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Revisiting The Greek "Razor's Edge"
With the impending March 20th maturity GGBs trading at 1400% yield (or 36% of par), EURUSD trading at 1.31, and European financials (and Greek financials explicitly) all up considerably, one could be forgiven for confusion as to what is priced in and what is not. As Bank of America (BAML) noted earlier in the year, believe it or not, Greece remains a blind spot and that risks from Greece are not fully priced in. Summarizing the deep cuts that Greece is expected to make - the Troika is demanding fiscal measures of 2% of GDP in 2012 - BAML points out that while they believe a common ground can be found, the asymmetric risks of a disorderly default could weaken the EUR well below their projection of 1.25 in the first half of the year. Certainly, while Greek sovereign bond markets seem priced for inevitable default (as real cashflows still count in the credit markets), FX and equity markets seem to be jumping-the-shark of the crisis - Europe will be stronger without Greece and Fed will backstop inevitable crisis - and missing the interim crisis conditions (Lehman-moments) that will occur as tail-risk scenarios and social unrest (that LTRO seems to have assuaged for now in people's minds) could return rapidly across the entire region. With frustration growing between an impatient Troika (that faces total humiliation, moral hazard, and ugly precedents for others) and a stubborn April-election-facing political class in Greece (along with the inability of the PSI to get done for all the reasons we have discussed in the past - foreign law bonds, basis traders, hedged positions, hedge fund sovereign litigation arbs) it seems the Troika has the most to lose for now seemingly holding a gun to their own head (as once again a massive ECB intervention might be needed with all its knock-on effects on the Fed's balance sheet expansion).
The March 20, 2012 GGB trades at EUR36.3 (or 1400% yield), down from Par less than two years ago. Default seems inevitable and whether orderly or disorderly seems irrelevant as PSI will not be achieved leaving even a 'claimed' orderly move stuck in litigation hell for months.
Bank of America: Greece on razor’s edge
The negotiations for a new program in Greece are at a crucial stage. A meeting of Prime Minister Papademos with the three political leaders of the coalition government on Sunday has failed to lead to an agreement. Another meeting is scheduled for Monday. We believe the Greek government needs to decide on the following demands by the IMF-ECB-EU Troika:
- Closure of public enterprises and organizations that do not perform a function anymore and let their staff go – a total of 15,000 employees.
- Stop the regime of permanent employment and cut wage supplements in public sector enterprises.
- Cut the minimum wage, freeze nominal wages and stop any wage increases from seniority in the private sector.
- Abolish or cut substantially the holiday salaries (13th and 14th salaries).
- Increase labor market flexibility and particularly in wage bargaining.
- Reform and cut supplementary pensions, and merge related funds.
- Include all public sector employees in the unified public compensation system, or cut by 20 percent salaries that are excluded.
- Substantial cuts in spending for pharmaceuticals.
- Cuts in defense spending.
In total, the Troika is asking for additional fiscal measures of 2 percent of GDP in 2012. Reports suggest that the Greek government has already identified measures for about half this amount and is asking to spread the adjustment over a two-year period.
The timetable is very short. Agreeing on a new program is a must for the PSI (private sector involvement in a voluntary debt restructuring scheme). To allow time for PSI participation by mid-February, an agreement should be reached as soon as possible. The final program documents can then be signed by end-February, followed by an IMF Board meeting by mid-March, just in time before the March 20 bond maturity of €14.4bn.
The negotiations with the Troika have been very challenging. Although most of the above measures are related to previous commitments, or are justified by continues fiscal slippages and failure to improve competitiveness through structural reforms, the Greek politicians appear to be trying to avoid any political cost before the April elections. The Troika has also been particularly tough and seems frustrated from continuous delays and implementation problems that threaten its credibility and could lead to moral hazard in the rest of the region, particularly after the PSI. The most controversial measures are the cuts in private sector labor costs, which intent to improve competitiveness and help the private sector adjust without further layoffs.
We still believe that a common ground can be found, but cannot ignore the highimpact risks involved – indeed, we have recently warned that Greece remains a blind spot. A disorderly default in Greece would be in nobody’s interest:
- Greece has large funding needs, both in its government and its private sector. Without market access and official funding, the required sharp adjustment would be substantially more painful than under the program and could trigger a chain of events that could lead to an exit from the Eurozone. Greece’s banking sector would collapse, in our view, as there would be no funding for its recapitalization. A bank run combined with the inability of the government to pay its obligations could lead to severe social unrest.
