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A Breather And Some Time To Sort Through Some Greek Details

Tyler Durden's picture




 

From Peter Tchir of TF Market Advisors

A Breather And Some Time To Sort Through Some Greek Details

Details continue to leak out, making it somewhat easier to analyze what is coming out of Europe.

It looks like the ECB and National Central Banks will get preferential treatment.  The ECB has already allegedly exchanged their bonds for new ones, though I don’t see a reduction in notional of existing bonds – which could be a fact that they haven’t settled yet.  It will be interesting to know definitively what the ECB owned.  And then the NCB’s since they were kind enough to do the swaps (whether legal or not, particularly in the case of English law bonds) on different days.

Greece did take the time to announce that the budget deficit will be 6.7% of GDP instead of the 5.4% that had been projected.  With a real GDP of €225 billion in 2010 that would have been about €3 billion, but with GDP dropping so quickly, it is less additional money needed than you might think (positive thinking).  The fact that they cobbled together this whole deal based on a base case that is unattainable and worse than anyone expected just 3 months ago shows the power of being locked into a negotiating stance.  Even Germany must feel a bit guilty that they put a puppet in charge of Greece whose sole function was to negotiate this deal and didn’t actually spend any time to see if there was a better alternative for Greece than more austerity and decreased sovereignty.  Killing with kindness.  Also on the European economic data front, European PMI was below 50 for the composite, services, and manufacturing.

The European Investment Bank said that Greece needs a Marshal Plan.   They kicked in €2 billion last year and seem prepared to kick in more this year.  That is reassuring that someone is focused on growth, and thankfully we live in a world where entities like the EIB can exist and issue as much debt as they want based on guarantees and promises, without impacting the credit of the guarantor.

Speaking of that, how much is the EFSF going to come up with for the Greek bailout?  It is hard to tell where all the money is coming from (at this stage – though I assume we will get more clarity any day), but Germany in particular just added a lot of debt.  If you want to assume that Italy is really participating, then Italy is on the hook for about 20% of the money coming from the EFSF (and I assume from the EU).  In that case Germany is only on the hook for 30% of the money.  If the money is really coming from those countries still mostly AAA (including France) then Germany is on the hook for 50% of the EFSF/EU money, and Italy is not burdened.  I’m sure Sarkozy is quietly hoping no one in France, or the rating agencies, notice just how much more debt France has committed themselves to.  He has been awfully quiet during this process.  The Dutch seem to be getting more involved, but seem to be leaning more towards the Finnish view, than the save Europe at all costs view.  The benefit of the current structure is that it is hard to pin the specific obligation of any one country, but in some real world of finance (that is no longer seems to exist), some countries just saw their debt burden rise.  Fortunately in the world of unlimited central bank liquidity it may not matter how much debt anyone takes on (until the day it does).

After months (it seems like years) of trying to avoid a CDS Credit Event, it looks like one is inevitable.  The Greek 5 year CDS is at least 70 bid which may be the highest ever.  The game plan seems to be that Greece will put in retroactive CAC laws.  The PSI will come in below 100%.  Greece will trigger the CAC clauses on the Greek bonds, and we will get 100% participation in all those bonds, and we will get a Credit Event.  The interesting part is that depending on what they manage to do with English law bonds, the only bonds outstanding (not in the hands of the central bank only bonds, and troika loans) will be the new bonds.  If they start CAC’ing each bond, it is possible that there will be no existing bonds outstanding left.  Settlement would be based on the new bond (yes, ISDA has a Sovereign Restructured Deliverable Obligation clause – Section 2.16 of the definitions).  With the amortization schedule in place (and not including any value attributable to the GDP strippable warrants), I get that the new bonds would trade at 30% of par with a yield of just over 13%.  I would be careful paying up for CDS here, because settlement will be against these new bonds, not existing bonds if every old bond is CAC’d.  And given the attitude out of Greece late yesterday, and harsh IMF demands, we may well see that. 

