Greece

Greece just implemented pension reforms in an attempt to shore up its public finances and others will follow suit...

As we look forward, we ask, who now determines the variation margin on Greek CDS (and Portugal, and Dubai, and Spain, and, pretty soon, Japan and the US), the associated recovery rate, and how much collateral should be posted by sellers of Greek protection? If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance. Let's say Goldman thinks Greece's debt recovery is 75 cents and the CDS should be trading at 700 bps, instead of the "prevailing" consensus of a 90 recovery and 450 spread, then it will very likely get its way when demanding extra capital to cover potential shortfalls, since Goldman itself has been instrumental in covering up Greece's catastrophic financial state and continues to be a critical factor in any future refinancing efforts on behalf of Greece. Obviously this incremental margin, which only Goldman will ever see, even if the CDS was purchased on a flow basis, will never be downstreamed on behalf of its clients, and instead will be used to [buy futures|buy steepeners|prepay 2011 bonuses|buy more treasuries for the BONY $60 billion Treasury rainy day fund].

In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy! This is unmitigated lunacy and a recipe for financial collapse at the global level.

With Greece getting all the imminent default attention, have we forgotten California? Jim Grant chimes in.

In the pre-math of the Greek collapse, conspiracy theories are swirling about who keeps blowing Greek CDS spreads wider. The answer, so far completely unconfirmed, is that a large US investment bank (we "wonder" just which US investment bank dominates the sovereign CDS market), and two major hedge funds are behind the CDS "attacks" on Greece, Portugal and Spain. According to Jean Quatremer, and his Coulisses de Bruxelles, UE blog, the plan involves blowing spreads to record levels, and is prompted by the hedge funds' anger at not having been allocated substantial amount of the recent €8 billion GGB issue, in order to lock in profits from their CDS long exposure. Being thus unhedged with a short bias, their alternative is to continue buying protection else risking to mark losses on their extensive CDS short risk exposure.

Remember the proverbial run on the bank? Well, that was the norm (or rather the outlier) before governments decided to backstop entire financial industries  residing within their territory. As a result, the post-Lehman version of "the bank run" will henceforth be referred to as "the country run" and for an example of one in practice, look no further than Greece. The Guardian reports that investors have pulled a stunning €8-10 billion since the Greek crisis commenced in earnest last November. If true, this is the beginning of the end for the troubled EMU-member country.

Quotes from Germany's Finance Minister:

G-7 To Discuss Greece, Portugal On Sidelines

Crisis Not Yet Fully Over

Market Moves Exaggerated But Must Be Taken Seriously

Euro Is And Will Remain Stable

Will Not Spare Greece From Efforts To Reduce Deficit

Europe Isn't Only Place With Budget Problems

EU Commission Will Enforce Tough Demands On Greece

Just headlines crossing at this time:

• SR TSY OFF'L: CHINA FX POL TO BE ON AGENDA AT G7 MEETING
• SR TSY OFF'L: CHINA CURRENCY 'SUBSTANTIALLY UNDERVALUED'
• SR TSY OFF'L: CHINA CURRENCY ISSUE ON 'EVERYBODY'S MIND'
  
• SR TSY OFF'L: CHINA FX NEEDS MORE FLEXIBILITY
• SR TSY OFF'L: ISSUE OF GREECE WILL BE TOUCHED ON AT G7

Never a boring day for Joaquin Almunia. Over the past two weeks, the commissioner has been busy trying to persuade anyone who is willing to listen that not only would Greece not be bailed out, not only would the country somehow reconcile its 140%+ Debt/GDP ratio and record budget deficit in order without a civil war, not only are various €40 billion GGB certificates popping up all over the price irrelevant in the grand scheme of things, but that the EMU is actually a viable concept, long after anyone who does not believe in the tooth fairy realize that it is only a matter of time before fallout in the periphery tears the Union apart. And highlighting the amount of tragicomedy in Europe's "connected vessels" alchemy-risk experiment is the symbiosis among PIIGS risk: indeed, as Greece Bund spreads have tightened by 10 bps to 343 bps, those of Portugal have widened by a much greater proportional level, and are now 15bps wider at 144 bps. Europe is now one big, cracking dam, holding back a toxic surge of mismarked securities, and a scurrying Almunia is using each and every available finger to plug the PIIGS holes. We wish him all the luck in the world.

It appears not even one day can pass without some new and improved indication of Greece's economic collapse. The latest comes from website Kathimerini.gr which discloses that the recently appointed "Committee on the Reliability Of Statistics" has uncovered $40 billion of previously hidden debt (one wonders when America will get a comparable commission: no question we are in dire need of one).

In response to several reader inquiries into the Bank Of America report behind the post highlighting the potential outcomes for the Greek nation, we present this simplified summary matrix from BofA that rates the probability of each possible scenario and the implications that would follow as a result. A useful cheat sheet for those sovereign default situations.

"Over the next few days, we are likely to get some combination of Greek and European donor announcements aimed at calming markets, reducing volatility and reducing contagion risk. But the impact on markets is unlikely to be sustained as both sides face multi-round, protracted challenges which contain all the elements of complex game dynamics." - Mohamed El-Erian

Not good for Europe: all the posturing about how Greece will never, ever be bailed out was just destroyed courtesy of a few words out of place by the IMF. IMF Managing Director John Lipsky just noted that the International Monetary Fund is ready to help Greece "in any way necessary." The quote comes from a Bloomberg TV interview conducted earlier.Perhaps that is why Greek CDS just hit another all time wide at 410 (+35). And joining the foot in the mouth crew is ECB president Trichet who said that "Debt on both sides of the Atlantic are unsustainable." So should we now assume that even Central Bankers admit we are headed for a brick wall at 120 mph?

Damn it people, did you not hear to the Prime Minister "This is just empty speculation. The country is fine, I promise, fine, I promise, fine, I promise..." ad chapter 11.

At this point using the words "Greece" and "record" in the same sentence is starting to get uncool. Alas, today, it has to be said one more time. The country's CDS is now at 387 bps, another all time wide, while the spread to Bunds is just getting plain silly. Of course, the chorus of voices begging for calm is increasing, with Spain's prime minister the latest to claim that "nobody will be leaving the euro." It is unclear at this point if he is referring to Greece or Spain. This is coupled with Papandreou saying that he is "seeing speculation in world financial markets" regarding his country's risk, and the ever ubiquitous " rumors can create problems." Dick Fuld surely can sympathize.

There is a rumor of a bailout going around. It is worth watching as the Greece/Germany spread was wider by 17bps on the day again. It may be worth looking at shorting some bunds here, especially given that 10s rejected their 118-10 resistance yesterday in the US. - Nic Lenoir