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Sliding Greek Bond Reality Challenges "Debt Deal" Hopium

Tyler Durden's picture




 

We have been rather vociferous in our table-pounding that even if a Greek PSI deal is achieved (in reality as opposed to what is claimed by headlines only to fall apart a month later), then Greece remains mired in an unsustainable situation that will likely mean further restructuring in the future. JPMorgan's Michael Cembalest agrees and notes that Debt/GDP will remain well above 100% post-deal but is more concerned at the implications (just as we noted earlier in the week) of the process itself including ECB preferred credit status, retroactive CACs (law changes), and CDS trigger aversions. In his words, the debt exchange is a bit of a farce and we reiterate our note from a few days ago - if this deal is so close, why is the 1Y GGB (AUG 2012) price trading -8.75% at EUR 28.75 (or 466% yield) and while longer-dated prices are rallying (maybe bear flattener unwinds), the moves are de minimus (-17bps today on a yield of 3353bps?) as selling pressure is clearly in the short-end not being rolled into the long-end as some surmise.

1Y GGBs (AUG 2012s) have slipped further and further this week...and while 10Y is rallying the move is very small and does not suggest (as some headlines proclaim) that investors are extending into Greek duration - the selling is all front-end and obviously heavy. Perhaps we are seeing some of the banks who are heavily exposed to the CDS side of the market covering (buying CTD bonds) to manage exposure into an involuntary event? The CTD is the 5Y GGB for now, and that has been...falling too...

 

JPMorgan, Michael Cembalest...Greece: Sisyphus revisited

We noted 2 years ago that despite being only 2% of European GDP, Greece would probably end up having disproportionate consequences for markets. That remains true today as it stumbles through to some kind of restructuring of its private sector debt (see table for one possible iteration). To be clear, the debt exchange is a bit of a farce on its own, since even after the debt reduction shown in the table, Greece’s debt/GDP ratio is still well above 100%.

 

Greece will almost certainly have to default on/restructure official sector debt as well, at a time and place of the EU’s choosing. Nevertheless, here are 3 things to watch as this process unfolds that can have broader ramifications:

 

How will the ECB behave? There are no justifications I know of for the ECB to assert preferred creditor status, which would entitle it to avoid being restructured (as the IMF does). So far, however, ECB comments indicate a reluctance to participate with the private sector rabble. If the ECB is treated as a preferred creditor, does that mean that all 217 billion of its sovereign debt purchases so far should be seen as effectively senior to private investors? This issue could be solved by having the ECB sell its bonds at cost to the EU before the exchange.

 

Will Greece put “collective action clauses” (CAC) in place? Without getting too detailed, many Greek bonds were issued under language known as “universal consent”, which means that all creditors have to agree to changes to maturity, interest or principal. A CAC allows the issuer to obtain a plurality of support from bondholders for changes to the bond indenture, and then impose them on any holdout creditors. There’s nothing wrong with CACs, except for the fact that applying them retroactively changes the rules of the game, and makes a mockery of the quaint notion of contract law. As we explained in Appendix C in our 2012 Outlook, contract law protections for investors in sovereign debt are very weak. Don’t like retroactive CACs? Go sue in an Athens court; good luck to you.

 

Will credit default swaps (CDS) end up being triggered? If there are no missed payments and everyone voluntarily participates in an exchange (no matter how coercive the process, or how large the debt forgiveness), then a default even as per CDS rules has not occurred. I have no objection to adherence to contract terms; but how will this affect users of CDS contracts that assumed they could hold bonds and hedge with CDS, now that they face losses on their cash positions without their hedges paying off? From now on, investors will be incented to sell their bonds, since their hedges won’t “work” in the way they thought they would. By the way, why is the EU so intent on avoiding a trigger of CDS contracts? Could it be that some EU banks are long Greece through CDS? We may never know for sure.