The ECB’s secondary market purchases have slowed to a trickle.  Without a doubt, the fact that the market is trading so well has played a role.  They haven’t needed to buy bonds.  That is good, but will they resume their buying if markets show any weakness?  With everything that is going on with their holdings of Greek debt, they may not be so eager to return to active SMP.  They have given the banks the ability to buy whatever they want (with LTRO) and maybe that will be enough?  Draghi’s responses to questions about their Greek bond holdings have lacked for any finesse.  He seems annoyed with the situation and being caught in the middle.  For the “integrity” of the ECB’s core mandate (and yes I’m laughing as I type) they may shy away from building a balance sheet of direct holdings of sovereign debt (as collateral for loans to banks, they have no problem).  I don’t think they like being caught in the middle as a direct lender, have felt like they are being ordered around by a bunch of politicians, and at this stage he can still largely blame the whole mess on Trichet in his memoirs.  I still think they will do SMP, but I think they will be a little more reluctant than in the past, and will use bank lending tools to try and calm markets, rather than direct intervention in sovereign debt markets.  Besides, that is the EFSF’s responsibility, if the EFSF still has any money left.

Some noise about this being the last LTRO?  I’m sure it won’t be the last LTRO if or when we get another round of fear, but makes sense with things so calm to start ratcheting down expectations.  We will see what the demand is for the February 29th one, and how much LTRO money is used to add assets as opposed to just managing funding risk. 

In the meantime, I’m not sure how central banks solve the deteriorating situation in Iran, and since they are the only ones who seem to be able to accomplish anything we should continue to watch developments there.  And although less exciting, probably more important, is figuring out if China can really manufacture a soft landing.  Expectations that things are under control there seem high, relative to evidence that all is not good.

 

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Wed, 02/22/2012 - 08:56 | 2184220 Jacks Cold Sweat
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SAME SWORD THEY KNIGHT YOU THEY GON' GOOD NIGHT YOU.

Wed, 02/22/2012 - 09:04 | 2184236 trav7777
trav7777's picture

thank god for peter tchir; i was gonna run right out and buy a bunch of paper shit related to greece

Wed, 02/22/2012 - 09:15 | 2184249 disabledvet
disabledvet's picture

"gold in euros, gold in euros, gold in euros." that's all I saw...

Wed, 02/22/2012 - 09:35 | 2184302 GetZeeGold
GetZeeGold's picture

 

 

Screw euros......just get gold.......and hang the hell on.

 

This Euroland crap is full tilt retard.

 

 

 

Wed, 02/22/2012 - 10:20 | 2184495 LowProfile
LowProfile's picture

It's an attempt at a stick save, or perhaps a fig leaf for Germany & the Northern European countries to kick Greece out.

Doubt they will be able to keep Ireland or the rest of the PIIGS in the euro.  ...Except for Italy, as Italy has G O L D.  Maybe Portugal too, but that's iffy IMO.

"Some of the PIIGS (to use the unfortunate and unfair acronym) have very sizeable gold reserves – especially Italy which alone has some 2,452 tonnes of gold. Portugal has 421.6 tonnes, Spain 281.6 tonnes, Greece 111.7 tonnes and Ireland has just 6 tonnes." -Goldcore

After this is resolved, the remaining countries will likely come to some agreement to continue to use the euro, and use gold to settle their trade imbalances.  So the euro will eventually stabilize, and the USD will continue to print straight to oblivion (barring RP getting elected or some other near-miracle).

Wed, 02/22/2012 - 12:46 | 2185147 BlackholeDivestment
BlackholeDivestment's picture

 

 

                         ''...just get gold ...and hang the hell on'' 

 

GetZeeGold, don't hang on to hell, jumping off the ship of fools with the Babylonian Tax Collector's Counterweights will not float your boat. You need to get airborn assets this time. LOL. Think Light and the power thereof. Lol. 

http://www.youtube.com/watch?v=CzNLYolfWxE 

                             MRE's ....Bitchez

 

 

Wed, 02/22/2012 - 08:58 | 2184222 maxmad
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So after all that BS!  It is still going to lead to a hard default on March 23rd???!!!  WTH!!!

