As Greece Embarks On The Road To Hades, Here Is How To Trade The European Implosion

Tyler Durden's picture

While a crippled Europe continues to gladly enjoy being in the shadow of Fed-driven revolutions and natural disasters, its time in the sun is coming to an end. Soon everyone will realize that just today, 2 Year Greek bonds traded at all time wides of over 17%. That's right - holders of Greek bonds for 2 years will be rewarded with a 17% gain if the country actually repays these at maturity. Alas, for those who are paying attention, this has a snowball's chance in Hades of happening. And speaking of Hades, Knight Capital's Alfredo Viegas has released a note explaining not only why Greece has just passed the Rubicon following the release of its disastrous budget deficit details earlier, but also advising those who care, how to be positioned to best profit from Greece's descent into Hades, which will be promptly followed by the rest of the Eurozone. His advice: short Spanish and Italian cash bonds (this trade will work just as well using horrible, evil CDS which no politician still understands and therefore continue to be the scapegoat for everything).

Is that an insolvent country or are Greek bonds just happy to realize they are skrewed:

From Knight Capital's Alfredo Viegas

GREECE: Budget #s & the road to HADES for the other

Greece just reported a very poor budget deficit of €1.0Bn over Jan/Feb of this year.  This represents a 9% increase over the same two months of last year. Even more troubling was the news that budgetary revenues fell 9.2% thanks in part to civic protests for paying tolls and taxes.  With spending actually up 3.3%, the road to austerity for Greece seems to be taking a detour.  Greece is scheduled to receive a fresh €15Bn tranche from the EFSF/IMF next week to help it meet over €10Bn in amortizations this month. Privatizations are still being lined up, so far €7Bn has been identified out of a possible €50Bn (yeah right)! Brussels/Berlin/Athens continue to debate the sticky points like raising the retirement age, imposing a debt ceiling and higher corporate tax rates.  Meanwhile, today in Brussels at the EU summit nothing much seems to be happening with inertia over the "core vs. periphery" pushing out many critical decisions to month-end.  Although much media/investor attention remains focused on the Greece/Ireland/Portugal troika of the troubled PIIGS club, we think too little attention is being focused on the other subset of future potential defaulters -- namely Spain / Italy and Belgium.

Our house view, shared by my colleagues Brian Yelvingon/Charles Mounts - is that bondholders of Greece and most of the other PIIGS sovereign debt will be forced to take haircuts -- the external borrowing needs for GREECE are just too daunting to get over, in 2012 the IMF projects that GREECE will need €31Bn externally, then €43Bn in 2013 and then €73Bn in 2014  -- Consider for a moment the sheer lunacy of these projections -- basically the IMF is ASSuming that ESFS/IMF bailout $$ will be SUPPLEMENTED by external borrowings.  With GREECE on-the-run 5-yr DEBT already trading at ~15% yields - we very seriously doubt that they will be 'accessing' external markets in 2012...

Our goal in this brief note is NOT to suggest a trading strategy for GGB/GREECE bonds, rather our point here is to redirect attention back to the other "safer" members of the periphery, who's short-dated debt has traded back into what we consider very attractive levels for selling/shorting.  Our contention is that GREECE is likely to be the "straw that breaks the Camel's back"  insofar that if any sort of debt haircut is contemplated -- then it will become defacto impossible to recork the bottle and get the 'haircut' genie back under control.  In this regard, the asymmetry currently in short and mid-curve periphery sovereigns is we believe very compelling for investors that secure locked up borrow in the names.  Consider for instance the following bonds which we have verified with some investors as being available for borrow without much difficulty:

          Issue     Mat    Price       YTM         Recent 52wk Hi-Low
SPAIN:    SPGB 2.3   '13   98½-99    3.03/2.78      101.2 / 96    €14Bn issue
ITALY:    ITALY 4.5  '15  105 -105½  3.11/2.97      108.7 / 99     $4Bn issue

Apart from individual budgetary pressures, the Euro area is also having now to combat increasingly higher implied cost-pressure inflation, and also deal with individual core-country political dissension -- remember the upcoming German regional votes:  MARCH 20  Saxony-Anhalt and then MARCH 27  Baden-Rhineland -- this of course coming on the back of the forced regisnation of Merkel's own defense ministry for plagarizing his doctoral dissertation!  A poll last week found MERKEL's coalition now down to just 39% support, while the opposition SPD-Greens can now muster 43%.  We believe that the German electorate is quickly tiring of MERKEL's policies and that continued bailout as usual talk could become very tiresome as we approach the March 24/25 EU Summit...

