I wrote about it briefly in my financial ramblings on Friday, but it does look like there is a lot of risk of seeing a sovereign nation going down the road of a debt default in the next few months as quite a few countries (including the US) are seeing deficits spiraling out of control. The problem of course is that even one such case, especially if it happened in a high profile country such as Greece could have effects throughout the world. Read any book that describes the recent financial crisis and you will usually hear that everything started getting out of control when Lehman Brothers went bankrupt. Is Greece going to be the start of a devastating domino effect??
Lehman and Greece both hid the truth for some time
Lehman Brothers said almost until the end that it was fine and there was no real issue or liquidity problem. Of course, Greece has been saying the same all along. For years, it used clever tricks from Investment Banks such as Goldman Sachs to “hide” how bad its financial situation truly was. As the New York Times puts it:
“In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.”
Greece has a major ally
Of course, Greek is fortunate to have a major friend as the European Union has a lot riding on its member and that means having nations as powerful as Germany and France have an important stake in Greece. It is far from a given though that European countries will bail out Greece but you could easily make the case that without the EU, sovreign debt default risk (as measured by CDS spreads), Greece would be #1, and it is only at #10:
#10-Greece
#9-Lebanon
#8-Romania
#7-Lithuania
#6-Dubai/United Arab Emirates
#5-Iceland
#4-Latvia
#3-Argentina
#2-Venezuela
#1-Ukraine
Major impacts already
Remember how Lehman Brothers started hearing about market rumors of liquidity issues? This caused most counterparts to start lending to Lehman which in turn created more liquidity issues, and so on. Of course, even with Greece months away from these possible problems, things are already getting much tougher. Foreign institutions and banks have started charging higher rates to Greek banks and cutting off funds. This will of course not help the financial situation of the country. Could all of these talks of a possible default become self-fulfilling?
The Greek government might soon be helpless but for now it is doing its best to get an intervention from the EU: Greek Prime Minister George Papandreou – “There was lack of coordination among the various bodies of the EU — the Commission, the member states, the ECB — and even differences of opinion within these bodies,” he said. “All this has undermined our credibility even within the European Union … all this has not helped our position in the markets.”
Major Impacts in Europe and abroad
And these changes are already making things difficult for Europeans banks. The magazine The Economist puts it best:
“Steep downgrades of the sovereign-debt ratings of countries such as Portugal, Greece and Ireland would probably translate into immediate rating cuts for their banks, as well as higher capital charges on banks’ debt holdings and bigger haircuts when using this debt as collateral.
The consequences of even small changes in a bank’s borrowing costs can be extreme. JPMorgan, an investment bank, reckons that an increase of just 0.2 percentage points in the borrowing costs of British banks such as Lloyds Banking Group and Royal Bank of Scotland would trim their earnings by 8-11% next year”
So imagine if things got much worse and these banks saw capital costs rise by a few percentage points?
How to trade a possible Greek collapse?
Of course, the logical question now would be: “How do I profit from this situation”?
There are many different ways, although it is not as easy for individual investors:
#1-Trade sovereign debt of Greece, Italy, etc (this is much more difficult for individuals)
#2-Short the Euro through an FX trade
#3-ETF plays
As I wrote last week, it is not entirely clear if trading an FX or equity ETF is the best way to do this but here are a few ideas:
Vanguard European ETF (VGK)
CurrencyShares Euro Trust (FXE)
#4-Individual names
The best way to do this would be playing the scenario described by the economist, and trading individual European banks. Some of them such as Royal Bank of Scotland (RBS) are also traded on US markets which makes it an easier trade.
Google news and how it will impact its stock
I’m not quite certain how Google executives and public relations are able to get some sleep as it seems like every day they are moving 100 miles/hour in an attempt to compete with all of its enemies. First up:
Launched as yet another attempt to better compete with Facebook & Twitter, Google Buzz launched amid a lot of turmoil and criticism because of many flaws. Most criticism around Google Buzz is geared towards its potential to help Google better compete in social media but also its flaws in regards to privacy protection. Stunningly, Google had made the default options very flawed. Google did not lose much time to answer back but damage had been done. Two things can be concluded in my opinion:
-Google did not do much testing on Google Buzz – Google has generally been a strong defender of privacy and I would assume that the mistakes made here were made not by choice but simply because Buzz was not tested enough to notice such flaws. Google does seem in a hurry to generate something to compete with Facebook/Twitter.
-Google Buzz is being talked about – To everyone that said Google Buzz had not shot, I would suggest looking at every technology media in the past few days. Turns out that Google Buzz is being talked about quite a bit and it is certainly good news for a company that to this day has been unable to generate anywhere near that word of mouth for its previous social attempt, Google Wave.
Interesting release from Google as they launched a series of template documents aimed to help brides and grooms to-be. You can take a look at their blog post explaining everything here. You can easily see how such tool kits can help Google Docs be more useful. Anyone who has planned a wedding knows how much planning is involved and having template for budgets, invitations, tables planning, timetables, and more can provide a huge help. With many people involved, having documents online for family members to view, modify and update saves many emails. Can you imagine sending an email to everyone involved each time someone new confirms their presence to the wedding?
Is it a major launch? No, of course not. But I expect that such launches provide the opportunity to showcase why users would gain by using cloud computing and more specifically, Google Docs. Long term, this is very positive.
Did you hear about the tragic luge accident on the opening day of the Vancouver Winter Olympics? It is tragic, sad and spread all over the world in a matter of minutes thanks to social media. And where did everyone tune in to get the news & images? Youtube of course. It is gaining more and more power as the first source of news and for that reason, Youtube looks like an increasingly valuable property.
Google Aardvark
Overall conclusion
Overall a decent week for Google and generally positive because of all the attention that Google Buzz received but I will be anxious to see if Google can keep its momentum in the coming weeks… as for impacts on its stock, not much to report from the past few days, I remain comfortable being long the stock.