Wed, 02/22/2012 - 09:00 | 2184227 Everyman
Everyman's picture

Who thinks this shit up?  Talk about a difficult confusing clusterfuck, and this is "the best they can come up with"?

 

http://www.youtube.com/watch?v=cPXPYI0iRbg

 

Aren't these guys "some kind of geniuses"????????????

Wed, 02/22/2012 - 09:36 | 2184311 GetZeeGold
GetZeeGold's picture

 

 

 

Ummmm.......nope.

 

 

 

Wed, 02/22/2012 - 10:04 | 2184405 Martial
Martial's picture

Ordo Ab Chao....once you realize their goals, it makes sense.

Wed, 02/22/2012 - 13:34 | 2185349 donsluck
Wed, 02/22/2012 - 09:04 | 2184233 PR Guy
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About an hour ago, Fitch downgraded its credit rating on Greece from CCC to C - the level that indicates default.

It said that the debt-swap deal will constitute a "distressed debt exchange". Once the swap is completed, it will lower Greece's rating to RD (for restrictive default), and then re-rate the country "at a level consistent with the agency's assessment of its post-default structure and credit profile". Whatever that mouthful actually means.

You should be able to find the statement here somewhere:

http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp

 

 

Wed, 02/22/2012 - 09:29 | 2184281 bdc63
bdc63's picture

So, let me get this straight.  Fitch recogonizes that Greece is in default, but the banks that hold the CDS's are still standing their ground that the bond holders have "volunteered" to take haircuts so there is no default in their eyes ... what a MADD, MADD, MADD, MADD world we live in.

Wed, 02/22/2012 - 12:05 | 2184998 KatyB
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Because "default" for rating agency is different than "credit event" for CDS. Is that so hard to grasp? 

Plus, nobody has "volunteered" to do anything yet.

Wed, 02/22/2012 - 09:05 | 2184234 Dr. Engali
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They sure are beating the war drums on CNBC. They must need a good distraction before shit hits the fan.

Wed, 02/22/2012 - 09:13 | 2184238 Cognitive Dissonance
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"The game plan seems to be that Greece will put in retroactive CAC laws."

This is the key to everything and the reason you want to own physical PMs. Because if you own paper ANYTHING they can change the rules of the game midstream with just a keystroke or two. With physical they must at least show up at my door....and your door.....and all those millions of doors over there.

That means in order to rob me they must either gain my consent by willing agreement or use force. They can't rob the PM group with minimal effort. That makes it much more messy for the powers that wanna be.

Wed, 02/22/2012 - 09:18 | 2184254 disabledvet
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Denominated in Euros IF you can get it. The big story tho is still "bank runs DEAD AHEAD."

Wed, 02/22/2012 - 09:31 | 2184290 bdc63
bdc63's picture

Huh? ... if you hold physical it's not denominated in anything ... if it's 'denominated' then all you own is paper ...

Wed, 02/22/2012 - 09:30 | 2184286 Dr. Engali
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We saw that with the GM bankruptcy.

Wed, 02/22/2012 - 09:11 | 2184242 jmcadg
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Are they treating Greece as a test case? If those subordinated by the ECB move, roll over, or try to trigger and the ISDA don't declare a default (!), then they will look to replicate in Portugal, Ireland, Spain, Italy, Belgium etc.

If this is the case, are all European sovereign bonds at risk to the same degree?

Just wondering. Because it seems to me that MF Global was also a test case to see if they can get away with that.

I'm sure someone here with knowledge will put me right on this.

Wed, 02/22/2012 - 09:21 | 2184259 disabledvet
disabledvet's picture

This is a GREAT question...one that I don't see how it could be answered. Expect..."surprises."

