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Greece Gets $61 Billion Bailout From EU, IMF

Written By Brian Hicks

Posted April 12, 2010

Editor’s Note: For a more updated and in-depth analysis of the Euro bailout from Wealth Daily, click here…

Spain and Portugal must be licking their chops…

After endless speculation, the EU is getting closer to bailing out Greece. The deal isn’t finalized yet — despite the headlines and leaders trumpeting a deal, which almost reeks of desperation.

But there has been progress… if you can call it that.

Germany is caving from pressure to put a deal together, after making a lot of noise about moral hazard in recent months. They’ve tentatively agreed to provide roughly one-third of a massive $61 billion package.

The aid will come in the form of low-interest three-year loans. Greece has $9 billion in notes coming due this May, which explains the announcement’s timing.

The EU’s Bazooka

But Greece will only use the lifeline if a rescue becomes necessary. So they say…

(That should sound familiar to U.S. readers. Remember Hank Paulson and his financial bazooka?)

Back in mid-2008 — when he was selling Congress on unlimited bailouts for Freddie and Fannie — then Treasury Sec. Paulson said, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.”

We all know how that turned out. Pretty well — at least for Paulson’s buddies. It let them keep dumping questionable loans onto the public’s lap.

Meanwhile, Freddie and Fannie continue to hemorrhage billions and require government backing.

It looks like EU financiers are using a similar ploy to sell this bailout to their citizens. It’s a lot easier to sell an expensive plan when it “may not be needed at all.”

There’s no doubt that Greece is going to need the cash. The question should be whether $61 billion will be enough.

All this does is buy Greece a little time. They now have three years to fix decades of systemic mismanagement, excess, and corruption… Three years to slash budget deficits from 12.9% this year — recently revised upward from 12.7% to 3% in 2012.

Probably not gonna happen. But it buys some time, which is typical of today’s kick-the-can school of economics.

Morally Hazardous

Carten Brzeski, an ING economist who worked at the European Commission, summed up the situation: “All that fuss and talk about not putting taxpayer money at risk has been made obsolete.”

It’s true. Once you put a safety net in place, everybody gets more daring.

Now that the net is in place, EU members have an incentive to let their budgets get out of control. And until the EU puts something in place to discourage reckless spending, that’s not going to change. Eventually, it could lead to a breakup of the EU… but that would be much further down the road.  

I mentioned that Spain and Portugal are licking their chops on this news. That’s because they’ll probably be next in line behind Greece for a bailout. If the Greek bailout goes through, other countries will expect similar treatment. It’s a dangerous precedent… But it seems the world is full of those these days.

A Broken State

The Greek economy needs an overhaul (as do many others). Its public sector is bloated and government employees are overpaid.

What they’re getting is short-sighted, extend-and-pretend economics. Three-year loans from the EU and IMF aren’t going to save Greece; they’ll just postpone any real change from taking place and allow the status quo to go on a bit longer.

The plan will inevitably lead to more bailouts in the future, for Greece and other EU member states.

It doesn’t bode well for the European Union.

I’m with Jim Rogers on this one. Rogers’ take on the situation is quite blunt: “Let Greece default, it’d be good for the EU.”

Rogers has a point, though. It would send a message that European leaders are serious about maintaining budget discipline and countries better get their finances in order.

But that sort of market discipline doesn’t happen these days, so we have to invest accordingly.

Are Greek Stocks a Buy?

The Greek bailout plan may be nothing more than economic voodoo. But that doesn’t mean we shouldn’t take advantage of it in the markets.

My colleague Christian DeHaemer lives for situations like the one unfolding in Greece right now. Chris is betting on the Bank of Greece. After all, we saw what happened to American banks after they got their $700b… Here’s a recent note he sent out to Crisis and Opportunity subscribers:

The Eurozone Blasts Greece with Cash… Stocks Launch 

Over the past two days, the leading Greek bank, The National Bank of Greece (NYSE: NBG) has jumped 17%.

It moved on Friday as rumors hit the markets about a Euro/IMF bailout of Greece… Today — or rather, last night — the stock moved up another $0.45 cents to $4.07.

The European government offered below market interest rates around five percent to bail out a country that was running debt levels above 12% of GDP. The Eurozone will offer as much as 30 billion euros in three-year loans.

Bloomberg quoted former IMF economist Stephen Jen as saying, “This is more than a bazooka. They have gone nuclear on the issue of Greece. In the short run, the market is short Greek assets, so we’ll get a rally in those.”

Two weeks ago, I recommended the largest Greek bank in my trading service Crisis & Opportunity. It seeks to find extreme value in crisis situations and profit as those situations are resolved and the stocks are revalued upward as a result.

The National Bank of Greece is a clear example of this type of investing. And the run is just getting started.

In the United States, bailed-out banks went on a bullish rampage:

Bank of America (NYSE: BAC) went from $3 at the bottom to $17.93 today…

Wells Fargo went from $8 to $31.20 today…

Citigroup (NYSE: C), with the worst management of the lot, climbed from $1 to $4.29!

NBG has a current P/E ratio of 1.89; pays a 0.29 cent dividend; has a 44% profit margin and an EPS of $2.24.

It is still priced for going out of business… But this company will rock and roll before that happens.

Join me for the NBG ramp-up… and in the meantime, click here to read more about the biggest boom market you’ve never heard of.

Good stuff, Chris — thanks.

Until next time,

Adam Sharp
Analyst, Wealth Daily

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