So Greece 'Defaults' And Europe Moves On...

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,

So far there are no dramatic consequences of the Greek default.  The ECB did say they couldn’t accept it as collateral, but national central banks (including Greece’s somehow solvent NCB) can, so no real change.  We will likely get a Credit Event prior to March 20th once CAC’s are used to get the deal fully done.  Will the market respond much to that?  Probably not, though there is a higher risk of unforeseen consequences from that, than there was from the S&P downgrade.


It just strikes me that Europe wasted a year or more, and has created a less stable system than it had before.  A year ago, Europe was adamant about no haircuts and no default.  I could never understand why.  Let Greece default, renegotiate terms, stay in the Euro and move on.  The key then, as now, was ensuring that banks that were solvent had enough liquidity.  Rather than take that advice, Europe proceeded to buy Greek debt, which not only failed miserably, but has complicated the situation.  The ECB holdings stick out like a sore thumb.  Had Greece been allowed (or forced) to default and restructure when the crisis first hit in 2010, the ECB wouldn’t own a single bond.


Every step of the way, the avoidance spread the risk and created contagion, rather than solving it.  EFSF was an artificial construct designed to sound impressive and never be used.  In the end it has been barely used, sounds unimpressive, and  did spread the contagion.


European leaders somehow see the “bailout” as having solved Greece’s problem.  The reality is massive debt forgiveness and losses to creditors do far more.  The leaders won’t pull back, but it would be far easier, and longer lasting, if they let Greece default (including on ECB holdings), wipe out virtually all the debt (offer 20% recovery), and have the EFSF give the €30 billion to Greece as fresh money rather than to creditors.  The IMF and ECB could still play roles too.  They won’t do it, because they continue to fight the wrong issues.  The German vote yesterday was helped along by the “incalculable” damages warning from Merkel.  That warning was based on Greece “leaving the Eurozone” which it wouldn’t necessarily have to, and doesn’t seem supported by any fact.  Just like their fear of default originally, and their fear of CDS, someone will eventually see the light, but it may be too late (at least for the Greek people).   


Whatever has been done is likely going to need to be fixed, and once again, they missed the chance to do something proper because they are all stuck in their positions, mostly based on fear, rather than critical analysis.  They will point to the SPX and say it is higher now than a year ago, and much higher than 2 years ago.  Correct.  What is hard, if not impossible to determine (except by central bankers) is what path the market and the economy would have taken if they had dealt with Greece properly.  Would contagion have spread and we hit much lower lows?  Or would contagion have been stopped in its path after some restructuring and liquidity?  What if the last year (or 2) had been spent focusing on growth for the countries in the most trouble, rather than on ways to keep them paying creditors?   What about a world where we had fewer zombie banks because they had been allowed to go bankrupt and new banks and financing companies been allowed to start?  Maybe securitization and the shadow banking system would be alive and well now, and cheap money would actually be flowing from central banks into the economy rather than just into banks and sovereign debt?  Maybe the S&P would be at 1,700 and we would have more to talk about than Apple and a QE inspired hope for housing?


We continue to try and avert short term pain at all costs.  Every plan is to get through the next month or two and doesn’t deal with the real problem.  We saw it in the US back in 2007, and it has never really stopped.  The economy and stock market are okay at best (stock market better than the economy), but still reliant on government support.  Defaults, write-downs, killing zombie banks, allowing free markets and real interest rates would have set us up for a much cleaner and optimistic future.  LTRO may help the market again tomorrow, but at what cost to the long term?  It is time to end the “it would have been worse if we did nothing” argument, and start talking about “look at how much better off we are now by doing so little” argument.


We get a lot of data today.  Home price is interesting since the price shouldn’t be impacted by the weather (sales yes, price no).  But since it is December data it is likely to be ignored if bad.  Durable goods orders estimates look low given the weather.   0% ex transport seems more likely to surprise to the upside, but with all the data and current stock prices, a surprise is likely baked in.  Richmond Fed is unlikely to do much either way unless it is massively different than expectations, and consumer confidence is likely to be strong – but who really cares?  And strong is a very relative term.


Tomorrow’s LTRO is definitely interesting.  It seems like every outcome is now bullish – big take up is bullish because of the “carry” trade.  Low take up is bullish because “banks are okay”.  I expect low take-up, partly because it was never meant to be for the carry trade anyways.  It was designed to ensure banks could deal with near term maturities.  It did that job.  Short dated sovereign has come in with it, part because banks could buy some, part because SMP was buying (looking at Greece, it looks like SMP likes the front end), and momentum chasing/stop loss trading helped things along.  With Spanish and Italian 2 year bonds trading at 2.5%, there isn’t that much left in the “carry” trade.  Any weak bank looking to borrow from the LTRO to buy sovereign debt would be insane to buy bonds longer than 3 years and take the roll risk, but on the other hand, the weakest and most insolvent, got there by doing insane things in the first place.