Wed, 02/22/2012 - 11:27 | 2184341 bdc63
bdc63's picture

I absolutely believe that Greece is ONE of their proving grounds ... how much can they get away with? ... how much will people "take" ... what are the unforseen contagions ...

For example, they are chipping away at Greece's sovereignty.  How will the people react? -- street riots?  bombings?  tracking down politicians & tax collectors and hanging them in the street?  Fine, so then at some point the PTB will feel "justified" in sending in the international UN blue hats to 'restore order' and squelch a revolution ... how will the people react? ... etc., etc.

Now, extrapolate those "lessons learned" over all of Europe AND the United States and prepare to pull out the artificial support system that has been holding up the world financial system ...

 

Wed, 02/22/2012 - 09:11 | 2184244 vh070
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If they start CAC'ing each other the caca will hit the fan.

Wed, 02/22/2012 - 09:15 | 2184247 CrashisOptimistic
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There is a sense that no one knows anything about how the PSI works in this arrangement.  There were comments yesterday suggesting that the "deal" ignored it . . . that the countries had enough of an ordeal just reaching an agreement on things and doing so "contingent on PSI agreement".

Meaning, they did not, at that table yesterday, have any idea what status of the PSI deal was.

Wed, 02/22/2012 - 09:20 | 2184257 Irish66
Irish66's picture

How come no one is reporting Anonymous?  Sarc/

Wed, 02/22/2012 - 09:21 | 2184260 spanish inquisition
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If they are going to default anyway, the real reason of continued negotiations is still buried into the paperwork.

I would posit that there is language that they (ECB) feel will prevent another Iceland debacle, it will also protect their interest uber alles in case they are wrong. Some sort of attaching to hard assets that they feel are not defaultable or beyond a sovereign default and reset. Just need to dig in and root out what the phrase is....

Something like "The ECB will now own Greece in its entirety and all its citizens throughout the world until the debt to the ECB is paid. This constitutes a sale and the payments to the ECB are now concidered a lease to own. The base rate of interest is variable on the buy out portion of the debt and will change the lease payments on a month to month basis. The goal will be the ECB keeping the Greeks in infinite servitude.... Wait strike that last part, "Greeks" narrows it too much and we have the rest of Europe to negotiate with.."

Wed, 02/22/2012 - 09:29 | 2184280 rsnoble
rsnoble's picture

If there's a credit event there's nothing to worry about for the ISDA that's ran by the likes of GS because the US banks say they have minimumal exposure to all of this. LOL.

Wed, 02/22/2012 - 09:45 | 2184344 Sean7k
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This is an operation just like the Icelandic one. Private equity came in bought the banks and with the government's collusion rearranged the debt to a more solid anchor. Ditto the robo signing agreement. Small payoff with hamp funding as a cover so they have nothing to pay out and then all new paperwork to establish the chain of ownership.

The bonds will be forced sales, as the bond vigilantes will be painted as criminals, and the ISDA will refuse to acknowledge a default (it is run by bankers). This will happen in all the PIIGS and France.

The bankers will be bailed out and they will have transferred the money to new assets of real value before the eventual inflation from the hemorrage of currency hits the people. The new debts be enforced with new taxation schedules. The existing bank heads will retire on huge payouts and a new group of "more responsible" bankers will take their turn at the trough as the politicians and technocrats trumpet their efforts that "saved" the financial system.

When you control the rules and flow of the game- you win the game. 

Wed, 02/22/2012 - 09:53 | 2184367 adr
adr's picture

The Marshal Plan wasn't just throwing money at the problem hoping more debt piled on debt would rebuild Europe. After WWII the Greeks were given Ford trucks, tractors, seeds, mules, copper wire, generators, and American engineers. Things to help actual people. Greek farmers wept when they were given mules that could carry three times what one of their donkeys could, and plow a field in half the time.

