Archive - May 13, 2012

Now that the Greek exit is back to being topic #1 of discussion, just as it was back in the fall of 2011, and the media has been flooded by groundless speculation posited by journalists who have never used excel in their lives and are merely paid mouthpieces of bigger bank interests (long live access journalism and the book sales it facilitates), it is time to rewind to a step by step analysis of precisely what will happen in the moment before Greece announces the EMU exit, how the transition from pre to post occurs, and the aftermath of what said transition would entail, courtesy of one of the smarter minds out there, Citi's Willem Buiter, who pontificated precisely on this topic last year, and whose thoughts he has graciously provided for all to read on his own website. Of course, take all of this with a huge grain of salt - these are observations by the chief economist of a bank which will likely be swept aside the second the EMU starts the post-Grexit rumble.

As suspected, yesterday's report that the Troika may be caving on Greece appears more and more as a red-herring trial balloon, leaked by the Greek press without substantiation, and which sought to lighten the tension ahead of a trading week which is already looking rather askew. Because not even a full 24 hours later, Germany fires right back with an article in the Spiegel which not only anticipates the Grexit, but what happens the day after: namely that Greece would receive further aid from the EFSF if it exited the euro. It also notes that the EFSF aid to service bonds would continue. Greece would continue to get aid as EU member as every other member state. While it is unclear if this article is in response to the WiWo piece we noted yesterday which tried to quantify the costs of a Greek impact, and which has now ominously been picked up by Die Welt, in which Germany was finally starting to get worried about the hundreds of billions in sunk costs should Greece exit, the punchline here, needless to say, is not only the contemplation of a Greek exit but that Greece would be "all taken care of" even as the newly reintroduced Drachma lost a few hundred percent in value every day as Greece stormed its way back to FX competitiveness. Spiegel's punchline: "This is to the consequences of a possible €-egress will be mitigated." Hopefully the market agrees.

A few live ones for you...and Happy Mother's Day Zero Hedge Mamas!

Europe is heading for a showdown and in a number of places; that much can be acknowledged with certainty. The first, and perhaps the most important, is the stand-off between France and the European Commission. The EU budgetary office is demanding that France reduce its deficit to 3.00% for 2012 while the projection is for 4.50% so that the Commission is threatening France with large fines. Mr. Hollande ran his campaign upon a reduction in the retirement age, more generous pensions, shorter work hours and more governmental spending so that the budgetary miss is likely to be larger than forecast; somewhere around 5.2% in my estimation. France then finds itself, one way or another, with a larger budgetary deficit and if the EU then imposes fines and sanctions Paris may thumb its nose at Berlin/Brussels in what could be a rather nasty affair with unknown consequences. Mrs. Merkel in one corner and Mr. Hollande in another slugging it out will not make for harmonious relations. Then there are the issues of Greece and Spain and the Socialist reaction is bound to be very different than the Austerity imposition as demanded by Germany. Jawohl!

Someone has to take the other side of the JPM debate. I'll try.

You better understand your risk.