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qussl3's picture

Is this the only default where the defaulter ends up with a larger debt burden than before?

GetZeeGold's picture



The good thing about a at some point you actually do give birth to something.


Deliver the baby.....shoot the SOMETHING!



Manthong's picture

Yeah, come on now, dammit.

We need to get all this Greece obfuscation, lies and can kicking out of the way so that get on with the obfuscation, lies and can kicking for Spain, Italy,  Japan and the U.S.

BobPaulson's picture

If they actually got to repudiate their debt then somebody would have to come clean on their rotting balance sheet(s). So perhaps the dominos will never fall, they will just melt.

The real currency is work or effort, and the banks are still getting everybody to do that for them, which is of course the name of the game. Everyone on this site is expecting and hoping for a day of reckoning, but maybe we are in already in the slow motion continuous day of reckoning.

"And now the wheels of heaven stop, you feel the devils riding crop, get ready for the future it is murder"

MillionDollarBonus_'s picture

What I can't understand is why a CAC offers equal voting rights to every bondholder. Surely, top tier investment banks, governments and primary dealers should have far greater voting rights than buy-side firms? Hedge funds are dispensable, but systemically important financial institutions such as banks have a far greater value to the world economy, and should thus be protected from a CDS trigger.

JPM Hater001's picture

I threw up in my mouth a little.

All bonds are created equal...but some bonds are more equal than other MDB?

Sounds very Orwellian.

spiral_eyes's picture

Us stupid libertarians and our quaint notion of equality before the law...

GetZeeGold's picture




Free Jon Corzine!!!!


Oh wait.....he is.




alien-IQ's picture

"systemically important financial institutions such as banks have a far greater value to the world economy, and should thus be protected from a CDS trigger."

Surely this must have come the desk of Jamie Dimon? No real human being would dare make such a comment without financial compensation.

carbonmutant's picture

I thought this was Paulson's point ...

bdc63's picture

Surely you jest ... If you give preferential treatment on bonds to "top tier investment banks, govenments and primary dealers", why in God's name would any individual, or hedge fund, or anybody that doesn't fall into the "special treatment" category, EVER AGAIN purchase a bond?

slaughterer's picture

MDB must be a robot.  No human could come up with this stuff.

MolotovCockhead's picture

"MDB must be a robot".....Wrong!!!

Robot don't fart!! Assholes do!

Schmuck Raker's picture

Golly MDB, how do you earn a living with such ignorance?

"...CAC offers equal voting rights to every bondholder." is not true at all.

CACs ensure that 'YES' votes count more than 'NO' votes.

WE ARE SAVED, I tell you, SAVED!

JPM Hater001's picture

I had a broker at Smith Barney like him.  Of course we know what happened to them.

I cashed out and bought gold and silver...I have done much better.

MsCreant's picture

Tyler, you're fucking with us. Tyler iz trollin' hiz own site.

Fight club.

Project Mayhem on Project Mayhem. Keep tearin' it down!

GetZeeGold's picture



We didn't start the's been always burning since the world's been turning.



carbonmutant's picture

Setting Fire to the Rain...

Jake88's picture

If the casino doesn't pay off then nobody will play the game.

Moneyswirth's picture

 Any weak bank looking to borrow from the LTRO to buy sovereign debt would be insane to buy bonds longer than 3 years

Which is why they'll do precisely that...



pazmaker's picture

Eur/USD to 1.5!

JPM Hater001's picture

The World Spot Price - Asia/Europe/NY markets

( closes in 9 hrs. 9 mins.)

  Metals Date Time (EST) Bid Ask Change from NY Close GOLD 02/28/2012 08:06 1779.00 1780.00



SILVER 02/28/2012 08:06 35.93 36.03




02/28/2012 08:06 1709.00 1717.00



PALLADIUM 02/28/2012 08:05 710.00 716.00



 I havent seen overnight PM moves like this in a long time.  Prepare for a fun day...these are the international spots.

Mongo's picture

Wouldn't the world end if Greece defaulted?...

number cruncher's picture

The effect of the LTRO v2 will lasta about 1 day, 2 days tops. Its baked in and has been since it was first mention in late December. Watch the market strat to fret after the LTRO v2 take up on where the next hit is going to come from... lots of bad news in the pieline afterwards and this is the last oasis before the long haul.


its about time to go short.. hurrah

Cursive's picture

The fallacy of Tchir's analysis is that he thinks a Ponzi scheme could have been managed better. Good luck with that.

Vince Clortho's picture

`We have the top ponzi managers money can buy.

This calls for another round of bonuses.