The risk/reward therefore is approaching an interesting point here with a catalyst just two weeks away.   The risk to being short the "tight" EU periphery sovereigns is that we get the greenlight for the ESFS to come into the marketplace to buy PIIGS bonds.  But this risk seems limited insofar as the targeted shorts we are advocating are in places like SPAIN and ITALY rather than in the other PIIGS.  If we however get a breakdown at the summit and no clear direction (which is what we are betting) then the talk of haircuts or 'shared pain' may reemerge... if it does, we think the short-end of PIIGS sovereign bonds would therefore be at risk of significant price declines...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mercury's picture

Viegas has released a note explaining not only why Greece has just passed the Rubicon...

The Styx really...there's no re-crossing that one either!

Double down's picture

You can, but you have be rather special and it helps to be artistically inclined:)


Oh, and never look back


Bananamerican's picture

yea, charlie sheen could totally do the Styx!

dearth vader's picture

Bouts of eloquence... is this a literary blog?

bob_dabolina's picture

There is a guy on these boards whom claims that socialism and public unions have done wonders for Europe...

Where is that guy?

Shell Game's picture

He's busy re-arranging deck chairs..

Eally Ucked's picture

You know what, they still can get down from 35 days holidays, tighten down their medical programs and few other social programs when there is real need. What about you? 2 days vacations, 2k/mth bills for medical and fighting with unions? Massage Ben ass to print more so you can keep your standard of living, whatever it is.

MachoMan's picture

Like hell they can...  this is about as academic of an argument as I have ever seen...  PEOPLE HAVE GOTTEN USED TO DOING NOTHING.  They start adding hours every week or taking away vacation time and they're throwing molotov cocktails like there's no tomorrow.  They have fighting with unions too, it's just that the whole damn country is a union...

Where do you think fosters more capital investment?

Eally Ucked's picture

You see you even won't have free time to throw molotovs.

"Where do you think fosters more capital investment?" - don't understand Q but I understand that answer supposed to be - USA with 220 bln$ deficit in Feb.

MachoMan's picture

Presuming you have a job...  our labor participation rate is pretty ugly...  especially for our yoots.

Azannoth's picture

Socialism and unions have done wonderfully for those who bought gold/silver early, thx suckers !

Calmyourself's picture

He is over on the Japan thread, explaining how GW is real science and the Chicago Carbon Credit exchange is not closed down just taking a breather..

Wannabee's picture

He is also telling everyone not to worry about over heating reactors; nuclear like coal is clean.

NOTW777's picture

look at euro 1375 to 1390 in a flash

pazmaker's picture

yep, and the RSI on the 5 min, 15 min and 30 min chart is showing the EUR/USD as overbought but it continues to go up!

TheGreatPonzi's picture

"short Spanish and Italian cash bonds"

I'd gladly do it if the entry ticket was not several billion euros. 

Even Interactive Brokers does not propose sovereign bonds. 

alien-IQ's picture

time to declare the USD a natural disaster?

99er's picture

Was this whirlpool off Japan's coast the ominous sign for Europe?

It's a small world.

plocequ1's picture

What? No mention of " The Taxpayer"?

treemagnet's picture

.....those damn unions!  Oh, sorry.  Did I say that outloud?

MarkTwainsMustache's picture

Good luck finding a repo desk to repo some Italian and Spanish cash bonds...

Plainview's picture

I'd prefer to short the Spanish and long the Italian. The Italian economy is simply not in as bad shape as the other four PIGS.

THE DORK OF CORK's picture

I cannot understand why Trichet does not put the entire M1 on the Euro balance sheet and recognize reality.

It must be fear of the German reaction more then worry for the US dollar ability to defend Europe.

But who really knows the mind of a central banker.

falak pema's picture

Angela Merkel. But she has a different agenda. Its complicated, playing at being Bismarck and..Atlas european.

ATM's picture

The German's biggest fear is inflation. They've had real inflation in their history whereas most of the rest of the Western countries had not experienced it. We've had depressions and our banksters like the Bernenk do everything to try to ward that off while the germans fear the next Weimar.

