Greece

Follow the motions: with Greece imploding once again, and bonds back to 7%+. let's try everything all over again and hope it works this time: IMF is *yawn* sending another team to Greece, Dominque Strauss-Kahn reports, even as Greek PM G-Pap has sent a letter to top officials in Europe and the IMF, requesting talks to discuss the details of a contingency financial support plan for his country. Um, we did that charade last weekend: it worked for 24 hours, just long enough for you to issue $2.1 billion in Bills, which auction by the way bankingnews.gr recently reported was a scam, with half the bids being fake! Well, congrats, but it ain't gonna work any more, as the market has called your half-pregnancy bluff. But that does not stop Greece, and its ex-Goldmanite head of public debt management, from demonstrating just how clueless it is when accessing the capital markets. At least Greece is acknowledging that at this point formal aid request is merely a matter of a few days. We are now convinced that Greece is in fact doing all it can to be allowed to default, yet Germany and Europe are forcing a two tier sovereign debt capital structure, with new guaranteed money becoming the Secured tranche in the Greek balance sheet. Of course this means that any demand for the "Unsecured" portion will disappear as soon as the bailout mechanism is finally activated.

SocGen's Dylan Grice is out with another must read report summarizing the Greek situation: in short, so much time and effort is injected in preserving the Greek status quo (so far unsuccessfully, even after 4 rounds of bailouts) as it is small enough that it could, in theory at least, be helped. If it goes, the next countries to follow will be simply too big to be bailed out. Just recall the $500 billion expansion in the IMF's NAB. The world is slowly realizing the dominoes can not be stopped, and as much capital must be locked away as possible in advance of the next major risk flaring episode. Which is also why stocks are currently going to the moon: the resultant crash in the stock market once the reality of just how ugly the global mess is will lead to large double digit drop in the market. Which is why getting to the highest possible level from which to plunge makes all the sense in the world...

As we expected last night, G-Pap's latest round of commentary was certain to set off fireworks in today's bond arena. Sure enough, at last check the 10 Year spread to Bunds had blown out by 40 bps to almost 400 bps, this is approaching the record wides seen during the duration of the entire crisis. As usual, the collateral damage is a drop in the ASE which was about 2% lower for the day, as well as Greek banks, mostly in the red. The primary source for the weakness was Moody's (which is now about 4notches behind Fitch) statement that "there is a 50% chance that Greece's credit rating could receive another downgrade in the next 12 to 18 months if fiscal consolidation falls short of goals. If Athens falls short of perfection, the Greek rating will be downgraded, a Moody's spokesman said" as reported by the WSJ. Additionally, a new round of strike is once again paralyzing the country. And confirming our observations that the half-life of any good news out of Greece is now less than 24 hours is Brown Brothers Harriman, which sent out a note to clients saying: "The afterglow of yesterday's Greek T-bill auction has faded." Lastly, CDS are back over 400 bps. The "speculators" are closing in on the kill... or at least the formal announcement of the bailout mechanism's activation by G-Pap. The loaded fire extinguisher is about to become a loaded gun, to be used shortly in a fatal game of Greek roulette (Russian roulette variation, where all the chambers are loaded).

And why not - after all it's all the rage among those waiting in line for iPads so they can be first to buy "The Steve Jobs Guide for Deadbeat Dummies Trying To Learn To Read Good." Now that Obama has given his blessing to an entire generation of Americans to tear up contracts (very appropriate coming from a contract law professor), the follow up to moral hazard is resulting in not just individuals and companies, but entire nations simply opting out of paying their dues. Evans-Pritchard reports that after today's ludicrous rates on 3 and 6 month Bills the tide may be turning in Greece, with both parties in the country finally realizing its creditors will do everything in their power to bleed it dry, at "usurious" rates. With economic growth negative for a decade and debt interests quite certainly positive, the marginal difference will destroy not only economic output, but sink Greece ever more in debt, as existing creditors fund capital shortfalls at maturity (or default) by ever increasing interest rates. Greece has the option to stop funneling domestic capital to Germany later (inevitable) or sooner (if it finally makes the right decision).

G-Pap, in an interview with Greek TV has just gone all in on his bluff, and has said that 'no EU state will block Greece's potential tapping an EU/IMF aid deal if the European Commission and European Central Bank issue a positive recommendation that it should be used." This leads us to believe that European opposition is mounting and that G-Pap is merely trying to preempt the vote down on Greek aid now that it has been revealed that several countries will need to hold "referendums" on whether this aid is in fact permitted (here's looking at Italy and Germany). What is more critical is that the PM has said "that Athens would never announce a "red line" at which it would decide to invoke the mechanism." That's perfectly understandable as not only is Greece way beyond the red line as is, but in the game of sovereign chicken, it will be the bondvigilantes who will always have the upper hand in calling Greece's bluff. And with statements like these we wouldn't be at all surprised to see another blow out in GGB spreads tomorrow, to continue the widening we started to see late in the day today.