Fire up the presses ...

oh wait, they never stopped.

dcb's picture

can someone please detail about this default. nothing on bloomberg, only here, and the story isn't put together in one article.

Die Weiße Rose's picture

dcb - this might be helpful :

Greek bailout is back in private sector hands

Ben Rooney @CNNMoneyMarkets
February 21, 2012: 11:56 AM ET

NEW YORK (CNNMoney) -- It looks like Greece will avoid an outright default in the short run now that eurozone finance officials have signed off on a second bailout for the debt-stricken nation. But the rescue package worth €130 billion is contingent on a historic debt reduction agreement with private sector investors that must be approved before any bailout money can be released. Assuming private sector investors sign off, Greece should be able to secure the funds it needs to make a €14.5 billion bond payment in March.

The terms of the private sector agreement include a write down of 53.5% on the face value of Greek government bonds, steeper than the previous 50% reduction agreed to in October.

The proposal will now be presented to members of the Institute of International Finance, which represents the private sector. The IIF's full committee will review the details and make a decision "in accordance with their own individual processes," according to a statement.

IIF director Charles Dallara said in an interview with CNN's Richard Quest that he expects a high participation rate,
but he acknowledged that each investor has the right to make their own decision.

Under the terms of the agreement, Greece's debt load will be cut by about €107 billion, equal to 50% of the nation's estimated economic output for the year. It will also reduce the amount of debt Greece needs to refinance over the coming years by roughly €150 billion, according to the IIF.

In addition to the write down, investors would exchange existing bonds for securities with lower interest rates. At the same time, investors would receive securities that could increase in value as the Greek economy improves, and EU officials would kick in a €30 billion "sweetener."

According to the IIF, the agreement represents the largest sovereign debt restructuring in history.

Overall, the deal will result in losses of 74% for the private sector, according to Marc Chandler, head of global currency strategy at Brown Brothers Harriman.

Given the onerous terms, he said reaching the targeted 95% participation rate "seems unlikely." He also suggested that an official endorsement by the IIF may not mean that all private sector investors are on board.

"It is not clear how much the IIF really represents the private sector," said Chandler, in a note to clients.

The concern is that a large number of investors will balk at the deal, forcing the terms to be renegotiated. That could delay the just-approved bailout and put Greece back at risk of a disorderly default.

The Greek government is expected to pass legislation this week that would force investors who reject the agreement to take losses on Greek bonds issued under domestic law, which make up the majority of the nation's debt load.

The presence of so-called collective action clauses would not qualify as a "credit event," according to the International Swaps and Derivatives Association. But the association suggested that activating the clauses could trigger credit default swaps, a form of insurance that investors use to protect against a default.

Credit default swaps, or CDS, were a major contributor to the 2008 financial crisis, when declines in the U.S. housing market caused banks to suffer major losses on mortgage-backed securities. (Lehman, AIG, Goldman Sachs)

But analysts say the Greek CDS market is small and such a credit event would probably not shock the global financial system. "The net Greek CDS positions of systemically-relevant financial institutions appear to be relatively limited,"
said Tobias Blattner, euro area economist at Daiwa Capital Markets.

-- CNN's Richard Quest contributed to this report.

To top of page
First Published: February 21, 2012: 11:01 AM ET


Die Weiße Rose's picture

The nine-member panel set up by the German parliament to monitor the activities of the temporary euro bailout fund is "in large part" unconstitutional, Germany's top court said on Tuesday.

The ruling could curtail Berlin's ability to fight the euro crisis.

Germany's highest court ruled on Tuesday that a select body of nine parliamentarians cannot alone make emergency decisions on eurozone financial aid, calling instead for the entire legislature to participate more actively.

The Constitutional Court based its decision on the "overall budgetary responsibility of parliament."

The German lower house of parliament, the Bundestag, had passed a law that empowered a nine-member body to make rapid decisions on behalf the 620-member legislature during emergency economic situations involving the health of the euro, the common currency of 17 European Union member states.,1518,818007,00.html,,15772567,00.html


magpie's picture

This is a non-story because Germany does not possess a constitution.

Die Weiße Rose's picture
Germany's "Grundgesetz" is the Constitution monitored and judicially reviewed by the Federal Constitutional Court of Germany:

The Federal Constitutional Court (German: Bundesverfassungsgericht, or BVerfG) is a supreme constitutional court established by the constitution or Basic Law of Germany. Since its inception with the beginning of the Federal Republic of Germany, the court has been located in the city of Karlsruhe — intentionally distanced from the other federal institutions in Berlin (earlier in Bonn), Munich, and Frankfurt.

