Because one video is worth one thousand pictures...
And Peter Tchir's latest observations on Greece:
My Big Fat Greek Shotgun Wedding
Only yesterday, I tried to compare the latest round of Greek bailout discussions to an arranged marriage. It is difficult to watch the protests on TV and read about the impact of the strikes and not think that the wedding has moved to the shotgun stage. It seems clear that the citizens of Greece are sick and tired of dealing with the austerity being placed on them. I cannot imagine that they like the idea of selling assets to pay foreigners. Whether or not they fully understand the consequences of a default (or restructuring) it seems like they have made their choice.
So we have evolved from the image of a country going with hat in hand to its neighbors for a hand out, to a reluctant bride doing what they are told because it is expected of them, to someone who is being bullied and dragged to the altar to take part of something they not only don't want, but now know is the wrong choice.
Greece has to do what is best for Greece
Recently, almost all the arguments against a near term Greek default (restructuring) are based on the fact that Germany, France, and the ECB would be hurt. It is not Greece's responsibility to worry about what impact a default would have on outside creditors. The situation has gone beyond that. Greece has to act responsibly throughout the restructuring process so that it can access capital markets again over time, but honestly, that is a low hurdle. Wall Street and Investors have a very short memory, and if restructured Greek debt performs well, there will be plenty of money available for future new issues. The bottom line is that the situation has deteriorated to the point it is clear to everyone that this is a solvency issue, and regardless of the pressure brought to bear by other countries, Greece must do what is right for Greece.
A Default is not the end of the world for Greece
The 'doomers' (and yes it is strange for me to refer to someone else as a doomer) would have you believe that a default would send Greece back to the dark ages. Argentina defaulted in 2001. It is doing better than ever.
Were there some disruptions in Argentina at the time? Yes, but they fixed their problems and now have an economy growing at a rate much of the world is envious of. Default does not have to be a big negative on the people of that country. As I've argued before, defaulting now allows Greece to move forward with real long term solutions. It should be easier for people to accept reforms when they are part of a new sustainable Greece, rather than to meet the demands of foreign borrowers.
Since courts cannot really enforce injunctions against Greece, they can attempt to implement some policies that benefit internal debt holders, especially individuals. Greece can also attempt to use programs similar to Brady bonds to help banks avoid having to take immediate write downs. Given the focus on mark to market, I am not sure that would help as much as in the past (and personally I don't think it should) but it is worth a try.
Greece doesn't need to know what the future holds to restructure now
More people have jumped onto the bandwagon that Greece should keep taking IMF money and maybe even so new bailout money until they figure out what their long term capacity to pay debt is. I just don't understand that at all. First off, this argument is coming for a lot of analysts who thought the problem was solved a year ago. Will there ever be a time when everyone will 'KNOW' the right debt level? Probably not, and even if they did, the borrower will want the maximum haircut while the lenders will want the minimum haircut. So negotiate now and deal with the future as it comes up.
The future will always be unclear so waiting is unlikely to provide much help, and in the meantime, real progress is delayed as the country is faced with work disruptions and growing bitterness towards the foreign bankers.
Whatever you do, do NOT pledge collateral or sell assets
Greek debt issued under International Law will help prevent Greece from hurting itself. I just do not see why Greece would agree to pledge collateral or sell assets to pay debt. I can understand (somewhat) why last year when the Greek government actually believed their problem was one of liquidity created by soon to be shirtless hedge funds, that they agreed to some collateral provisions with the IMF. But a year later, with the hedge funds wearing fancy new monogrammed shirts, the Greek government is aware that this isn't merely a liquidity problem. There is a growing certainty that they cannot meet their future obligations, so any pledge of collateral is likely to be executed on. They should avoid this at all costs. The nature of a sovereign default puts them in the driver's seat for any negotiation. Most investors will have trouble winning relief against the government in Greek courts, and then even more trouble enforcing those judgments. Providing specific collateral against further lending makes no sense at this time. Save it for the future.
If Germany, France, and the ECB are really so desperate to avoid a default, they will cave on this demand.
Where is all the CDS?
So far I have only read about estimates of where the bonds reside. I have not seen any work done that tries to take into account CDS. Greek CDS is somewhat active and it is one of the 15 reference entities in SOVX so some of the risk has to have been redistributed via CDS.
I doubt many hedge funds are outright short CDS as a trade at this time. It is expensive, and particularly as you move out the curve, has limited upside potential. I would guess that any hedge fund that is short through CDS is now managing that short around a basis position where they are long bonds.
I think big sophisticated banks are in a similar position. They may be slightly net long Greece, but they are running a basis position of long bonds versus short CDS. Since the CDS has been so volatile, and largely tracked movements in bonds over time, most banks would have shifted their bonds to a mark to market book. If banks left the bonds in a non mark to market book, they would have to book the price swings of the CDS into their P&L, so given the extreme range the CDS has taken over the past year, they would likely have put their bonds into a mark to market book. This means that they would have already marked the loss so are not greatly impacted by a restructuring, even on any net long position. So again, I would disagree with the knee jerk reaction to buy puts on DB as an example. I suspect that they are not as exposed as the market may believe.
I would like to make the assumption that no bank that holds Greek bonds has also written credit protection on Greece. It would be mind boggling if they did, but I guess there is a reason the term 'dumb bank' has existed for so long. Any bank that gets caught being long bonds and long via CDS, particularly in a non mark to market account should get an instant visit from the regulators.
Assuming it is not banks who wrote the credit protection, where is it sitting? I expect a lot of the net writers of protection are insurance companies and to a lesser extent hedge funds. Insurance companies are a natural choice to be net writers of protection, and it would be about par for the course if AIG took a big hit on Greece CDS during their roadshow.
In spite of the demonization of hedge funds by various public officials in Europe, I suspect hedge funds are net long CDS. At these prices, and with so much obvious pressure on governments to continue to provide better bailout terms, it is not a bad bet.
In any case, any analysis that looks purely at the bonds in an attempt to determine where the risk resides is probably missing at least some of the picture.