What good is transfering billions in debt from one hand to the other going to do? It doesn't help anyone other than the debt whores that caused the problem.

Bernanke is either a complete moron or put us in this depression on purpose. Perhaps what he studied the depression for was to learn how the stock market nearly recovered 90% of its value following 1929. How the banking clan actually made fortunes while the population lost their life savings in a flash. How socialism nearly won the day.

Make no mistake, we are in a depression. I still have family members who lived through 29-45. This time they say feels worse because most people don't realize the truth of the situation. People forget during the Great Depression much of the country still worked in agriculture and there were far less people to feed. People still bought cars, radios, and went to movies in droves. People bought Coca-Cola, shopped at dpearment stores, commerce went on. The majority still had jobs. The banksters of the day made fortunes on the rebounding stock market. GDP growth acceleated on the back of hope things weren't bad. The depression was caused by the fact that fractional reserve banking and credit expansion caused unsustainable levels of consumption and rotted the core fundamentals of commerce.

History books only show you the misery and bread lines. The plight of the unemployed. Mostly low skilled immigrants and excess farmers who came to the cities to produce products for the credit based 1920s consumption boom. When access to cheap credit was cut off, real consuption tanked and the excess workers were not needed. Much of our latest boom was based on building homes and the services supplied to that sector.

During the Great Depression the government didn't have the social safety net we have now. A safety net that hides the truth from plain view and allows consuption to actually increase through the increase of government debt. How long would the bread lines be without food stamps? Without welfare? How many people would be waiting in lines at free clinics for flu shots without medicaid?

Today the stock market has put on its greatest show since 1930-32. Banksters and connected insiders once again made fortunes. The government once again thought it could fix massive structural problems caused by credit expansion and debt, by more debt and credit expansion. When studying the depression in college, I learned it was triggered on purpose to consolidate power. The depression was supposed to end with a socialist utopia, the banks and the wealthy holding all property and power. The serfs producing for them.

WWII was fought to consolidate power into socialist hands. It was Hitler's version of a global empire vs Stalin and FR's vision. FDR and Stalin were of like mind and carved up the world, Churchill was actually thrown out. There wasn't supposed to be a Cold War. The world was supposed to become a centrally planned bilateral socialist empire. Russia in the east, Ameirca in the west. Truman was kept in the dark on purpose, he was a patsy. FDR died and Truman was thrust into a world plan he had no knowledge of. A plan he wanted no part of.

IN reality the vision of global elite control was pushed back for almost 50 years, thanks to some American pride following WWII. The Marshal plan rebuilt Europe, and the Cold War kept a one world government off the table. Plans were put in place during the late 1960s to set the stage for a repeat of the 1920s. It played out and now the elites are once again sitting in a room carving up the world. The one world government is back in vogue. Sadly only WWIII can prevent the elite's consolidation of power. Just like WWII fights over which elitist vision is right, will throw the world into chaos.

Maybe I'm wrong. I don't know, but it seems like I am living the books I read in a very high level history course.

Wed, 02/22/2012 - 10:03 | 2184403 Sean7k
Sean7k's picture

Nice synopsis, but Britain was thrown out of nothing- it continues to rule the world, but this is the fiction they would have you believe. 

We must always look at results and effects, not the facade of history written by the tools of empire.

Wed, 02/22/2012 - 09:53 | 2184369 machineh
machineh's picture

Thanks, Peter, for bringing some clarity to a very opaque picture.

Scary to think that you probably understand it better than most of Europe's political decision makers (other than the Goldman Sachs ringers salted into key posts).

Wed, 02/22/2012 - 10:16 | 2184469 forexer
forexer's picture

This guy knows his stuff.

Wed, 02/22/2012 - 13:03 | 2185213 Joebloinvestor
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HAHAHA

The "evil ratings agencies" have already started downgrading this shit.

Who in their fucking right mind would buy a bond that can retroactively be altered in value and terms?

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