- As the rest of the Eurozone periphery remains fragile and is only in the beginning of its reform process, such a chaotic scenario in Greece could have systemic implications. The limited EFSF funds are likely to prove insufficient to address contagion risks.
Market implications
The elevated uncertainty in Greece suggests downward EUR pressures, in our view. We continue projecting the EUR-USD at 1.25 in the first half of this year.
Even if the Greek government reaches an agreement on Monday, social unrest is likely to follow the measures related to wage cuts. Implementation problems are likely to continue before the signing of the new program. And we believe that the PSI will reach well below the almost full participation that the Troika assumes, putting the scheme at risk. A disorderly default in Greece could weaken the EUR well below our projection.
We do not believe that the risks from Greece are fully priced in. Bond market prices suggest that a default in Greece is almost inevitable, but FX markets suggest that contagion from Greece would be contained. However, negative news from Greece continues affecting FX markets – such as the announcement of a referendum on the Euro last fall. Although the EUR could eventually be stronger without Greece, a Greek exit under crisis conditions could increase uncertainty and even lead to tail risk scenarios in the rest of the region. A massive ECB intervention may be needed, weakening the EUR.
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They better start reading Zerohedge too
TOAST (and with no Butter), Bitchez ...
Burnt toast...mmmmm.....
But, it's quite clear to me now why Greece is trying to run it down to E.
Because E+ Razor = Erazor.
Blunting the Banker's Bludgeoning Blow...ERazor. The rubber for your tail...risk.
ori
songs-for-SONGS/
Risks from Greece are unknown? Nonsense!
Risks from Greece have been qualified and quantified sufficiently.
We know what its going to cost and therfore LTRO's were set up in order to protect the banking systems of Spain, Italy and France.
Believe me, we are ready to let the Greek and Portuguese go wherever their Mama calls them to go....
Have a good one!
No kidding they should start reading zerohedge.
More intervention? More insolvents bailing out other insolvents? Riiiiggghhht.
When the banks lends you a little money and you can not pay it back, it is your problem. When the bank lends you a shitload of money and you can not pay it back, it becomes their problem. BIG taxpayer bailouts of banks continuing, sheeple will wake up one day to - "hey, where is my 401k?"
Tick Tock, Tick Tock.
How many seconds left to (financial Armageddon) Midnight?
maybe we should do some sort of office pool. Kind of like the birth of a co-worker's first child. If any of you go all Price is Right on me, and take my day +1, we're going to have problems.
"How many seconds left to (financial Armageddon) Midnight?"
http://europeanfinancialsystemdeathclock.com/
Images from Blazing Saddles come to mind:
http://www.youtube.com/watch?v=upvZdVK913I
Not to worry. The Fed is backstopping the ECB.
"Closure of public enterprises and organizations that do not perform a function anymore and let their staff go "
We could use some of that here.
"Troika has the most to lose for now seemingly holding a gun to their own head".
Must...not...pull...trigger...bang!
There are no more tools in the tool kit , only the shillers and shysters are keeping this system on lifeline support ..
Game Over
__,_____
/ __.==--"
/#(-'
`-'
..
This is what denial looks like:
German Chancellor Merkel tells German TV "We refuse to acknowledge Greek Bankruptcy. We cannot accept that"
Since when does "refusing to acknowledge" something make it go away?
All the money is on black and it falls on red. "I can not accept this, roll the ball again until it falls n red"
A. Merkel
Since Alice in Wonderland. Or Angela in Euroland.
Awesome observation by the way, speaks volumes for where we are.
ori
Where was she quoted to having said that?
And yes, refusing to ack means it can't go away. They can stop paying, but if creditors refuse to ack (forgive debts, whatever), then yes, the (growing) debt remains.
"we refuse to acknowledge the melting point of steel" - 9/11 comission
See, it happenned exactly like it happened............doh
http://www.youtube.com/watch?v=NZ15f41TRDc
In an environment where governments will do ANYTHING to keep the wheels turning, it remains very unlikely that something so prominently on the radar screen for so long can be the item to crash the system.
On the other hand, the Greek elections are a serious problem. Voting for austerity is much easier if you know your own cushy job in Parliament won't be cut, but with an election looming, you lose that confidence. This could change the equation.
Zero hedge cannot state what it doesn't see: around the corner there is now maturing a plAn B which is diabolical. It is simply and effectively to shut down the market in its primary function : price discovery. Mark to market and mark to model will then be the same thing.