 

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Thu, 01/19/2012 - 10:41 | 2077642 SheepDog-One
SheepDog-One's picture

Oh well, no doubt another 'Hopium' will immediately be trotted out to take its place. All just about carrots and sticks now covering for outright manipulation of all markets. Its pure fascism, and yet people think they can front run the Maniacal Monetizer controllers....LOL good luck you'll need it as youre the target.

Thu, 01/19/2012 - 10:58 | 2077710 VanillAnalyst
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EU banks long Greece through CDS issuance blocking a credit event?

The Dude: Walter, ya know, it's Smokey, so his toe slipped over the line a little, big deal. It's just a game, man.
Walter Sobchak: Dude, this is a league game, this determines who enters the next round robin. Am I wrong? Am I wrong?
Smokey: Yeah, but I wasn't over. Gimme the marker Dude, I'm marking it 8.
Walter Sobchak: [pulls out a gun] Smokey, my friend, you are entering a world of pain.
The Dude: Walter...
Walter Sobchak: You mark that frame an 8, and you're entering a world of pain.
Smokey: I'm not...
Walter Sobchak: A world of pain.
Smokey: Dude, he's your partner...
Walter Sobchak: [shouting] Has the whole world gone crazy? Am I the only one around here who gives a shit about the rules? Mark it zero!
The Dude: They're calling the cops, put the piece away.
Walter Sobchak: Mark it zero!
[points gun in Smokey's face]
The Dude: Walter...
Walter Sobchak: [shouting] You think I'm fucking around here? Mark it zero!
Smokey: All right, it's fucking zero. Are you happy, you crazy fuck?
Walter Sobchak: ...It's a league game, Smokey.

Thu, 01/19/2012 - 10:40 | 2077645 SeverinSlade
SeverinSlade's picture

Shhh, the HFTs are feeling the hopium high at the moment...

Thu, 01/19/2012 - 10:41 | 2077646 knight99
knight99's picture

Keep shorting the Euro should be at 1.15 in the next few monhts. Wait till this hopium rally end is SP 500 to gain some real tracktion in this trade.

Thu, 01/19/2012 - 10:43 | 2077650 SheepDog-One
SheepDog-One's picture

Should be, but what reality ANYWHERE is being reflected? Outside of maybe PM's, which with gold at $1700 with all this massive printing should at least be double that...oh well good luck finding reality anywhere in this fantasy land.

Thu, 01/19/2012 - 10:44 | 2077652 LawsofPhysics
LawsofPhysics's picture

Was thinking the same thing.  Short term U.S. equity and dollar strength relative to euro.  Oh joy, maybe I will get that ski chalet in the alps after all.

Thu, 01/19/2012 - 10:48 | 2077668 SeverinSlade
SeverinSlade's picture

That just further proves how Wall Street is more of a casino than Las Vegas or Macau.

Thu, 01/19/2012 - 11:11 | 2077726 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The dollar strength is a mirage.  It is due to the notion that the euro is weak, and so the dollar is strong.  If A then B is a logical fallacy, especially considering neither one has any intrinsic value.

The real reason for dollar "strength" is because of a lack of volacity in the money supply.  China, Japan, India, Russia, and other States have been ending their trade in dollars.  They are dumping USTs hand over fist.  This means Bernanke has to sit on more and more debt.  This is the main reason for relative dollar strength.

Yet Bernanke needs a weak dollar to keep the Fiat Ponzi going.  He needs inflation to widdle away at the dollar.  This is why he needs to monetize his POMO auctions.  This is why in a month or two he will issue QE X.

Thu, 01/19/2012 - 12:11 | 2077992 steve from virginia
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Dollar is priced in crude oil products every day by millions of motorists voluntarily exchanging their dollars for valuable physical commodity -- gas -- on demand. Motorists make monetary policy in the US (and in the rest of the world 'on the bounce'), Bernanke is irrelevant.

