Guest Post: Greece - Is The Shotgun Wedding Still On?

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

Greece - Is the shotgun wedding still on?

Last week I used the analogy of a shotgun wedding to describe how the bailout was being forced upon the Greek people.  Maybe, after the events of this weekend, I wasn’t being harsh enough in my choice of analogy.

As I continue to digest the news and various opinions, I still reach the same conclusion.  Default or restructuring is the most logical outcome and should occur sooner than later.  I believe that the image of the IMF has been tainted and it will make it more difficult for the Greek people to accept a deal from them, unless the terms are incredibly favorable.  I’ve also listed several of the arguments most commonly used to encourage Greece to delay restructuring, and point out the flaws in each of them. 

Greece will be more reluctant to do the bidding of the IMF

It seems like the experts are split on whether the IMF will continue to aggressively pursue existing policies (bailout after bailout) or whether the IMF may pull back a bit and encourage some form of restructuring.  I don’t have a strong opinion on how the political maneuvering will play out, but I am certain that the Greek people are even more strongly opposed to the IMF than before.  Regardless of how the case against DSK plays out, the indelible image of a corrupt, power hungry, arrogant man, preaching austerity while sipping champagne in first class, has now been firmly burned into the mind of every Greek citizen.  A population that has already been resistant to harsh austerity measures, is going to be even more determined to fight anything they view as an IMF directive.  This will make it harder for Greek politicians to agree to any unfavorable terms for further IMF assistance.

Uncertainty is no reason to waste money paying creditors

Over and over, people bring up the uncertainty and weakness of the Greek economy as a reason to delay restructuring.  It is widely agreed that Greece cannot afford to continue to make payments at current levels.  Some people argue that Greece should continue servicing debt until it becomes more clear what it can afford on a long term basis.  Some argue that even without paying interest, Greece is still running a budget deficit.  Both of those arguments seem to be self serving arguments defending existing bondholders.  The harsh reality is that Greece cannot sustain current debt payment levels, so they should stop those now while determining what is sustainable.  Every euro paid out now to bondholders is a euro less that is available for the future.  Spending more money they don’t have in the interim is not in any way helpful in developing a long term solution.

Greece won’t be able to borrow to meet short term needs if they default

BS.  That really is just wrong.  The capital markets still have excess cash for credit worth lenders.  If Greece defaults now, prior to creating a senior class of government lenders, or pledging collateral to those lenders, Greece would have plenty of options to create debt that the likes of Blackrock or Pimco would scoop up.  Rather than wasting their ability to collateralize debt or create a senior block of lenders in a futile effort to delay eventual default, they should default now and use those resources to secure new loans as part of a sustainable long term budget plan.

The Greek Pension Funds will be hurt

Yes.  Greek pension plans own a sizeable amount of Greek debt.  The losses will hurt.  Well, maybe that will help force the people to accept reduced benefits.  As part of any long term solution, benefits will have to be cut.  It is painful.  People are very reluctant.  As distressing as it might be, a combination of actually seeing the losses and witnessing defiance against all lenders, the people might be more willing to accept the reality of cuts.  Actual losses will make it more clear that there is no choice.  ‘Stuffing’ the foreign lenders may help the Greek’s see this as shared pain rather than just more austerity to save lenders.

Greek Banks will fail

Many, if not all, Greek banks will fail.  Having to realize the loss could cause them to fail.  If they were on a mark to market accounting basis, they probably would already have failed.  If book value accounting is actually working to keep the banks alive, then the restructuring should be able to use a brady bond style solution so that the banks don’t have to take the write downs.  But there is a better solution.  Rather than paying interest on all of its obligations, in an effort, in part, to save these banks, why default.  With the full interest payments saved, the Greek government can come in post default and allocate money to the banks that are savable.  With some direct equity investments, post default, the Greek government will have used far less cash, have more control over the banking system, and reap the rewards if Greece’s new plan works well.  This isn’t good for the senior people at the banks (likely the same ones advising the government) but seems to be the most efficient use of funds for the Greek people.

Greek Citizens will lose money on Greek Bond Holdings

Offer Greek citizens par on some amount of bonds they own.  Sure, foreign lenders will be annoyed, but it isn’t much different than when the U.S. stepped up and increased FDIC limits, and the reality is that the amount of debt that would be affected is negligible.

The Greek Economy will grind to a standstill if they default.

Why?  I’ve seen no evidence that supports this.  Will there be some confusion and some problems?  Probably, but Iceland most recently went through a bankruptcy with minimal interruption.  Argentina defaulted early this century and was not pushed back into the dark ages.   The common currency may complicate the issue, but not defaulting in order to avoid some hysterical claims is illogical. 

Letting Greece go will create a domino effect

This is probably true.  A Greek default will make it harder to save Ireland and Portugal in particular.  On the other hand, even letting Greece struggle along for awhile longer doesn’t ensure that Ireland and Portugal can be saved.  They both have their own sets of problems and may not make it even if Greece restructuring is pushed off.  So finding a Greek solution makes it less likely that Ireland or Portugal would restructure but it does not guarantee that we won’t see other dominos fall anyways.