Well that particular bailout lasted all of 24 hours: that's what happens when the markets habituate to endless non-bailout bailouts. The half life of each successive one is now half the previous. The Athens Stock Exchange is once again seeing deep red (-2% at last check), and now the ever critical 10 Year bonds are starting to get dumped. This follows a massive move in the EURUSD from up 100 bps to now down 15 or so. The 10 Year has now blown back out to 368 bps over Bunds. NBG, Alpha and Piraeus are all trading down 5%. In the meantime, nothing, nothing can touch the US stock market. Computers are now fully sentient and realize that Ben Bernanke will never in his lifetime allow a downtick.

And here we were thinking that a $2 billion successful Bills auction, (not really) backstopped by everyone and the kitchen sink would sound the all clear on the country with the 16% budget deficit. Alas, with the 10 Year still at 350 bps over Bunds nothing at all has changed for Greece. And here comes Deutsche Bank, which has billions at risk among the PIIGS, saying Greece will very likely be forced to protect its creditors asap, or within the next month, whatever comes first if it has no market access. Alas, as real Greek bonds are still trading just south of 7%, this pretty much means the market doesn't care about the country's long-term prospects, which in our books is equivalent to "absent market access" to anything more than oilve oil and Ouzo. And the cherry on top: several European governments will be forced to have a parliament vote to approve the bail out. It appears the market still has not figured this virtually certain collapse trigger to the rescue package. When it does, the end game for Greece will truly be there.

Greece is giddy about not only placing 3 and 6 month Bills, but also upsizing the issues from €600 to €780 million. Well, when the yield involved is more than double that of just 3 months ago, and an all time records, and the country has the full backing of the EMU, and the IMF just created a $550 billion new bailout credit facility to make sure nobody ever fails, we are shocked it took yields of 4.55% and 4.85% to get these done. To be sure, without the bailout of Germany et al, Greece would have been paying 7% on both, meaning the 2% differential is now implicitly (for now) borne by German and American taxpayers - that amounts to $42 million. Next up: let's see if Greece can price something beyond the immediate near-term horizon, especially past the guaranteed 3 year point.

A casual reminder of what Joaquin Almunia said just over two months ago goes to show the caliber of intellect of those running the show. Needless to say, Zero Hedge was skeptical of Joaquin's bullshit. Speaking of said bureaucrat, we wonder - did he fall off the face of the earth recently? With statesmen like this, who create soundbites such as "We have no Plan B - Plan A is on the the table, it is fiscal adjustment" who needs enemies like Ben Bernanke. Oh yeah, Europe. Nevermind.

Tomorrow Greece is issuing €600 million of 3 Month and 6 Month Bills each. The latest curve from Bloomberg shows that absent some new bailout between today and tomorrow, Greece will likely be forced to offer a stunning ~6% yield for both issues (assuming these go off at market rates). Without having checked historical records, we are confident that never in its post-EU history has Greece had to issue short-term debt at such record levels. And with the bulk of Greek debt rolling over in 2-3 years, the country will gradually become bogged down in untenable interest expense, even as its overall output is decimated thanks to real (as opposed to imaginary) austerity measures. There is no way that this curve is indicative of a sustainable situation or a situation where a liquidity crisis can be avoided. Greece thought the loaded fire extinguisher of this weekend's announcement would be sufficient to generate a far more aggressive steepening of the curve. It was wrong. It is now forced to activate the EU/IMF rescue plan. Each day it delays results in one day closer to certain sovereign bankruptcy.

Here is what happens when you green light Moral Hazard - in less than two hours after the videoconference in which the EMU announced €30 billion in aid for Greece, a Greek senior official has already come up and said that they were only kidding about needing just €40 or so billion (with the IMF's 10). The full amount will actually be double that, or €80 billion, for the three year period. Look for Portugal, Spain, Ireland, Bulgaria, Hungary, Latvia, and Lithuania to come knocking in the next 45 minutes.

Someone please explain to us how these two paragraphs do not directly contradict each other?

“In order to set incentives for Greece to return to market financing, Euro area Members States loans will be granted onnon-concessional interest rates.

and

“The pricing formula used by the IMF is an appropriate benchmark for setting Euro area Members States bilateral loan conditions, albeit with some adjustments. Variable-rate loans will be based on 3-month Euribor. Fixed-rate loans will be based upon the rates corresponding to Euribor swap rates for the relevant maturities. A charge of 300 basis points will be applied. A further 100 basis points are charged for amounts outstanding for more than 3 years. In conformity with IMF charges, a one-off service fee of maximum 50 basis points will be charged to cover operational costs.

Nobel Prize-winning economist Joseph Stiglitz talks with Bloomberg's Francine Lacqua about Greece's debt problem and China's currency. Stiglitz said an International Monetary Fund rescue of Greece would be a "sad" chapter in the history of the European Union.

Forget the earlier disclosure about low Greek bailout rates. According to more recent headlines, the loan will be 6% for three years, 7% if longer. This means there is no bailout as Greece can not sustain those kinds of rates, and the EU is merely buying itself time to prepare for the imminent unwind of the EMU.

Many have asked why all the consternation about the IMF bailing out Greece. After all, as Bob Pisani claims, it is headed by some woman called Dominique Strauss-Kahn? That name sure doesn't sound like it came from Alabama. So what is the big deal?