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There Will Never Be A “Good” Time For Greece To Default

Tyler Durden's picture




 

By Peter Tchir of TF Market Advisors

There Will Never Be a “Good” Time For Greece To Default

I have been a proponent that Greece should default sooner rather than later for a long time.  At first most people argued that Greece would never have to default.  Now many people argue that Greece should default, but now isn’t a good time.  The argument goes that Europe needs time to prepare for the default or the risk of contagion is too high.

My view is that Europe needs to let Greece default.  Europe needs to abandon the existing perimeter and fall back to a more defensible position.  Europe doesn’t need to collapse, but it does need to retreat to a core, stronger position, where it can dig in its heels and defend itself.  Battles are not lost because every soldier is killed, battles are lost when morale gets so low that the soldiers give up and flee for their lives.  Wars are won when isolated, broken units, are captured or killed.  I think Europe has to take the pain now, or risk further pain.

My argument against “waiting for a better time” is that it may never come.  Europe has squandered the last year.  Europe was in much better shape to deal with a Greek default last year than they are now.  Contagion was a concern back then in regards to Ireland and Portugal, now it is a reality.  Only the darkest of the doom and gloom crowd believed that contagion could really spread to Spain and Italy, yet now that risk is palpable.   Banks were more worried about fighting Dodd-Frank, and raising dividends, and creating almost record bonus pools, not trying to convince employees that the firm’s are solvent.

Contagion in many ways has already hit.  The EU stocks are down over 20% in the past 12 months in most cases.  Germany has performed better than the rest, but that is a very large drop and the market in Europe as a whole are in a Bear Market.  The U.K. with its proximity to Europe, and Japan with the earthquake are also lower, but the U.S. stock market has remained relatively unscathed (despite what you might be reading this weekend about how our sell-off is overdone).  China and Brazil are experiencing some troubles in their own stock markets.  In spite of the hype of the BRIC’s coming to the rescue, they may be too busy taking care of themselves.  It is worth noting that the EUR/USD exchange rate was 1.36 on September 30th last year, and is 1.35 now, so it is not all about exchange rates.

The credit story is more bleak and stark.  Credit has clearly picked the safe havens, the next Greece, and those in between.  Italy and Spain are now trading almost where Portugal was a year ago.  How much easier would it have been for Italy to withstand a Greek default when it’s 5 year bonds were trading at Bunds + 134 instead of Bunds + 407.  CDS has blown out across the board, including the allegedly cash rich China, but there is a “basis” swap element as the CDS trades in a currency different than what the country uses (ie, all Eurozone CDS trades in dollars).

It is hard to look at the data and note with that the bold steps of letting Greece default, had been taken last year when countries were in better shape.  It is also clear, that the contagion has occurred without a default.  Portugal has clearly moved to the plagued group and Italy and Spain are trying to fight it off.

Last September, the Eurozone and the U.S. had just posted 2nd quarter GDP growth of about 0.9%.  This year, both the Eurozone and U.S. only had 0.2% growth in the 2nd quarter.  At the risk of being ridiculed by proper economists, you cannot guarantee that GDP growth will be even worse or in contraction if we wait any longer for Greece to default.

It also worth pointing out that at the time, the ECB was only an amateur at overpaying for bonds.  It has since purchased even more bonds well above the current market price.  All that purchasing power would be nice to have now, but it has been spent.  They can always spend more, but the ECB would be much stronger if it wasn’t sitting on such a big inventory of losing positions, that clearly did little to stem the crisis.

What about the banks?  Don’t we need to wait so the banks can be stronger?

It doesn’t take a rocket scientist to see that the banks squandered a year to improve their capital base.  BAC wasn’t selling cheap options to Warren Buffett when their stock was at 13.  The SocGen CEO wasn’t on TV trying to convince investors that they had no funding or capital problems when his stock was at 42.  The banks are even worse off than most of the countries, but why should anyone assume that waiting will make it easier for them to digest a Greek default.

To me, it seems that a lot has already been priced in and that the contagion is occurring whether we want it to or not, so we may as well let Greece default now and figure out how much has already been priced in and how to really stop the contagion from spreading to Italy and Spain and to banks that deserve to be saved.  Let’s just admit it is gangrene and that it has already spread farther than is safe, but it is still better to cut off an arm to save the body.  If we keep waiting it may not be possible to save the patient.  The patient is getting weaker by the day, and being blind to that is just as big and just as dangerous as letting Greece default now.

 

 

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Sat, 09/24/2011 - 13:38 | 1705498 WonderDawg
WonderDawg's picture

The patient is getting weaker by the day, and being blind to that is just as big and just as dangerous as letting Greece default now.

I would say it's much more dangerous.

Sat, 09/24/2011 - 13:53 | 1705535 Market Efficien...
Market Efficiency Romantic's picture

if you are the arm that's being cut off, yes.

Sat, 09/24/2011 - 20:14 | 1706199 ratso
ratso's picture

Little doubt that the only way out is along a dangerous and unknown road that may not be well negotiated by those in power.  The pressure to begin the journey rather quickly is increasing as can be seen in the rise in cds prices - this a rising cost that cannot contiue indefinitely.  If the various countries, EU , ECB IMF and the G20 do not have the courage to begin the jouney of unraveling the chaotic logjam, the markets will soon shove them inexorably in actions that they might never have anticipated making to save themselves - self-preservation will be the only motivation in the long run.

