Hong Kong, Rome, Milan, Tallinn, and Santiago, Chile. He has received the Global Citizen Award from GIC for his efforts.

    Mr. Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), serves on the Research Advisory Board of BCA Research, and is also a member of the Philadelphia Council for Business Economics (PCBE).

    Mr. Kotok has served as a Commissioner of the Delaware River Port Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. He has also served as a board member of the New Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority.

    Mr. Kotok hosts an annual Maine fishing trip, where, it is rumored, most of the nation’s important financial and economic decisions are actually made.
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