Greek Banks: Problem Contained?

Overnight markets were weaker, especially in Europe, which was impacted by the nasty battle that has engulfed Greece. The country's interest rates continue to climb, as 2-year government debt now yields about 8.3%. Apparently, there's a good deal of difficulty within Greece's banking system, as the Lord of the Dark Matter noted in a couple of emails to me late yesterday:

"Yep. International banks cut off unsecured lending to Greek banks months ago, and some of them stopped anything other than overnight repo (secured) trades with Greek banks. Now even the overnight repo deals with Greek banks are being cut off. Basically the Greek private sector is being strangled to death when it comes to funding. If the ECB doesn't blink big time at their meeting tomorrow, then Greece could blow by the end of this week, causing significant ruptures in Europe."

Based on Trichet's comment this morning -- "that default not an issue for Greece" -- it doesn't appear as though the ECB has done much blinking, or that the ECB has broadened the collateral it accepts. Thus, it would appear, based on the Lord of the Dark Matter's vantage point, that things are liable to get quite ugly for the Greek banking system. Which will have knock-on effects for other banks in countries like Germany, for instance.

If You Can't Pay Your Union Dues Of course, the market will then turn its attention to other EU problem children. Greece, comprising roughly 2% of the euro community, isn't the problem -- it's the fear of future problems, i.e., the PII(G)S. Perhaps at some point, those countries (which probably should never have been in the euro to begin with) will be kicked out, and the euro will be a really strong piece of paper. Then again, maybe the ECB will blink, and it will be just like the dollar.

Due to all the moving parts in this exercise, it's not possible to know how it will turn out. But I think the entire world is realizing that paper currencies are problematic, as they continue to put a bid in the gold market -- thus breaking down the alleged correlations of markets that are supposed to "tell gold what to do."

As for the stock market, the early going saw a decline of about 0.5%, but by midafternoon the market was sporting a gain of 0.5%, before a late-day selloff trimmed the advances to what you see in the box scores.

Away from stocks, oil and the piggys were slightly lower, ditto the metals, along with the dollar.

In other currency-related news, the Chinese appear to be signaling that the yuan will be revalued higher in the not-too-distant future. Now obviously they didn't come out and say that, but to me their body language suggests that that will happen sometime in the next couple months. As to the ramifications, I really don't know, but the longer they indicate the move is coming before it actually occurs, the better-discounted it will be.

Index Close % Change
Dow 10927.07 +0.27
S&P 500 1186.44 +0.34
Nasdaq 2436.81 +0.23
Nasdaq 100 1980.73 +0.17
Russell 2000 699.63 +0.02
Sox Index 371.47 -1.44
Bank Index 55.06 +0.97
Dow Transports 4456.7 +1.38
Dow Utilities 382.65 -0.41
Nikkei 225 11168.2 -1.1
Gold - Front Month 1151.3 -0.15
Silver - Front Month 18.07 -0.74
Crude Oil 85.5 -0.44
Dollar Index 81.55 -0.08
Euro Spot 1.34 +0.04
Long Bond 20-year 115.47 -0.19
FOTM - Yen Spot 93.35 +0.01
4/8/2010 1:05:14 PM