I found it very interesting that Ireland is already demanding that they get better terms.  It seems that Ireland would have been better off waiting until Greece was ‘resolved’ before raising their hand for more.  In many ways it is harder for the other European governments to give into Greece and Ireland at the same time.  Maybe Ireland doesn’t want to be saved?  The current government was voted in as a direct result of the bailout policies of the prior government.  Maybe they are attempting to derail the Greek bailout so that they too can restructure but without taking the European political blame of being the first country to default?  It is a little far-fetched, but fits the facts.

Where has all the CDS gone?

The CDS market continues to remain a wildcard in this game.  Last year the CDS speculators were blamed by the governments for the problems in Greece.  I strongly suspect that CDS positioning has redistributed the risk in ways that make the worst case scenarios for banks less bad.  At this stage, no ‘dumb’ bank should be long non mark to market Greek bonds and long via CDS.  Any bank that is found to have that position should attract some unwanted regulatory attention.  At these prices/spreads, I don’t think many hedge funds will be outright short.  A lot of the potential gains from a restructuring are already priced in and the carry is costly so it’s just not a great position.  In fact, given all the European government attempts at finding a resolution, many hedge funds are likely long Greece, both in cash and synthetically.  A lot of investors got comfortable getting long Lehman bonds immediately ahead of their bankruptcy, based on the logic that first Countrywide, and then Bear Stearns were saved, so Lehman would be saved too.  A few very smart funds made a lot of money buying short dated Bear Stearns bonds ahead the weekend that JPM saved them.  A lot of funds tried to mimic that trade going into the Lehman weekend.  It didn’t work out so well that time.  This situation is starting to feel the same.  Too many people are relying on the fact that the Greek government has been bailed out before to assume they will be bailed out again. 

Throughout this report, I use the term restructuring somewhat loosely to include the ‘hard’, ‘soft’, and ‘reprofiling’ versions and assume that they will all trigger sovereign CDS.  The governments may attempt to play around with any restructuring in such a way to avoid triggering Greek CDS, but that would be a mistake, especially if I’m correct and the synthetic long positions are now primarily outside of the banking industry the governments are trying to protect.

Comment viewing options

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

"Greece is willing to discuss the prospect of a "soft restructuring" of its debt if needed, its deputy foreign minister said on Tuesday"

Sounds like it's going to take stiff proposition to penetrate Greek opposition...

TruthInSunshine's picture

Sorry to go OT on your post, CM, and I won't do it often, but:

Robotrader's mom is now destitute, and living off donations from kind hearted souls, as Robo 'Nails' Trader had her put her life savings in Coldwater Creek, and she's blown her savings up (the other MoMo failures of late only exacerbated her pain - RoboTrader was having her invest in Leo's Chinese Solars and even some Chinese Fraud/Sham stocks):

If you can spare some money in these hard times, send some money for food her way, because RoboTrader has fled, and there's rumor that some Russians and Triads are looking for him.


topcallingtroll's picture


This explains the troll curve.

Why there is an optimal number of speculators needed to liquify a market and improve efficient price discovery.

Too many speculators with too much shared information cancels out the crowd effect.

vote_libertarian_party's picture

The banks may have smartened up about CDS exposure (or maybe not) but there is a lot of dumb money around the world.  Probably a lot of hedge funds levered to the hilt that would blow up.  Where did they borrow from?  The banks.

DoChenRollingBearing's picture

There is no way Greece gets a good deal out of all of this.

Maybe they should just default and get it over with.  Sooner or later they will.  Their creditors should suffer a good haircut.

Mr Lennon Hendrix's picture

From what I can tell they have had the poor side of the deal since the beginning, which must be why the people of Greece have been rioting in spurts for over a year now.  They sold their islands (and to whom I am still not sure), China "bailed" them out, they have had two debt restructurings (right?  last year and this...) and so, DoChen, I agree with you, it ends in default. 

Jack Sheet's picture

The in-fighting is on for the juicy bits of collateral (energy companies, pension funds, the next 50 years of olive oil production ) - they used to call it asset stripping.

silver140's picture

Yep, what the IMF and World Bank (US/Euro/corporate fascists)have been doing to the "third world" for decades.  Now it's our turn, asset stripping here and in Europe. There's no limit now.  They've got the power and it's being used.

buzzsaw99's picture

Bust a deal, face the wheel.

topcallingtroll's picture

That would be much more exciting!

Encroaching Darkness's picture

Where in all this is there even a mention of changing the culture - the idea that the government should and will take care of the average Greek? Is anyone saying that the Greek functions like pensions, services, and so forth should be privatised?

