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