Doesn't matter, we're all fucked.

FunkyMonkeyBoy's picture

Only in a Banana Republic like the good ol' USA, could the stock market finish up on a day like this. If you are unfortunate to hail from the good ol' USA, you should be deeply ashamed of that blight on humanity you call a country...

... you see the corruption daily, clear as day, and yet you sit there doing nothing to change it.

jimijon's picture

I think you meant "Bernanka Republic"

Bananamerican's picture

no, this land is MY land....

Calmyourself's picture

Where is this bastion of justice and fair play in which you reside?

I am a Man I am Forty's picture

no thanks, not taking responsibility for government evil doers

Leo Kolivakis's picture

State finances collapsed in the first two months of the year, creating a fiscal black hole reaching 1.15 billion euros.

According to figures released by the Finance Ministry on Friday, revenues have fallen short while expenditure has overshot the mark, forcing the government to look into adopting further measures to save this year’s budget.

Revenues in the January-February period were 865 million euros off the target set by the Finance Ministry.

In comparison with the same period a year earlier, revenues were 9.2 percent lower, with the ministry blaming the differences on last year’s boost in road tax which was not repeated, fewer contributions from a one-off tax imposed on companies and less revenues from salary earners.

What is unusual is that the ministry had not set lower targets due to the anticipated revenue drop connected to these three reasons.


Meanwhile, Prime Minister George Papandreou heads into a meeting of eurozone leaders in Brussels on Friday afternoon aiming to convince his counterparts that Greece should be given improved terms for its 110-billion-euro loan package.

traderjoe's picture

Are you still bullish on Greek bonds? 

Austerity doesn't work. Revenues will continue to decline. The 'no pay' campaign will bite further. 

Greece will have to default. Better to do it sooner, and get it over with. I hope it's a total default though, and not some negotiated re-structuring. 

RoRoTrader's picture

Nice to see you again, Leo and always appreciate your informed insights.

Already short the IBEX35 and looking to sell into rallies so was wondering how you might play this situation?

Thanks as always. Hope to meet you someday.

The Axe's picture

good luck trying to get that trade on,,,Paulson maybe....please not a shot in hell-or hades

pazmaker's picture

Maybe the dog and pony show in Brussels today is propping up the EUR

The Axe's picture

another low for the dollar--another low volume melt-up for the computer driven ponzi

hambone's picture

Anybody explain how the 2yr Greek bond is 4% higher return than their 10yr (12.8% vs. 17%, respectively)???

If 2yr paper is mega high risk and requires 17% to incent buyers, 10yr is less risky and only requires 13% to excite buyers???

bob_dabolina's picture


10yr paper is radiated by beams of sunshine and backed by jaguar blood. The low supply of jaguars make them more valuable.

-Ben Bernanke

hambone's picture

LOL - awesome.  I don't think there could be a better answer.


Cash_is_Trash's picture

Get those two golden coins for the boatman, Greece.

The boatman only takes real money, not any fiat shit.

citta vritti's picture

copper or bronze will have to do

william the bastard's picture

How to trade Greece and Spain?

Short the bonds!

Genius, sheer genius Holmes!

A Man without Qualities's picture

Privatizations of state owned businesses are somewhat complicated by the fact there are all sorts of hidden liabilities/ losses.  There's all sorts of nasties, hidden loans to the government (in exchange for cash flows to keep the bills paid), unaccounted for pension obligations, derivatives that don't need to be market to market.  If there was a chance in hell they could sell these things, they would have done it years ago as they never miss a chance to flog anything that's not nailed down.  

I've worked on a deals with a couple of these Greek state owned enterprises and they are so far from being viable going concerns it's not even funny.

EconomyPolitics's picture

Short Spanish and Italian CDS?  

The whole European contagion thing should in my opinion stop after Portugal.  CDS spreads on both are way off their highs while portugal is very close.

To be quite honest I think a better strategy would be a spread play of shorting Portugal and going long on Italy. 

Spain is a wildcard as their cajas need recapitalization and it is estimated to be between 40-120 BB Euros to get them solvent.  While markets think that they are going to stay solvent, it all depends on how severe the cajas crisis is and wether or not Spain will bail them out (OK everyone knows they will).



firstdivision's picture

Wow, we're up 1% today and rightfully so with a day full of good, positive news all day.