Positions in Europe: Long Germany (EWG); Short Spain (EWP)
All eyes and ears are waiting for Greece’s confidence vote on PM Papandreou’s current government, scheduled to be announced by midnight local time, or 5pm EST tonight.
An expert on the Greek political state recently stated on a JPMorgan conference call that the probability that Papandreou’s leading PASOK party wins the confidence vote is around 75%. We think the number is realistic and expect, despite a few PASOK party dissenters in recent weeks, parliamentary heads to vote along the party line to secure their jobs.
Concerns over party defection should be put in context. Over the last 10 days 2 PASOK deputies resigned, meaning their seats were turned over to new PASOK members, and two members defected, meaning they refuse to vote for the party but don’t give up their seats. Currently PASOK has 155 seats in the 300 seat chamber, or a majority of 5 seats. While the party had as much as a 10 seat majority in 2009, history has shown that a party can rule with as little as a 1 seat majority.
The main opposition party, New Democracy (under the leadership of Antonis Samaras), currently polls around 30% approval, or around 10% higher than PASOK if elections were held today, awaits tonight’s vote. Commentators criticize New Democracy’s anti-austerity position and lean to renegotiate bailout terms with troika (ECB, IMF, EU) as short-sided and unrealistic for their positions are squarely against troika’s mandate that bailout monies will only be provided if the €78 billion austerity package [€28Bill in spending cuts and tax hikes and €50 billion sale of private assets by 2015] is passed.
Risk, as reflected by Greek sovereign CDS spreads and bond yields, has come in over recent days reflecting the likelihood that Papandreou wins the confidence vote tonight and Greece receives future bailout funds (see chart below). That said, risk in Ireland and Portugal continue to trend higher, and indicate once again that fiscal imbalances across the periphery are far from rear-view (see second chart below).
We expect to see EUR-USD support around $1.42 and trade up to $1.44 over the immediate term, bouncing on headline news, but ultimately finding support as big brother Troika steps in to aid Greece over the intermediate term.
If Papandreou wins the Confidence vote tonight, here’s a timeline of important events over the next weeks to keep ahead of:
Thursday, June 23-Fri June 24 – Summit of EU leaders to assess the 18-month-long debt crisis.
Thursday, June 30 – Greece votes on a €78 billion austerity package, the passing of which is a precondition, as defined by the European finance ministers, to get its next quarterly (€12 Bill.) installment of bailout money from Troika in July.
July 3 – Eurozone Finance Ministers meet. Assuming the Greek parliament votes to pass the austerity/privatization measures, the next tranche of IMF money would be formally released following this Jul 3 gathering.
July 11 – European Finance Ministers meeting.
Banks Indicate Risk
As is typical for our weekly European Risk Monitor, our European Financials CDS Monitor shows that bank swaps in Europe were wider last week, week-over-week. 35 of the 38 swaps were wider and only 3 tightened. The move is in line with the rising risk premium to own the perilous financial state of the periphery.
We do not currently see the weakness in Greek capital markets as a buying opportunity. For reference, Greek equities are down -27% since a high in February, and finished 2010 down -36%. We’d get short Spain or Italy at the right price. We’re currently short Spain via the etf EWP in the Hedgeye Virtual Portfolio. We remain long Germany (EWG), despite a more cautious view given slowing high frequency data points over the last months, the newest data including ZEW’s 6-month forward looking economic sentiment survey that plunged to -9 in June versus 3.1 in May.