If one is wondering why Greece Finance Minister Venizelos is scrambling to pass the proposed bill which enacts Greek Bailout #2, without any debate or details, very much like the US Attorneys General passed the robosigning settlement without a robosigning settlement even having been inked, the following excerpt from Section E of the MoU between Greece and the Troika should explain it. Because heaven forbid someone actually ask for details as to just what '€[xxx]' of future funding needs over and above the €320 billion in committed funding means in practical terms, i.e., just how lower the minimum wage is going, how many million more jobs will be lost (in a population of just 11 million), and how soon until pension and retirement benefits go negative. Also, our German friends may be interested to know that funding 136% of Greek GDP in the form of endless "bailouts" (of which 81% goes to shore up bank balance sheets), is just the beginning. We are confident our German PM friend is more than aware of this exit clause which gives her the loophole to opt out of everything all over again.
Today at midnight local time, 5pm Eastern, the Greek parliament is expected to pass the latest bill finalizing the terms of the second Greek bailout, which as explained yesterday has quietly increased from €130 billion to €210 billion. Needless to say, it will pass, as the opportunity cost for Greece of "pledging" to achieve unattainable targets while doing absolutely nothing, as has been shown repeatedly over the past two years, is zero. The only real questions are i) what the Greek population may do in response to this latest selling out of a population "led" by an unelected banker, which if history is any precedent, the answer is not much, and ii) how Germany will subvert this latest event, and put the bail [sic] back in Greece's court once again.
The rhetoric coming out of Greece has reached a fever pitch. Papademos and Samaras are both out their creating dire images of a post apocalyptic Greek state if a default occurs. Maybe it is a good time to remember what Papademos’ job is. He wasn’t elected. He doesn’t represent the Greek people in a fashion that we are used to – running for election and winning the election. He was foisted on the Greek people by the EU – the very people he is going through the motions of negotiating with. His JOB was to get the Greeks to accept what the EU wants. If he isn’t the most conflicted politician of all time, he is right up there. Samaras may believe it, or may have decided this is his best route to power when the vote is passed and the Greek people decide to kick Papademos out (remember, he was never voted in). Either of them would be more credible if they made any attempt to explain why it would be so disastrous. So far, not one basic fact to support the chaos theory has been given. I will admit that if Greece defaults without any preparation, it would be extremely ugly, but there is no reason not to be prepared. So, if I was the Greek Finance Minister (I would probably have a longer last name, with more vowels) here is an outline of how I would prepare for default.
We have posted various extracts from this piece from Credit Suisse previously. We will post from it again, because, to loosely paraphrase Lewis Black, it bears reposting... especially in the context of the latest and greatest Greek "bailout" (of Europe's bankers), which incidentally, will achieve nothing and merely bring the country one step closer to a military coup and/or civil war.
"The European Union suffers under Germany” ruffled some feathers, but Greek reform rebellion gives Angela Merkel and others what they’ve been looking for: plausible deniability.
The Cost Of The Combined Greek Bailout Just Rose To €320 Billion In Secured Debt, Or 136% Of Greek GDPSubmitted by Tyler Durden on 02/11/2012 12:02 -0400
Some of our German readers may be laboring under the impression that following the €110 billion first Greek bailout agreed upon and executed in May 2010, the second Greek bailout would cost a "mere" €130 billion. Alas we have news for you - as of this morning, the formal cost of rescuing Greece for the adjusted adjusted adjusted second time has just risen to €145 billion, €175 billion, a whopping €210 billion, bringing the total explicit cost of all Greek bailout funds to date (and many more in store) to €320 billion. Which incidentally is a little more than Greek GDP (which however is declining rapidly) at 310 billion, only in dollars. So as of today, merely the ratio of the Greek DIP loan (Debtor In Possession, because Greece is after all broke) has reached a whopping ratio of 136% Debt to GDP. This excludes any standing debt which is for all intents and purposes worthless. This is secured debt, which means that if every dollar in assets generating one dollar in GDP were to be liquidated and Greece sold off entirely in part or whole to Goldman Sachs et al, there would still be a 36% shortfall to the Troika, EFSF, ECB and whoever else funds the DIP loan (i.e., European and US taxpayers)! Another way of putting this disturbing fact is that global bankers now have a priming lien on 136% of Greek GDP - the entire country and then some now officially belongs to the world banking syndicate. Consider that when evaluating Greek promises of reducing total debt to GDP to 120% in 2020, as it would mean wiping all existing "pre-petition debt" and paying off some of the DIP. Also keep in mind that Greece has roughly €240 billion in existing pre-petition debt, of which much will remain untouched as it is not held in Private hands (this is the debt which will see a major "haircut" - or not: all depends on the holdout lawsuits, the local vs non-local bonds and various other nuances discussed here). If you said this is beyond idiotic, you are right. It is not the impairment on the Greek "pre-petition' debt that the market should be worried about - that clearly is 100% wiped out. It is how much the Troika DIP will have to charge off when the Greek 363 asset sale finally comes. This is also what Angela Merkel will say tomorrow when Greece shows up on its doorstep with the latest "revised" agreement from its parliament to take Europe's money ahead of the March 20 D-Day. Because finally, after months (and to think we did the math for Die Frau back in July) Germany has done the math, and has reached the conclusion that letting Greece go is now the cheaper option.
