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...