From Peter Tchir of TF Market Advisors
Greek Theatre. Tragedy Or Comedy?
Something about the news-flow over the weekend seems scripted. All of the comments and actions and "leaks" seem to be following a plan. The comments are too consistent. For the first time in months it seems that they have managed to contain people willing to speak to the media to just a few senior ministry of finance officials at the largest countries. Merkel and Sarkozy have been very quiet about the Finance Minister meetings, though Merkel was busy losing another election, so that may have something to do with it. This all started after a Friday trading session that was described by many corporate bond traders as not just quiet, but as "eerily" quiet.
In any case the big question is guessing how this play will end. Is it an attempt to allow Greek to default with as much dignity as possible? The Greek's can say that the new plans were pushing things too far too fast and it was unfair. The US says they need stimulus to grow, we could not continue on a plan of austerity. The other countries would then say that they gave Greece every opportunity to remain current and they would do so with other countries that were more commited to plans.
Or they could be setting us up for Greece to announce some new commitment to a plan. Then the European leaders can tell their citizens that they pushed Greece to the edge of default and are only providing taxpayer money with the certainty that Greece will live up to its obligations.
I still think this ends in default for Greece and that tomorrow is a potential date as so many pieces line up for it, but am wary that the EU politicians have hired some hollywood writers and are going to try and make us believe in happy endings. The ultimate ending won't be happy, but that might not stop them from trying one more time.
One argument I heard, and makes some sense, is that the default will wait til after the private sector rolls over their debt. The advantage would be the SPV they collectively own, would hold the voting power, and make it easier to negotiate with Greece. That makes some sense, but I still don't see what the rollover does for Greece. Greece looks like they still pay about the same amount as now, but it is split between going to banks and going to the EFSF. It does push out some of their cash flows, but not nearly enough given where Greek bonds are trading and the problems they are having. It is great for the banks, because they think they can trick people into focusing on the AAA rated zero coupon EFSF bond component when looking at their books, and they just shifted about 40% of their Greek debt risk to the EFSF (cost of a 30 year zero coupon bond has risen since the plan was first implemented). Expect to see more noise out of the IIF, and maybe it is enough to let everyone delay the default for now, but it doesn't do much for Greece, and just ensures that EU taxpayers take future losses directly instead of through the banks.
It should be another long week in any case as liquidity remains extremely thin, and we are likely to get contradictory headline after contradictory headline. The credit markets, which never fully participated in the stock rally last week, are significantly worse again this morning.