UPDATE: EURUSD back over 1.32 and TSYs +2bps on Greek loan plan news.
Credit (and vol) continue to lead the way as smart deriskers as ES (the e-mini S&P 500 futures contract) ends down only 0.5% - which sadly is the biggest drop since 12/28. The late day surge in ES, which was not supported by IG or HY credit (and very clearly not HYG - the HY bond ETF - which closed at its lows and saw its biggest single-day loss since Thanksgiving), saw heavier volumes and large average trade size which suggest professionals willing to cover longs or add shorts above in order to get filled. Materials stocks underperformed but the major financials had a tough day as their CDS deteriorated to one-week wides. VIX (and its many derivative ETFs) had a very bumpy ride today. VXX (the vol ETF) rose over 14% (most in 3 months) at one point before it pulled back (coming back to settle perfectly at its VWAP so not too worrisome). After the European close, FX markets largely went sideways with the USD inching higher (EUR weaker) as JPY strength reflected on FX carry pair weakness and held stocks down. Treasuries extended their gains from yesterday's peak of the week yields as 7s to 30s rallied around 6bps leaving the 30Y best performer on the week at around unchanged. Commodities generally tracked lower on USD strength with Oil the exception as WTI pushed back up to $99 into the close (ending the week +1.1% and Copper -1.1%). Gold and Silver ended the week down almost in line with USD's gains at around 0.25-0.5%. Broadly speaking risk has been off since around the European close yesterday and ES and CONTEXT have reconverged on a medium-term basis this afternoon (to around NFP-spike levels) as traders await the potential for event risk emerging from Europe.
Earlier in the week we began discussing the stigma that would likely be attached to the banks that decide to borrow from the ECB via the LTRO. Many talking heads including Mario Draghi himself, arbiter in chief of all risky collateral in Europe, dismissed this - reflecting back at the compression in credit spreads in the market-place as evidence that all was well and confidence was returning. In the last week our (senior unsecured debt) index of LTRO-ridden banks has underperformed non-LTRO-ridden banks by 23bps to a 75bps differential. This is the largest divergence since the LTRO began and corrects off mid-Summer tight levels of difference as the critical flaw that we also pointed out earlier in the week (that of the implicit subordination of bank assets via ECB's LTRO collateralization). Credit Suisse agrees with us and expounds on 'the flaw' in the LTRO scheme noting that the market is fickle and self-sustaining at times (as we have seen) but over time (and that time appears to be up this week), the market will weigh the liability side of the balance sheet versus the asset side, less haircuts (which implies haircuts will become the de facto capital requirements) and inevitably (given bank earnings potential) reflect this huge differential - most specifically in the senior unsecured debt market. With few shorts left to squeeze, spreads back at pre-crisis levels and financials having dramatically outperformed even large gains on sovereigns, the weakness in senior financial debt in Europe this week is more than just a canary in the coal-mine, it should become the pivot security for risk appetite perception.
Obama Revises CBO Deficit Forecast, Predicts 110% Debt-To-GDP By End Of 2013, Worse Deficit In 2012 Than 2011Submitted by Tyler Durden on 02/10/2012 14:54 -0400
While we have excoriated the unemployable, C-grade, goalseeking, manipulative excel hacks at the CBO on more than one occasion by now (see here, here and here), it appears this time it is the administration itself which has shown that when it comes to predicting the future, only "pledging" Greece is potentially worse than the CBO. WSJ reports that "President Barack Obama's budget request to Congress on Monday will forecast a deficit of $1.33 trillion in fiscal year 2012 and will include hundreds of billions of dollars of proposed infrastructure spending, according to draft documents viewed by Dow Jones Newswires and The Wall Street Journal. The projected deficit is higher than the $1.296 trillion deficit in 2011 and also slightly higher than a roughly $1.15 trillion projection released by the Congressional Budget Office last week. The budget, according to the documents, will forecast a $901 billion deficit for fiscal 2013, which would be equivalent to 5.5% of gross domestic product. That is up from the administration's September forecast of a deficit of $833 billion, or 5.1% of GDP." Where does the CBO see the 2013 budget (deficit of course): -$585 billion, or a 35% delta from the impartial CBO! In other words between 2012 and 2013 the difference between the CBO and Obama's own numbers will be a total of $542 billion. That's $542 billion more debt than the CBO, Treasury and TBAC predict will be needed. In other words while we already know that the total debt by the end of 2012 will be about $16.4 trillion (and likely more, we just use the next debt target, pardon debt ceiling as a referenece point), this means that by the end of 2013, total US debt will be at least $17.4 trillion. Assuming that US 2011 GDP of $15.1 trillion grows by the consensus forecast 2% in 2012 and 3% in 2013, it means that by the end of next year GDP will be $15.8 trillion, or a debt-to-GDP ratio of 110%. Half way from where we are now, to where Italy was yesterday. And of course, both the real final deficit and Debt to GDP will be far, far worse, but that's irrelevant.
