Greece

Well, nobody is leaving the eurozone (as expected), but EU is merely ratcheting up the rhetoric one notch seeing full well what happens to countries that continue to endorse unlimited banker bail outs. And it is likely that the war of words will simply continue escalating until such time as the Greek restructuring becomes inevitable, which will likely happen not sooner than a year from now due to Greek bailout liquidity availability and nobody will push the country to do the inevitable until there is even one spare euro in the coffers for fears of what will happen to Deutsche Bank and the European financial domino. So for those wondering what happened at last night's secret finance minister meeting, one one hand, as Dow Jones reports, Greece "asked its euro-zone partners to ease the country's deficit targets as it struggles to comply with strict austerity terms set under last year's financial bailout agreement, a senior euro-zone government official said Saturday. The senior official said Greece acknowledged that it is unlikely to be able to return to the bond market next year and might need to tap the European Financial Stability Facility, the EU's new bailout fund, for funding. A German proposal to possibly extend the maturities of Greek debt falling due in 2012 also was discussed, this person said. Athens has a long-term borrowing requirement of EUR27 billion in 2012. "Greece has asked for the deficit targets to be eased, specifically to push the budget deficit target of 3% of GDP in 2014 forward by at least two years."" Alas, as expected the latest panhandling attempt by Greece was met with abject failure: "No decisions were taken, according to the Commission's statement. Greece's request for easier terms didn't win the assent of Germany and other participants in Friday's meeting, according to a senior European official." In other words, the country is on autopilot, and possibly worse. Per Bloomberg: "European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring, said a person with direct knowledge of the situation."In other words, for the first time since Weimar, a country may soon be forced to collateralize superpriority debt issuance to foreign creditors: an exercise not really seen in international politics since the Weimar war reparations... and at least Germany had its own currency back then. Summary: the EU just told Greece to prepare for Debtor in Possession loan issuance. Basically should Greece default, and it will, the Parthenon will go to Germany, Santorini will go to Luxembourg, Piraeos will likely end up in IMF hands, and the Chinese will own the rest. Welcome to sovereign debt restructurings for the 21st century.

Comprehensive summary of this week's key bullish and bearish events

Equities underperformed credit once again as macro protection was in demand (in all asset classes) and some rotation from macro-to-micro protection in equities ended a day which was very ugly open-to-close despite what headlines will yell.

Just as expected:

• EU'S JUNCKER SAYS `STUPID' TO TALK OF GREECE EURO EXIT
• EU'S JUNCKER SAYS `NO WAY' GREECE WILL LEAVE EURO AREA
• EU MINISTERS TO DISCUSS NEW `ADJUSTMENT PROGRAM' FOR GREECE

But yes, the EURUSD will open at 1.43 on Monday, not 1.45. FX ping pong game mission accomplished.

Looks like this one time the Greeks may actually be telling the truth. But who cares: by Monday, when every nation in the eurozone will be right where it was on Friday, the EURUSD will be 200 pips lower. Mission accomplished. Although unlike in 2010, we are absolutely certain no investigation will ever be launched to discover who instigated this EUR hit piece which just end up benefitting both Greece, German and... the eurozone. And yet, should it be uncovered one day that none other than Greece initiated this process to weaken the euro we would be almost as surprised as learning that Greek banks had bought CDS on Greek debt.

For those wondering which bank domino drops first if Greece files tomorrow, Sunday, in one month, or in one year, here is the market providing the answer: Deutsche Bank put volume surges to 7,353, 11 times normal.

While on one hand nobody can predict what the downstream effects on the European financial system will be from a Greek restructuring, and if Lehman is any indication, they would be quite dramatic to say the least, the biggest reason why Greece would likely never voluntarily initiate a pull out of the eurozone (which would mean an immediate default for all EUR-denominated Greek debt, which is all of it), comes courtesy of Credit Sights: "The reality from Greece's perspective is that if it unclear why restructuring would be a politically astute option. More than a quarter of Greek debt is held domestically - primarily social security (€28 billion) and banks (€31 billion), but even Greek households are holding €6 billion in short-dated securities. While those are relatively small amounts, we don't believe that asking those sectors to accept losses on their holdings of government securities would be a vote winner. What's more, Greece has the liquidity it needs until some time in 2013 thanks to the EU and IMF loan facility. There is €83 billion within Greece' EU-IMF facility that has not yet been drawn."