Priced in crude, dollars are worth something. As more people go broke -- and lose access to dollars -- the buck becomes more valuable. The increasingly hard dollar is behind much of the current pain being felt in Europe, China, Japan and elsewhere.

$110 crude has Bernanke's balls in a vice. Any increase in crude price and bottom falls out of the economy which drops said crude price. This is the current oil dynamic, it runs outside of Bernanke's control. Any decline in crude price makes dollar more valuable.

As the crude price cannot increase, the ability of customers to pay for crude oil diminishes instead. This is a defacto revaluation upward of the dollar. a 'dollar shortage' with a scarcity premium attached to dollars.

Bernanke can go back to being an old-school primary broker-banker like JP Morgan was at the turn of the 20th century. He can sell his dollars dear and collect an immense fortune (for his friends in banking). Or he can retire and let Bill Dudley hold down the chair at the Fed.

We don't need a gold standard, we have an oil standard and a mindless automobile fetish.  Both of these things provided a standard of living to be admired. Now both of these things are destroying everything in sight.

Thu, 01/19/2012 - 12:37 | 2078122 LawsofPhysics
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Yes, primarily because the energetic return on oil used to be 50:1 (1 barrel of oil could be used to recover 50).  Now this number is 3:1 (one barrel recovers three) and decreasing exponentially.  Unfortunately 99.9 % do not understand math much less an exponential relationship, this goes double for most eCONomists.

Thu, 01/19/2012 - 10:42 | 2077648 LawsofPhysics
LawsofPhysics's picture

Bah ha ha ha.  Bonds for sale!  Get you red hot bonds here!  In other news; Hunker down folks, now the trade wars can begin in earnest.

Thu, 01/19/2012 - 10:45 | 2077661 SheepDog-One
SheepDog-One's picture

And yet still all they need to do is manipulate fake stock indexes green and therefore no one senses the least bit of danger....I never believed that could be but someone once said you could never go broke underestimating the stupidity of the public.

Thu, 01/19/2012 - 10:45 | 2077660 KidHorn
KidHorn's picture

There's something I don't get.

If a bond is trading at 28 and it's yield is 466%, this implies the original coupon rate was close to 100%. How is this possible?

Thu, 01/19/2012 - 10:50 | 2077676 Everybodys All ...
Everybodys All American's picture

It does not imply that at all.

Thu, 01/19/2012 - 10:47 | 2077665 Snakeeyes
Snakeeyes's picture

I posted something similar yesterday. While Greek yields fell a little today, there is still a bloodbath. 

http://confoundedinterest.wordpress.com/2012/01/18/greek-optimism-turns-sour-like-a-bad-dolmathes-well-intended-central-plans-are-difficult-to-control/

Thu, 01/19/2012 - 10:51 | 2077672 The Count
The Count's picture

Just let that lepra infested, putrid corpse of a country, Greece, die already. From the ashes there will arise a new Greece, history is but a chain of rises and falls.

Thu, 01/19/2012 - 10:51 | 2077683 SheepDog-One
SheepDog-One's picture

And the funny part is, the rest of Europe AND the US is in no better shape than the putrid corpse of Greece is.

Thu, 01/19/2012 - 11:16 | 2077769 The Count
The Count's picture

Yep, thats right. But the strange thing about the human phyche is that it prefers a slow death by pinpricks (by not facing the facts) than a clean cut.  

Thu, 01/19/2012 - 11:06 | 2077685 Mercury
Mercury's picture

Alright!  this guy is framing the situation in a way similar to the kinds of questions I've been asking for a week or so.

Seems like the whole thing is boiling down to a binary outcome of CDS getting triggered or not.  It's not like there is any chance in hell that principal and interest will be paid in full on outstanding Greek debt.

And yes, I'd be willing to bet that European banks are very much net short Greek CDS.