The interest rate and the quantity of money on the table and how its used will then be decided not by market functions but by central banks and political decisions. Lacking all visibility, all independent operators, not part of the inner annointed circle, will be behind the curve and sitting ducks for contrived mayhem. Public debt will continue to explode and private profit to emigrate, until the incremental rate of return falls to zero. Then there will be reset but they will have all the cards and will instill stashed, accumulated capital with parcimony in areas where they share power with people; as labour stays primary if not only motor to create riches. Growth and sweat go hand in hand.
Blind side market and open side political play. In the name of putting an end to asymmetry and financial shenanigans, but in reality to achieve the opposite : protect the rich and bleed the poor, in the name of superior interest of general good, that nobody can verify and control; as the system is in total regulatory capture!
Marking to model will be easy as the west already has the model of tomorrow before its very eyes : the perfect Oligarchy machine, one party China, with an entrepreneurial class thats skims the milk with its political czars. All they have to do is copy it and front it with American razmattaz via complicit MSM like Fox.
The nation then stays sheeple in a slow growth environment, whose doldrums can be explained by PAST errors of the system, genetic malfunctions inherited in body politic from past meltdown and debt explosion and which cannot be laid at the feet of each generation of NEW leaders. Staying one step ahead of public sentiment will be the name of Oligarchy game, free enterprise oriented, allowing "free" elections of hand picked Oligarchs wearing "red" and "blue" labels to ensure illusion of plurality.
The great Hatchery of Thatcher-Reagan visionary construct now straddles the world as one unified Oligarchy. No ideological divide, only Oligarchy control via hand picked multi nationals who organise each key sector in their vice like hands, and stash their profits outside the nation state systems answerable to the sheeple.
Money line control, media hype pump, and the political class educated in Ivy League now runs for the system like one orchestrated symphony.
No anarchy, no free market, no wars; we are all now part of HAtchery and Brave New World. Big Brother a constant reminder to never step out of line for those who want to buck the system. Its Soviet type Utopia but more intelligently run, the dystopia only begins if you be heretic.
Will it work? Of course, until hubris and corruption destroys it.
We stay Sisyphus until a new civilization is born amongst the plebes; new barbarians, who have nothing to lose, no inhibitions to changing the power rules.
New DNA bitchez!!!
That is such an insane notion..
you are probably right.
So just what is "Nominal GDP Targeting" again?
"parsimony" is not my strong point!
Btw : They sing "Tahrir" "Tahrir" in Putin land today, the "new barbarians" who hate hatchery ways.
There is no grand plan or conspiracy. None is needed. The present state of affairs is the expected result of nothing more than a soup of principled men sacrificing themselves and "them others" to a mystical common good--the ultimate hypocrisy--as if action could be anything but selfish. Like Maxwell's Demon, they assume order can be maintained for the benefit of Mankind [their abstraction, not mine] by the imposition of forceful constraints on actual men: each other. They think they can cheat friction and maintain a liquid state despite a relentless search for the threshold of vapor pressure. They've just about found it, now.
Who are they?
Who aren't they.
Somebody should have told them that Maxwell's Demon died in a fire.
The opportunists who've profited from the madness of crowds have done so only up to a point; their ultimate reward will be the same as the plebes'. If some delude themselves with notions of having orchestrated something, don't be duped. They don't control the weather, they're just along for the ride.
The centuries-long experiment with Democracy--the last in a succession of temporarily effective meta-regimes--will yield its final result, the same as its predecessors: rules can be made, enforced or discarded, but law is immutable. The inviolable law of the universe says that entropy over time is monotonic, and reaction accompanies action. The longer one avoids accounting for it, the higher the eventual toll will be when reality lays waste to all that has come to rest on faulty suppositions.
Well-being will continually elude those who must force it.
The preceeding global regime failure led to a millenium-long dark age. How long will the new endarkenment take to reprogram the gene pool?
what gets me is that we still call the ECB a Central Bank
when it is really a Junk-Bond trading high-risk Hedge-Fund
and the largest Hedge-Fund manager in the World is:
the Ben Bernank TBTF Federal Reserve Hedge Fund.
and yes - there is a big difference between a Central Bank and a Hedge Fund....
No - there actually isn't !
Most People might have some difficulties remembering what a real Bank
but especially a Central Reserve Bank actually is or supposed to look like.
A Central Bank is Not supposed to be a Hedge-Fund !
or is it ?
but obviously it is !
that would explain the Tim Geitner GS BLS data.
clear as mud !
wr;)
"Substantial cuts in spending for pharmaceuticals."
Bastards.
They should use their gold holdings to buy silver with which to issue silver coins to every citizen over 21, when the system implodes at least they will have real money with which to transact if the banking system closes down.
That's a statist approach, guaranteed to result in theft, corruption, favoritism and who knows what else.
