Greece Investment Risk - European Crisis Affect on Moodys Ratings

The Greece austerity competition plan and the outcome of Greece wage deal protests are the overriding factor in evaluating the European debt crisis. The Greece wage deal and competition measures for the next three years are a key term of the European Union – IMF loan backdrop deal. A three-year wage deal was struck between with Greece workers' unions and private company representatives on Thursday. The deal sees a pay freeze for 2010. Following years see wage rises based on euro zone inflation. Doomsayers said this deal could never happen.

This is one step but it is a key step in Greece’s structural change. We are three months on and the threat of Greece economic contagion remains. There have been positive developments with the first Greece debt sale going through and industrial unrest slowing down. The overriding threat is that Greece is on the verge of collapse. There are calls for the end of the Euro and the EU. That was the common thought flowing around this morning and has been for the past month or so. Remember though the funny thing with common thought in markets is that it represents the herd and the herd’s positions.

If we delve a little deeper when the contagion frenzy reigned Reuters ran a story on Germany’s leader Angela Merkel before the German parliament. Merkel said a precursor to the EU summit that any Greece help would be as a last resort. Merkel also noted that any bilateral help would only come in combination with the IMF. This ended up happening.

We saw the Euro fall to less than 1.2000, which helped German industry gain business against the Chinese and Japanese in particular. This tells us the wage deals and competition measures Germany struck a few years back have benefited Germany. The Greece austerity competition plan after the Greece wage deal protests seems to be making some headway here. Will wage deals transform Greece so emphatically? We have heard cries for the end of the Euro. The Euro bounced from 1.1890 to 1.3400 since the initial contagion selling. The German Manufacturing and Services PMI reports showed slowing in September as the high Euro bit again. 

Coming to grips with Greece economic contagion one has to understand European gamesmanship. America has seemingly chosen to ignore the European crisis but make no mistakes a bankrupt California is the immediate task at hand. The BP oil spill disaster and the US Gulf economy doom add weight to a US crisis. Back to Europe was Merkel speaking more for all the Euro Zone back in May? After the Latvia IMF credit facility none of the non-Euro zone EU members are expected to object to any IMF involvement.

ECB boss Jean-Claude Trichet extended emergency lending rules, saying Greek bonds won’t be cut off from ECB refinancing operations next year. This is in case Moody’s Investors Service lowers its Greece rating. This where it gets messy as this was a back flip from his comments in January that it wouldn’t soften its collateral policy for the sake of a single country. Sounds like the U.S. here or does it? There is also a thought that the ECB played hardball to insert a lesson for potential destruction in Italy and Spain. We now watch if Spain gets any economic boost from their win in the 2010 World Cup as Italy did in 2006. The point is there are many variables at play here.

Bloomberg Citigroup Global Markets Ltd. in London head of fixed-income strategy Mark Schofield said back then, “There’s a structural desire to stabilize the fiscal environment.” This sums it up really for mine, Europe has been steadfast on not “pissing money against the wall” ala Obama, Bernanke and whoever else you care to mention Stateside.

In a significant development in the Greece Economic crisis and therefore the European crisis a key Greek wage deal was stuck on July 15, 2010. An agreement between the GSEE labor confederation and the SEV industries association is significant for two reasons. The first reason is there is a deal involving the Greek unions. The second reason is the deal includes all of the 2 million private sector workers in Greece.

The tone of GSEE spokesman Stathis Anestis signaled a change in what had been an acrimonious process. Anestis said 'this year there will be no wages rises because it is a particularly difficult year. It is evident that securing jobs is more important than a wage hike'.

The three year wage deal sees a pay freeze for 2010 until July 2011. There will be wage rises based on euro zone inflation in the following two years. The first pay increase is currently estimated at 1.5 percent for July 2011. The second pay increase is set for July 2012.

When the International Monetary Fund and the European Union extended Greece the 110 billion euro ($135 billion) bailout wages was a key condition. Wage moderation is needed to restore the Greece's competitiveness. The bailout terms included private sector minimum wages to remain stable for at least three years.

Vassilis Korkidis the chairman of trade association ESEE told Reuters 'With this agreement we demonstrate that we can give pay increases in this difficult juncture, sending a message of hope,', Korkidia took part in the current wage negotiations.

Greece economic contagion, America has a bankrupt California. This brings us back to California, for this to be the end of Europe as we know it and the EU and Euro abject failures what is the alternative? The US dollar? California I would dare say makes Spain, Greece and Italy look like a picnic and we haven’t got into the other “dog” states. So this argument seems a bit of wishful thinking for Euro shorts at this point. Certainly the 1.50 premium was a bit rich given Portugal, Greece, Ireland problems but does that mean it is the end of the Euro.

Another thought is Germany doesn’t mind this as it brings the Euro back into a more competitive price level and puts the wind up the “red headed step children” of the Euro zone, and there are a few! Merkel’s word as today plays into that thought. I tend to put a little weight on this also because relatively speaking Greece needs are small, around $27 billion (what a world we live in!). Europe is prudent when it comes to “pissing money against the wall” and is fully aware that Italy and Spain are teetering. So would just agreeing and not posturing be worse given that way of thinking?

There is a growing anger with the US and specifically with Goldman Sachs over Greece. This has played out at the g-20 and G-7 conferences since the May crisis flashpoints. Goldman got their fees, proprietary profits and proceeded to screw a nation and a region with impunity. This sounds familiar to many with the other bubbles Goldman is said to have manufactured and benefited from. The SEC has charged Goldman for fraud in the US over the abacus CDO.

Europe has kept Goldman out of Greek bond actions but no doubt they want more action and pressure put on the “Giant Squid”. There is a little voice saying, ‘you know what the IMF means US is on the hook, well good.”  Should the Greece economic contagion hit America than there will be some smug Europeans claiming Karma. If you think America is a immune think of this, California has more debt than the PIIGS combined, not just Greece. That means Portugal. Ireland, Italy, Greece and Spain America. The EU has set up a trillion dollar emergency fund. Will America turn on the printing presses for a bankrupt California? This is something that should concern all Americans.

There are of course the usual arguments of incompetence and non-cohesion throughout the different European crisis. Though how much of this was planned given the different ideals of Germany, Germany and the socialists in both those nations let alone the rest this again comes down to brinkmanship most likely. As far as incompetence and telling fibs, just have a look at this morning’s US Senate actions with the US healthcare bill, the US house has a license on incompetence and storytelling!

For this reason I don’t think you can blindly trash the Euro in favor of the greenback, which brings more appropriate plays in like the Swiss Franc, Australian Dollar and perhaps the Yen. I am aware the Euro was a step up from the ECU to compete against the US dollar and credibility is a major issue. Given how quickly currency regain credibility this isn’t a major factor, just look at the comeback of the Australian dollar since the carry trade collapse and also the Brazilian Real. However if the ECB and France and Germany get all out of whack and become increasingly blustering than the Euro continues under pressure.

The Greece austerity competition plan after the Greece wage deal protests looks to be at least gaining traction. At the end of the day I can’t get past Greece being Europe’s California, well perhaps just Europe’s Orange County. We watch the Greece economic contagion, America has a bankrupt California link develop. That would put an interesting twist should Greece get punted from the Euro zone. That could be viewed as a good thing by some. We now watch European crisis austerity plans unfold. We have the first Greece wage deal, competition measures like this are needed to allow Greece to compete.