Until you cure the cause, pouring water on a gasoline fire will only spread the flames - gotta find the shutoff valve and make people responsible for themselves again, or it will just flare up again, bigger, later.

agent default's picture

Forget about Greece, Greece along with Ireland and Portugal are toast and this has probably been priced in fully already.  What about Spain though?  Is that fixed?  Everyone seems very quiet about that one. 

butchee's picture

The most appropriate analogy for Greek debt is a the micreant progeny of the shotgun wedding of a circle jerk and a clusterfuck!  Spain is indeed the big question mark out there....for it is at once too big to fail and also too big to save and has some bizzare accounting systems that obfuscate and both aid and abet the lies of the bankers and administration.

kushmere's picture

Linking to FT should be illegal.

butchee's picture

Just a repost of a link Tyler himself posted this morning....sorry to offend your delicate sensibilities

Ben Probanke's picture


Mr Lennon Hendrix's picture

Part of me is cheering Gadaffi...damn you Hegel!  Will the people not sit together and realize that the money spent on war would solve...the debt...the problems..everything!  These two sides, they are of the same coin.  Yet, if you choose not to use the coin.  Anyway, until we all reach nirvana, buy silver.

rsi1's picture


they just need to call up a few banks, GS probably their favourite, and start selling CDS on themselves like crazy. This will give them cash to repay debt and cover the deficit, the good thing is, the more CDS protection they sell the lower their borrowing costs go, so they should sell all they can asap to get the current high bps, and then add as things move down until they reach 0! Following this strategy things cant go wrong! :)

Pepe's picture

Don't make deals with the devil, Greece. Remember GS gave you the money needed to join the EU. That is of course pure coincidence

sabra1's picture

the greek pensions will be hurt, meanwhile the fed has their grubby little hands on the other nations pensions. see, you don't need austerity people!

Hedgetard55's picture

The loser Greeks jumped the shark 3,000 years ago. They had their day, now they are just debt addicted socialist moron libtards - witness Leo K.


You would think they would have learned something from Odysseus, but no, they could not resist the siren song of socialism, something for nothing...


and for every junk this post gets, three or four of you tards are agreeing with me.

Geoff-UK's picture

Bring back the Drachma!!!


Initial valuation of the "New Drachma"?  1,500 Euros to one ND= here's 50 million ND debt-holders!  Problemo solvedo!


High Plains Drifter's picture

Leo should go home and help his people.

honestann's picture




These discussions get so boring.  Yeah, I know, it isn't ZH, it is the predators-that-be who won't let the BS end.  Default is the only viable answer.

In fact, default is the appropriate answer in every way.  It teaches morons who lend to governments that doing so is stupid.  It hopefully teaches morons who might lend to governments in the future that doing so is stupid.  It also reduces (or hopefully eliminates) the availability of further addictive and self-destructive loans AKA debt, and helps the population get used to living a more honest (and much less stressful) life.

DEFAULT is the answer.  To greeks and everyone else: STOP letting the predators steal you blind.  DEFAULT, and add to the constitution a prohibition against government debt.  Or better yet, stop believing that government exists, or has any right to a penny from your pocket, or to obligate you and your descendants in any way.


Pepe's picture

Agree. Default and show the middle finger

Jacks Cold Sweat's picture

We got free from the Turkish chaps 190 years ago.

162 of them were democratic years.

172 goverments have been running the ship since day 1.

1.06 per year. 

$35,471.72 is the debt per head while in our neighbours in Italy it's 40k+and nobody  gives a rats ass about them..

they can't let Greece default..

honestann's picture

They can't STOP them from defaulting.

Iceland said no.  Twice.  So should Greece.

Sure, they will definitely need to cut back on useless and counterproductive government employees and programs, and maybe even some modestly useful services.  So what?  To say people cannot survive without endless borrowing is a lie... and a banksters and politician created scam of astronomical magnitude.


And don't borrow again.

silver140's picture

The Greek people would decide to default, in a heartbeat, if it were put up for a vote.  The Irish as well, the Portuguese too. It took the Argentinians months of riots to throw out 3 or 4 governments before they got the one that did what they wanted, which was kick the IMF out and default. Hell, the U.S. citizens would not have given any bailouts to the banksters, in fact they'd be in jail along with Paulson, Summers, and all the power pimps we could round up, as well as Bush, Cheney, and now Obummer bin lyin, if it was up to us.  But control is now in the hands of the corporate fascists, and they know it.  GS, JPM, etc contol the "market", our food supply, our energy supply, the wars we fight, etc and the US govern and the IMF, and Europe.  They're probably well established in China and the rest of the world.  There's no patriotism to any one country or region anymore.  It's a pandemic of parasitoid, disaster capitalism with no end in sight until the host, us and the entire biosphere, is turned into fiat currency.

topcallingtroll's picture

DEFAULT is so inevitable that even the greek government admits it.

Soft restructuring? What an inventive use of language.

AldoHux_IV's picture

If CDS' were actually utilized by the right people prudently then all the pain borne by pensioners and Greek citizens would be painless or painfree.  As a matter of fact if these insurance products were held by the right people then you could actually break up the euro and allow for individual economies to restructure and revive without spreading pain to the taxpayers.

Only if...