Top 10 at 10: Greek exit from euro appears inevitable; Default disaster looms; Freddie skint again; Dilbert

Here are my Top 10 links from around the Internet at 10 pm (!) What a day. I welcome your additions and comments below or please send suggestion for Thursday’s Top 10 at 10 to bernard.hickey@interest.co.nz 1. Too illiquid - Bruce Sheppard makes some good points over on his 'Stirring the pot' blog at Stuff about the attempts by the NZX to boost liquidity by introducing derivatives trade. A waste to time, Bruce reckons.

NZ is populated by highly illiquid small companies that it is hard to attract much research enthusiasm for. And thus these small stocks fail to attract buyer interest and fail to support sensible valuations and eventually become takeover targets. If we want to defend our nation from foreign ownership, liquidity is important. Now to NZX’s solution, which is to develop a derivatives market. With the exception of commodity and currency derivatives which serve a buisness purpose and allow businesses to mitigate trading risks , all other derivatives have nothing to do with investing. Simply they enable speculation and in themselves create nothing, except merchant banking and broker transactions volumes from which they can tax the participating populace for profits.

2. Default or euro exit - Take your pick. Felix Salmon at Reuters explains why Greece will eventually have to default on its sovereign debt and may as well save itself some pain now by exiting from the euro. The only thing causing the delay is the French and Germans worrying that their banks can't take the hits right now.

Even if Greece were running a zero primary deficit (and I’d love to know if it’s ever managed that particular feat), a default without devaluation would still keep the country mired in its current uncompetitive state. If you’re going to go through the massive pain of a default, you might as well get the upside of devaluation at the same time, and exit the euro. At that point, the only question is: do you default and devalue now, or do you wait a couple of years? Germany and France might well want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time. But from a Greek perspective, if the pain is coming, best to go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future.

3. Oh Dear - Here we go again. Freddie Mac, one of the big US mortgage providers, is asking the government for another bailout worth US$10.6 billion after it uncovered yet more delinquent loans and jingle mail, Reuters reported.

Freddie Mac (FRE.N), the second-largest provider of U.S. residential mortgage funds, on Wednesday asked for an additional $10.6 billion in federal aid after it lost $8 billion in the first quarter. The company warned it would continue to need billions more in government funds because the housing market remains fragile.

4. Meredith speaks - Meredith Whitney, the analyst credited with sparking the US bank rout in 2008 with a couple of sell notes, says she's worried about a double-dip in US housing that will leave many banks under provisioned and unable to pay dividends as capital requirements rise, Bloomberg reported.

Banks are unfairly “teasing” investors by discussing higher dividends because regulators are demanding lenders hold on to capital, said Whitney, known for her forecast for 2008 that Citigroup Inc. would cut its payout. “I’ve been amazed to see the demand come back time and time again for financial institutions that are still not paying a dividend and still may not be able to for a while,” Whitney said. “I’m steadfast in my belief there’s going to be a double- dip in housing,” she said. “You will see clearly that the banks are under-reserved when housing dips again.” Whitney said yesterday in an interview with Tom Keene on Bloomberg Radio that the nation’s largest banks are susceptible to another dip in the consumer-credit market. While Wall Street rebounded in the first quarter, consumers haven’t seen a similar improvement and U.S. states may cut jobs, she said. “For the consumer, nothing has changed and the large banks are still weighed down by exposure to consumers,” she said. “If consumer credit turns, which we think it will, you will underperform with all these banks.”

5. Krugman speaks - Paul Krugman at the New York Times reckons a euro exit is more attractive for Greece now than slow grinding death by deflation and riots. Fair enough. I'm beginning to think the euro's days are numbered.

If Greece were a highly cohesive society with collective wage-setting, a sort of Aegean Austria, it might be possible to do this via a collectively agreed reduction in wages across the board –an “internal devaluation.” But as today’s grim events show, it isn’t. The alternative is a devaluation — which means leaving the euro. Any announcement of plans to leave the euro would, as Eichengreen points out, trigger disastrous bank runs. By the same token, any suggestion by outside players, like the ECB, that the option exists would amount to invoking a speculative attack on Greek banks, and therefore can’t be made. The whole thing is effectively undiscussable. But that doesn’t mean it can’t happen. Greece is already starting to look like Argentina 2001. Again, this isn’t an alternative to debt restructuring; it’s what might be needed in addition to debt restructuring to make the fiscal adjustment possible. I hope that somewhere, deep in the bowels of the ECB and the Greek Ministry of Finance, people are thinking about the unthinkable. Because this awful outcome is starting to look better than the alternatives.

6. 'Fundamentally unworkable' - Ed Harrison at Credit Writedowns has a very useful backgrounder on how the euro came to pass originally and why it doesn't work. Monetary policy is not backed by a single fiscal policy.

A European treasury with an effective fiscal transfer mechanism would have been a better way to implement the euro-zone. If you had a pre-funded fiscal mechanism to support countries as an automatic stabiliser against the unharmonised EU fiscal and economic regimes, you wouldn’t need a bailout. Obviously, it would be more desirable to have a monetary union of more harmonised countries but the US states are not harmonised either. What US states do have is automatic stabilisers.

7. Shock and awe? - The New York Times' Landon Thomas reports that analysts are now calling for a 'shock and awe' response from the ECB to the growing contagion fears.

Just three days after a 110 billion euro ($134 billion) bailout of Greece was presented as the latest step to stabilize European markets, the opposite has transpired. Fears have spread through the financial markets that a larger epidemic would infect Spain, Portugal and perhaps other indebted countries outside the euro zone, like Britain and the United States. In response, analysts are calling for a shock and awe option — some rescue of the largest of the peripheral euro zone economies suffering from stagnation and high levels of debt, not unlike the Troubled Asset Relief Program that was created to restore confidence in the American financial system. They suggest that the European Central Bank buy back billions of euros of unwanted Greek, Portuguese and Spanish debt and that the I.M.F. offer a large bailout for Spain. Such a broad stroke would surely cost more than the $700 billion that the United States pledged to back up its failing banks in late 2008. Therein lies the rub: not only is it an enormous sum, but it requires a degree of flexibility, political courage and teamwork that the European Union and the I.M.F. have not yet begun to show. “It is not really about money,” said Timothy Congdon, an economist and professed euro skeptic who foresees an exodus of savings from banks on Europe’s periphery to Germany as doubts build about these countries’ staying power in the Eurozone. “It is about how much pain the people in periphery can stand in order to keep this thing going. Once the confidence is gone, and Greeks and Spaniards move their deposits to Frankfurt, it becomes a self-fulfilling prophecy, and the whole thing implodes.”

8. Those mad hedgies - Some nutter hedge fundie is building an algorithm that analyses blog posts from financial bloggers to predict share price movements. Oy Vey. When will the madness end? HT Kevin via IM.

Hedge funds are taking that feed, mixing it with other data, and using the combination to try to create successful algorithmic trading strategies. So far, the data suggest stock prices outperform when sentiment at a given company has been positive for a number of weeks.

9. Totally irrelevant picture - This is the world's most expensive car at somewhere around US$40 million. Someone has some money left somewhere. It's a Bugatti Type 57SC Atlantic.

10. Totally irrelevant video - Here is the entire Star Wars saga told in 3 minutes with stop motion video of lego figures. Some people have too much time on their hands. Lucky for us.