Let them use whatever they want!
For the non village-idiots amongst us. The others may continue the Euro-bashing circle jerk.
Petrodollar pumping US policy on Iran, backfire looms
http://rt.com/news/iran-attack-us-allegations-243/
At the heart of the issue is not Iran’s dubious attempt to build nuclear weapons, or even oil, but how that oil is paid for. In 1973, Richard Nixon promised King Faisal of Saudi Arabia that the US would protect Saudi Arabian oilfields from any and all interested parties seeking to forcefully wrest them from the House of Saud. It’s important to remember that in 1973, Saudi Arabia didn’t have a fraction of the military and ground forces it possesses today (almost exclusively US manufactured weapons) and the USSR was very much a threat.
In return Saudi Arabia, and by extension OPEC, agreed to sell their oil in US dollars only. As if that weren’t sweet enough, as part of the deal, they were required to invest their profits in US treasuries, bonds and bills. The real zinger is that all countries purchasing oil from OPEC had to do so in US dollars, or ‘petrodollars’.
This strengthened the US dollar, resulting in a steady US economic growth cycle throughout the 80’s and 90’s. Countries purchasing OPEC oil started buying US treasury bills, bonds and securities to ensure they could continue purchasing OPEC oil. This worked fine for the US until 2001.
No plan, however well formulated, functions smoothly indefinitely.
2001, enter Saddam Hussein. He floated a plan to sell oil for European currencies in lieu of petrodollars. Shortly after Iraq was ‘suddenly’ found to be seeking and stockpiling weapons of mass destruction – allegations spearheaded by the US. The world knows what happened, suffice it to say that Saddam is dead and Iraq is ‘back on track’, selling its oil for petrodollars once again.
Muammar Gaddafi harbored the Lockerbie Bombers and allowed various terrorist organizations establish training camps in Libya. He tried to buy a nuke from China in 1972. In 1977, he approached Pakistan, then India. He sought nerve gas from Thailand. In spite of well over fifty failed assassination attempts on Gaddafi by Israel, the US and the UK, Libya was left to its own devices for the most part. Seeking nukes and harboring terrorists is one thing, but threatening the petrodollar is quite another. Gaddafi made a fatal error when he decided to move away from the petrodollar in favor of other currencies. This simply was not tolerated by the US. Having already played the WMD card in Iraq, something new was pulled from the US ‘regime change’ grab bag. Within a year, ‘internal’ elements rose up in rebellion against Gaddafi and now he is dead. Long live the petrodollar.
Dominique Strauss-Kahn, former head of the International Monetary Fund (IMF), suggested last year that the Euro would be a more suitable oil reserve currency than the US Dollar. Within three months of that statement, allegations of rape ruined his career, derailing his bid for the French Presidency in the process. Soon thereafter, all charges were dropped, but of course, le dommage était fait – the damage was done. Christine Lagarde, DSK’s replacement as head of the IMF sees no reason to change the current arrangement, naturellement.
The Iran situation is a little trickier. The US has sought to dismantle Iran’s regime ever since the 1979 Iranian Revolution, so this round of hostilities, while not new, reflects a new level of intensity. Why, after thirty years of hostility, has the US ratcheted up its rhetoric? As Obama stated in his recent State of the Union address, when it comes to Iran and the insistence they dismantle their nuclear program, “no options are off the table”. By stating ‘no options’ this would include nuclear deployment as a deterrent.
The answer of course is that Iran is now seeking to disengage itself from the petrodollar dynamic. In 2005, Iran sought to create an Iranian Oil Exchange, thus bypassing the US controlled petrodollar. Fear that western powers would freeze accounts in European and London banks put an end to that plan.
But that was not the end of their attempts, and Iran sought other ways to get around the petrodollar noose. There are rumors that India, which imports 12% of their oil from Iran, has agreed to purchase oil for gold. Energy trade with China, importing 15% of its oil and natural gas from Iran may be settled in gold, yuan, and rial. South Korea plans to buy 10% of their oil from Iran in 2012, and unless Seoul sides with American and European sanctions, it is likely to use gold or their sovereign currency to pay for it. Also, Iran is already dumping the dollar in its trade with Russia in favor of rials and rubles.
Iran is breaking the back of the petrodollar. Others have tried, but Iran is succeeding. To understand how disastrous this is for the US, one must have a basic understanding of how critical a role the petrodollar plays in the economic health of the US.
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So this might be our last chance to SELL all our gold....
http://finance.yahoo.com/blogs/breakout/last-chance-sell-gold-suttmeier-...