The sole task of the court is judicial review, and it may declare legislation unconstitutional, thus rendering them ineffective. In this respect, it is similar to other supreme courts with judicial review powers, like the Supreme Court of the United States; yet the Court possesses a number of additional powers, and is regarded as among the most interventionist and powerful national courts in the world.

The court's practice of enormous constitutional control frequency on the one hand, and the continuity in judicial restraint and political revision on the other hand, have created a unique defender of the Grundgesetz since World War II and given it a valuable role in Germany's modern democracy.


magpie's picture

Even if it were a non-constitution constitution say in the sense of the UK's, it is trumped by the EU one any day.

EZYJET PILOT's picture

Can someone explain to me in simple terms what sort of haircut has been imposed on "creditors"? I keep hearing about a 75% haircut on Greek debt but how can there be when all the bailout money is going to fund banks through the back door. 

How can this be any good for Greece when its debt has just increased by 130 billion, thats 130 bilion that has to be paid off to meet the 120% debt/GDP by 2020. Either this is crazy or I'm a simpleton, why does it just seem so obviously stupid to me, yet is presented by the media in all sincerity, are they taking the piss out of us?! 

Is it that the haircut money is offset by the bailout money so there is no net increase in debt, what is going on, can somebody with a finger on the pulse please explain. Zerohedge is good for tit bits here and there but it would help if Tyler would collate all the information and put it into some sort of article to connect the dots and present the big picture.

Arthur's picture


Not saying you are wrong but it seems to me the reason for the delay was the concern that a quick default would have taken out too many German and French banks and other collateral damage.

No one is in charge.  The bailout has been run by committee and surprise, each member looked after their own rather than think about the big picture.


slaughterer's picture

I am waiting for the Finnish parliament to go where no German has gone before. 

kill switch's picture


OK! Now, next up to the podium is Spain,, by the way Spain bring Portugal with you please,,,Italy please step forward, don't crowed the podium single file please,,,,BTY America, don't buy any green bananas, as your place in line nears the front of the room..

espirit's picture

But first, let the credit default swaps begin and see if there is market impact or whether this event is truly priced in.

Ride' em Cowboy.

bugs_'s picture

ponzi's work until that magic moment when they don't.

disabledvet's picture

The bankers must pull back. The markets have left them no choice as all commodities surge across the entirety of the commodity complex. Their job is...well..."their job" now namely "lend to the private sector in the hopes cost containment still exists." these "facilities" are the enemy..and "forcing the banks to play ball" was never an option in the first place. We are NOT long the XLF! We REMAIN long the S&P and equities in general as "fix it again Timmy" rears his head...AGAIN.

chindit13's picture

Bondholders now are proven to have absolutely no rights, so bonds will be bid.

A 75% haircut probably won't be a default event, so CDSs are worthless, and always were since the determination of an "event" was always in the hands of people with a vested interest to not have events.  CDSs will continue to be bought.

Europe will outprint Bernanke (ECB balance sheet up 40% since June 2011, not including the take-up on today's LTRO), and the euro is bid up.

In the Land of the Blind, the one-eyed man misses the rally.  When the asylum is run by the lunatics, it is better to be crazy.

EZYJET PILOT's picture

Bondholders were reckless in the first place thats why we're in this mess but is it really a 75% haircut on all Greek bonds? What are the specifics, do you know at all? I read somewhere, forget where that the haircut was only connected with 30% of bonds.

Here found it

Sandmann's picture

You forget the old adage.....You cannot be wrong if you go with the flow........or as Sam Rayburn put it "To get along, go along"

EZYJET PILOT's picture

Would rather not get along in a world of lies/obfuscation/deceit. Here's my adage if you want justice get rid of bankers, politicians and the mainstream media.

benbushiii's picture

The problem with the LTRO and QEs is it forces a duration shift to the front end of the curve.  Everyone rushes in to take advantage of the carry trade, and countries take advantage by financing the longer date maturies toward the front of the curve.  This may go on for a little while, but when the world suddenly realizes all of the debt is maturing within the next three years, there will be no way to pay off all the maturing bonds and rates for newly issued debt will soar as will the shift of duration back out on the curve.  This debt then gets financed through enhanced revenue gathering (read taxes); crushing 99% of the populations.

flyonmywall's picture

There is no way that the vaunted Teutonic efficiency could have ring-fenced everything from the impending clusterfuck.

Somewhere in Italy or Austria, or perhaps France, there is some trading desk or pension fund that has been asleep at the wheel, thinking everything is ok.

Then in March, that payment will not come in, and there WILL be a cash flow problem. Then the cash will be nowhere to be found, and contracts will be called in.

Some insurer like Dexia, or Assgen in Italy will be on the hook for a few billions. It will not seem like much, but it will start a chain reaction.

Then "bullishness" will turn to "contagion", but endless meetings will not solve the problem.