Not Greecing the Wheels

Bloomberg reports that the bailout package for Greece, which is an EU and IMF package, has not convinced investors as it is still just a backup and only kicks in if Greece runs out of other options. Apparently investors believe, as I do, that Greece will soon run out of other options. It is certainly a problem for the EU. They are on the edge of violating some of their basic rules/premises. They do not want IMF involvement as that is a sign of EU failure. And they certainly do not want an EU country bankruptcy, though their very structure could lead to it.

Greece by any analysis is a problem child of the EU, though not the only one. They are the leading chin of the PIIGS. More will come if/after Greece fails. Yet Greece is a poster child of what went wrong in the bubble days. Their debt versus GDP went through the roof, real estate prices were sky high based on buyers with bubble financing, the economy has very little left to sustain it in the long term, tax evasion is rampant and the populace is not likely to be willing to go through the pain they need to in order to repair all this damage (few countries are today). Don't believe me, click on this link to Sudden Debt where the author has covered Greece in good detail.

http://suddendebt.blogspot.com/2010/03/greek-experiment.html

At the end of the day, I do not see Greece being able to do what it needs to do to address its problems. It did a number of financial tricks to kick its debt problems down the road and those will be showing up for years to come, and the citizens there are simply not going to put up with the necessary pain when they take the punch bowl away. Then again, I do not see the EU or IMF providing enough support to avoid that punch bowl leaving. So soveriegn bankruptcy is certainly in the cards in my book. Sure, if this were the only problem country for the EU it is small enough to figure something out, but it is not and those citizens footing the bill in other EU countries will not put up with saving all the PIIGS.

For countries around the world with problems, and I definitely include the U.S., it is time to get our house in order and stimulus spending is only making the long term picture worse, not better. Time to take our medicine.

Disclosures: None.

Option ARMs and Commercial Real Estate

A friend recently sent me an article from the WSJ about how option ARM resets this year and next may not be as bad as expected. Two basic reasons for it are (a) interest rates are very low so the resets will not be terribly bad for most and (b) a lot of underwater homeowners have already defaulted on their option ARMs even before the resets so there are not that many left there to default. A third possible reason is loan mods but we all know these are not really happening too often or working when they do (the percentages are small on this having an impact), so I will dismiss that one out of hand.

For the first point, let me note that these ARMs are either resetting to adjustable rate mortgages or eventually will go there and interest rates will not stay this low forever, so this is another kicking the can down the road success story. Moreover, a lot of these loans had homeowners simply paying interest only, so even with rates low the new payments that will include principal will still be higher. But, in any event, the low rates do give some people time to get back on their feet and perhaps refinance if their homes are not underwater, which is a good thing.

The second reason, a lot of defaults have already occurred, I do buy, especially in California where the option ARMs were all the rage.

Does this mean banks are out of the woods? In a word - no. Especially smaller local and regional banks still have a load of commercial loans that are continuing to sour and the pain is not done yet on the commercial side, though I would agree the worst is behind us on residential side. On the commercial side most commercial mortgages are expected to be underwater by the end of this year:

http://bubblemeter.blogspot.com/2010/03/elizabeth-warren-half-of-commercial-re.html

I really think we are in for a world of commercial real estate hurt this year and next. I read a stat earlier this year that the U.S. has significantly more, as in around 50% more, commercial real estate than any other country. For a country where consumers are still over their heads in way too much debt, I do not see commercial real estate rebounding any time soon. Obama can spend as much stimulus as he wants but I do not see many businesses walking out the plank and taking on new leases or real estate any time soon in this economy. This will lead to some massive commercial loan losses this year and next, which is simply the next step in this economy.

Disclosures: None.