Thu, 01/19/2012 - 10:57 | 2077708 adr
adr's picture

But, but the USA is on its way to becoming a major industrial powerhouse again. We'll all be working manufacturing jobs after the great recovery sparked by our great president. Of course every home will be empty because no worker wil be able to afford them. Factories will have dorms built next to them and everyone will get 100 sq ft to live on thier $1 a day. THANKS OBAMA!!!!!!

Thu, 01/19/2012 - 10:59 | 2077711 Silverhog
Silverhog's picture

The mind numbing propaganda the news networks pump out will probably kill us all well before any real event takes place.

Thu, 01/19/2012 - 11:08 | 2077739 Dr. Engali
Dr. Engali's picture

There is just too much money out there if people are willing to throw it away for this crap...

Let me rephrase that. There is too much money in the hands of stupid people if they are willing to throw it away on this crap. I am sure there are a lot of people in need who could do better.

Thu, 01/19/2012 - 11:11 | 2077740 sabra1
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peoples, take a few minutes to view this video regarding bank holiday!!!

http://youtu.be/EB319yIHZdE?t=12m39s

 

Thu, 01/19/2012 - 11:09 | 2077742 fonzannoon
fonzannoon's picture

Any comment from anyone about overnight deposits dropping substantially at the ECB overnight? I know everytime they went up there was something on it.

Thu, 01/19/2012 - 11:12 | 2077755 Downtoolong
Downtoolong's picture

I can’t think of a better example of destructive capitalism than the tragedy of Greece and the EU unfolding before us. There is no social or economic value being created here. This is simply financial warfare. As with physical wars, this one involves some of the worst in human behavior: hostage taking, terrorism, lies, deceit, full frontal assault, and of course collateral damage of the innocent. As with all wars, size and power is everything. Little investors doesn’t stand a chance at all (compared to the miniscule chance they had before). Worst of all, those who are promoting the war on all sides now are the same who stand to profit from it the most, at everyone else’s expense. They could care less about the long-term consequences of their actions as long as they profit from the process itself. In the end, it’s all just about a handful of large market participants gaining a larger piece of a shrinking pie.

Thu, 01/19/2012 - 11:36 | 2077863 Mercury
Mercury's picture

What about governments spending beyond their means, lying about it and trying to squirm out of the consequences? What's that a good example of?

Thu, 01/19/2012 - 11:18 | 2077787 spastic_colon
spastic_colon's picture

doesnt matter.....whatever comes out of Greece will be considered voluntary regardless of how it is structured

Thu, 01/19/2012 - 11:34 | 2077867 Texas Ginslinger
Texas Ginslinger's picture

Yield on the one year Greek bond is at 466 - still heading north...

Baltic Dry Index is at 926 - still heading south...

Based on how quickly the bond number is rising, I say the intersection point will be 800 - 850....

Thu, 01/19/2012 - 12:16 | 2078019 Georgesblog
Georgesblog's picture

This is how the debt game worked in Africa and South America, for the past 50 years. Countries end up with nothing left to sell. In the world of monetized debt, everything and everyone is for sale.

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

Thu, 01/19/2012 - 12:16 | 2078023 Herkimer Jerkimer
Herkimer Jerkimer's picture

I don't know much about finance, but if I buys something like insurance on my new toy from the salesman, and then sump'in happens to said stuff that in my unner'stan'in seems to me that the insurance should be paying out and it don't...

 

Well...

 

I guess I'm not only buyin' no more insurance, I ain't buyin' no more of the their product.

 

Guess I won't be buying anymore CDS or bonds. Howz that gonna work out for the world?

 

•?•
V-V

Thu, 01/19/2012 - 12:54 | 2078195 Snakeeyes
Snakeeyes's picture

And the bond market response to the IMF's firepower request was "Is it really a water pistol?"

And look at ECB's Liquidity Reserve Requirments!

http://confoundedinterest.wordpress.com/2012/01/19/imf-increases-eurozone-bailout-firepower-by-600-billion-but-it-performs-like-a-water-pistol-ecb-liquidity-reserve-requirements-plummet/

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