Chart Update as Market is ready for a Correction.
As the headlines from Europe become more and more realistic (and ironically more and more Onion-worthy), Reuters notes one of the more interesting examples of just how the Greek people are feeling. The Federation of Greek Police have accused EU/IMF officials, in a formal letter, of "...blackmail, covertly abolishing or eroding democracy and national sovereignty". While violence erupts among the largely unemployed youth, the supposedly 'grown-up and responsible' segment of the Greek society, which for now at least appears not to be on strike, is recognizing the wholesale destruction of their society (as 22% cuts in minimum wage for instance are thrust upon them). The Greek police, who have stood against the protesters and done their jobs facing threats and anger, are seemingly expressing solidarity with the antagonists as they call out ECB, European Commission, and IMF leaders for their destructive policies. At what point do the police throw down their riot shields and follow the Greek people into their 'Bastille'?
Heading into the North American open, EU equity indices are trading lower following reports that Eurozone Finance Ministers have dismissed as incomplete a budget presented to them by the Greek party leaders. In addition to that, EU lawmakers have warned Greece of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets. The Greek Finance Minister Venizelos said that Greece must make a “final, strategic” decision Greek membership in the Eurozone over the next six days as it decides on new austerity and reform measures or faces leaving the single currency. However, according to sources, German finance minister told MPs, Greek reform plans would bring debt to 136% of GDP by 2020, instead of targeted 120%. So it remains to be seen as to whether Greece will be able to meet the looming redemptions in March. Of note, analysts at Fitch said that the ongoing Greece talks stating that the country must secure an agreement to cut its debt burden in the next few days to prevent a “disorderly” default.
- Eurozone dismisses Greek budget deal (FT)
- Germany Says Greece Missing Debt Targets in Aid Rebuff (Bloomberg)
- Germans concerned over Draghi liquidity offer (FT)
- Azumi Says Japan Won’t Be Shy About Unilateral Intervention (Bloomberg)
- Schaeuble Signals Germany Is Flexible on Revising Terms of Portuguese Aid (Bloomberg) - food euphemism for "next on the bailout wagon"
- Venizelos Tells Greek Lawmakers to Back Budget Cuts or Risk Exiting Euro (Bloomberg)
- Putin May Dissolve Ruling Party After Vote (Bloomberg)
- HK Bubble pops? Hong Kong Sells Tuen Mun Site to Kerry for HK$2.7 Billion, Government Says (Bloomberg)
- Gross Buys Treasuries as Buffett Says Bonds Are ‘Dangerous’ (Bloomberg)
Remember the pomp and circumstance with which Venizelos showed up in Brussels yesterday carrying a two paragraph statement from Lucas Papademos in hand, saying Greece promises it has agreed to agree to make idiotic "pledges"? Well, as was largely suspected by cynical old us, even that "deal" has lasted not even a whopping 24 hours.
- GREECE'S KARATZAFERIS SAYS CAN'T VOTE FOR TROIKA ACCORD AS IS - BBG
- GREEK FAR-RIGHT PARTY LEADER SAYS ELECTIONS WOULD NOT PROVIDE A SOLUTION NOW, WOULD NEED MORE TIME
This is coming from the LAOS coalition member whose support for the Troika accord was supposedly in place yesterday.Alas, without his endorsement, the whole thing is off. And just to complete the sheer chaos that is about to be unleashed in Greece:
- Greeek far right party leader says asks for reshuffle of Papademos technocrat gov
-> Kiss this whole thing goodbye. Just as Germany wanted all along. And the EURUSD, which lately had traded with the sheer idiocy with which one trades US 3x beta stocks, and which had soared on what was glaringly idiotic hopes that this time, just this time, things in Greece would be different, tumbles.
The situation in Greece has taken a more sinister turn. The outrage in Greece is growing. More and more of the people on my distribution list with ties to Greece are pointing out how bad things are there. Daily life is getting more difficult by the day for most people, yet the EU has told the Greeks that their current offer isn’t enough and that they have doubts about its implementation. At least they got that right, the austerity measures, will not remain implemented. It seems obvious to anyone who hasn’t become locked into a negotiating stance that the whole austerity idea isn’t working. It is possible over the weekend that the Greek parliament will defer to EU demands and vote in a plan that is “acceptable” but I don’t see it lasting. The people are fed up and more and more realize that defaulting and costing the foreign bankers money is worth a shot. Default is NOT the end of the world or of Greece. For all the politicians who keep saying default is the end, they are just wrong. It will cause problems, but Greece will survive, and for the first time can start focusing on a plan to move forward rather than dealing just with problems of the past.