Is Greek Default Coming?

Stocks rallied nicely yesterday as investors appear to be optimistic that the debt situation in Europe is getting the proper attention. Yesterday’s teleconference (?) between Merkel, Sarkozy and Papandreou yielded pledges that Europe is committed to keeping Greece in the Union.

Germany and France say they will continue to support Greece with bailout money. Greece says austerity measures will be implemented to get that bailout money.

But the issue of default is absent from the conversation.

Banks are writing down Greek debt. French bank BNP Paribas has taken a $773 million charge from its Greek debt. Germany’s Commerzbank has taken a $1 billion hit. Bloomberg estimates that European banks will loose $27 billion on their Greek debt holdings. That figure assumes 21% losses on Greek debt.

Clearly, that 21% could end up being more. In fact, we should probably assume that it will be.

Since the start of 2010, when Greek debt first became a serious issue, bank deposits at European banks have been falling. Deposits at Greek banks are down 19%. At Irish banks, it’s 40%. Deposits are down 12% in Germany.

U.S. money market funds are buying less Euro-debt, too. Bloomberg says that "the eight largest U.S. money-market funds halved their lending to German, French and U.K. banks over the past 12 months and stopped financing Italian and Spanish financial firms.

The drop in deposits and bond purchases, along with Greek debt exposure are impacting these banks capital base. That means these banks have less in assets to lend against. And it also means they have less ability to cover existing loans that could potentially becomes non-performing. That’s why Moody’s just downgraded France’s Credit Agricole and Societe Generale. BNP Paribas remains "under review."

We know that banks need a steady stream of cash. The lack of it, along with impairment to assets, will damage the credit markets and lead to situations like we saw during the sub-prime mortgage crisis.

With deposits falling, and money market funds wary, the European Central Bank will have to be the lender of last resort for Europe, just like the Fed and Treasury were in 2008 and 2009.

The stock market liked the conciliatory tone of yesterday’s meeting between France, Germany and Greece. And stocks rallied in anticipation that all will turn out well for Europe.

While I’m generally an optimist, I have a hard time being so cavalier about Europe. I’m convinced that Greece will default. And I think the amount will be more than the 21% banks are currently planning for.

I have recently added a chunk of cash to my $100K Portfolio to take advantage of what I think will be an attractive buying opportunity, once Greece actually defaults.

The market research company Gartner says that semiconductor sales will be down .01% this year. Its previous estimate was for sales to rise 5%.

As you might expect, the market has already priced in weaker sales for chips. Semiconductor stocks have been routed since May.

Gartner also lowered sales estimates for 2012, to a gain of 4.6% from 8.6%.

Take a look at the charts for Nvidia (Nasadq:NVDA), NXP Semiconductor (Nasdaq:NXPI) and even Intel (Nasdaq:INTC) and you might make a case for a bullish turnaround for the chips.

Write me anytime at [email protected].

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On Tuesday, Andy will reveal the core parts of his strategy to a select group of subscribers who sign up soon. There’s a strict limit on how many people Andy can accommodate, so I hope you’ll sign up if you’re interested.

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