For all those lamenting the sad fate of "commodity" guys, we suggest you save your tears for the FX brigade. Levered between 10 and 100 times more, the recent 560 pip move in the EURUSD means that at least one macro fund, who has not hedged FX exposure, has gone under. Oh, and this whole move is nothing but a EUR hit job. There is no chance that Greece will leave the eurozone (at least not for a long time and not voluntarily).

From Reuters: Senior Greek government official denies report that Greece raises possibility of leaving Eurozone. So pretty much everyone has denied this, the EUR has crashed, and in a worst case the EUR is one step closer to reverting to its fair value: the DEM? Of course, with a record number of EUR longs, meaning the spec bandwagon in the EURUSD is orders of magnitude greater than the silver trade, the kneejerk response was down, and likely wrong. And yes, if Greece has gotten so far, German banks are certainly now happy to write off their exposure, and convert their EUR-denom Greek exposure to the drachma. The only question is what the impact to the ECB would be. As per Spiegel: "The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion). Of course, the ECB can simply print, print, print.

• GREECE THREATENS TO LEAVE EURO AREA, GERMANY'S DER SPIEGEL SAYS
• FINANCE MINISTER FROM EUROZONE AND EU COMMISSION HOLDINGS CRISIS MEETING TODAY IN LUXEMBOURG
• MEETING AGENDA INCLUDES POSSIBLE NEAR-TERM DEBT RESTRUCTURING FOR GREECE
• EUROGROUP CHAIRMAN JUNCKER "TOTALLY DENIES" MEETING TO BE HELD TODAY TO DISCUSS GREECE
  • And cue panic and furious denials:
    
• French finance ministry official cannot neither confirm or deny Spiegel report of emergency Eurozone meeting
• Austrian Finance Minister spokesman says Eurozone breakup "absolutely unthinkable"
• German government source says theres no plan for Greece to leave the Eurozone
  
• Senior Greek government official denies report that Greece raises possibility of leaving Eurozone
  
• IMF SAYS IT HAS `NO COMMENT' ON REPORT OF GREEK EURO EXIT BID
  

Away from the chaos that was the commodities sector today, recent themes in credit, equity, and vol contexts continued to gnaw away at the bullishness of every talking head. Shifts in CMBX tranches point to growing fears of systemic concerns in MBS markets and the up-in-quality trade (or up in capital structure) is in full force.

"I feel completely blessed to be alive right now. To be a witness and participant in a moment in human history that will be written about and passed down in tales for as long as humanity remains on this planet. We are currently observing the evaporation of what Nazis referred to as “The Big Lie.” In very basic terms the concept of The Big Lie is that if you are going to lie you may as well lie big. So big in fact that the majority of well meaning citizenry could never imagine anyone lying on such a grand scale (particularly not their government “officials”) so that they don’t even question the basis of their own reality. In the case of the United States the Big Lie is that we have a free market capitalist economy. Instead we have a corporatist/fascist economy that enriches three main groups. Wall street financiers, the military industrial complex and large multi-national corporations that don’t pay taxes. So that begs the question, how can the American people be so brainwashed into thinking they live in this false reality? It’s very easy. It’s all about the money." Mike Krieger

This does not sound like the sound of European consensus: "The leader of Finland’s euro-skeptic True Finns party, Timo Soini, said Europe’s crisis-handling mechanism “doesn’t work” and Greece will default on its debts as efforts to keep the country afloat have failed. He spoke today in a phone interview with Bloomberg Television." More like the sound of inevitability...We wonder how this will be spun by Trichet. In the meantime, things in carry land are getting worse and worse, as the USDJPY hit 79.60 overnight, a level at which the Japanese economy joins Europe and the US in full contraction mode. The summer of central bankers' discontent is coming fast and furious.

Trichet says:

• CPI rates likely to stay above 2% in coming months
• Risks on economy from Japan disaster
• Geopolitical tensions pose growth risks
• Paramount that rise in HICP inflation does not lead to second-round effects
• Risks to medium term inflation outlook are on upside
• Inflation expectations must remain firmly anchored
• Monetary analysis indicates underlying pace of monetary expansion picking up but moderate
• Confirm banks have continued to expand lending to private sector
• Governments need to achieve their fiscal consolidation targets in 2011

Most importantly: he says nothing about a June hike which was largely "priced in" by the Wall Street lemmingraty.