 

The November 4 conclusion of the G20 meeting in Cannes will show how much courage these guys can muster.  Say good night Greecie

Sat, 09/24/2011 - 23:30 | 1706634 LowProfile
LowProfile's picture

"and figure out how much has already been priced in and how to really stop the contagion from spreading to Italy and Spain and to banks that deserve to be saved."

That's gonna be a short list...

Sun, 09/25/2011 - 02:12 | 1706821 Spirit Of Truth
Spirit Of Truth's picture

Ultimately the real issue here is likely which banks issued CDS contracts beyond their capital capacity.  Tis the same game as what happened w/AIG when the sub-prime mortgage bubble popped.  JPM, GS & MS have been rolling around in fat short-term profits by selling grossly undercapitlized CDS contracts on sovereign debt.  They do so recognizing that they will get paid handsome bonuses and the banks short-term profits will be fat until the music stops.  When the music stops, there's a "moral hazard" sensibility that the banksters can go to the government and call for new bailouts "or else".  Even if the gov't says no this time in deference of taxpayers unwilling to be conned anymore by the banksters, these financial terrorists realize they will still walk away with enough money for many lifetimes, so they just don't give a flying poop.  The only way to correct this corruption and criminality is to put these a$$hoies in prison, but as it stands there are no indictments from the first round of financial raping and looting in 2008.  Our government is sold-out and the people are being repressed by their own self-consumed lethargy and apathy.

Sun, 09/25/2011 - 07:19 | 1707054 DrunkenMonkey
DrunkenMonkey's picture

Banks over-leveraging themselves with mystical paper derivatives that are bought by idiots who have an under-developed conception of counter-party risk ? Whatever next ? :)

Sat, 09/24/2011 - 20:44 | 1706383 Waterfallsparkles
Waterfallsparkles's picture

This fiasco is all about how to save the Bankers and make the People of the Country slaves to the Bankers eternally.

If the People do not want to pay the Debt then the Bankers want to Foreclose on all of the Countrys Assets and control the Country entirely without Government.

Time for the Countries to THROW THE BANKERS OUT and dispell them from their lands.

Sat, 09/24/2011 - 22:51 | 1706587 jeff montanye
jeff montanye's picture

have loved the name since i saw it.  agree completely except for the part about "entirely without government".  the banksters will never give up the legal gun.  that is what makes them so pernicious.

Sun, 09/25/2011 - 05:50 | 1706987 Shvanztanz
Shvanztanz's picture

while I whole heartedly agree, after being taken not once, but twice, in the real estate bubble/ponzi fiasco, I have to point out that the problem with your idea, which I support, is that there is no muscle to do any of that.

except for the .01% of Americans that went to war recently, the bulk of the American muscle that would force any change are just plain weak. this generation of soldiers in fact forced a drop in standards for physical training because they were suffering too many stress fractures and non-malingering injuries to make the standard. Even the boomers generation wore boots instead of sneakers and toughed it out under way tougher standards. The only thing this generation can boast is some well defined thumbs and an ability to string together acronyms.

I cite myself as an example, I could be out protesting on wall street, but it is far more comfortable here on this chair where I sit, with snacks.

I wish it were different, but as much as social media is this great wonder, it keeps all the sheeple like me and you in the house and not in the street

PTB have employed all the muscle. they don't need to understand, just shove the people back if they get too close to the sacred bull, get off shift, have a brewski and a bag a of chips, no big deal, no hippie is going to follow him home and give him any grief.

So, just like with Orwell, you can put your faith in the proles, but even the bankers know that they are the only group less reliable than themselves. 

Sat, 09/24/2011 - 13:39 | 1705499 Ancona
Ancona's picture

To all my friends who thought I was a doomer wingnut I say, "Who's your daddy now non-believer bitchez"?

Sat, 09/24/2011 - 13:59 | 1705548 It is a bargin ...
Sat, 09/24/2011 - 17:50 | 1706041 Papasmurf
Papasmurf's picture

You're not out the other end of this shit yet.  Don't brag too early.

Sat, 09/24/2011 - 18:59 | 1706144 CrashisOptimistic
CrashisOptimistic's picture

>>

You're not out the other end of this shit yet.  Don't brag too early.

>>

There is no other end for the 7 billion.

There is another end for 1 billion, but they will likely never fly airliners across the world carrying 200 people in 18 hrs.  

They'll travel on sailing ships.

1 billion.  Not 7.  You won't be one of them.  Neither will your kids, or their kids.

 

Sat, 09/24/2011 - 13:40 | 1705504 Segestan
Segestan's picture

"dangerous"..... depends on you're point of view.

Sat, 09/24/2011 - 13:43 | 1705508 lolmao500
lolmao500's picture

Greece doesn't need to default. It needs to get the hell out of the euro, then tell the foreign creditors to SUCK IT.

Sat, 09/24/2011 - 14:12 | 1705602 Bend
Bend's picture

Big facepalm for you, Sir.

Sat, 09/24/2011 - 14:40 | 1705679 Lord Welligton
Lord Welligton's picture

tell the foreign creditors to SUCK IT.

Is that not the technical expression for default?

Sat, 09/24/2011 - 15:11 | 1705756 lolmao500
lolmao500's picture

Nah creditors always want a bit of money at least. Make them eat the losses. 100% of them.

Sat, 09/24/2011 - 13:44 | 1705509 SparkySC
SparkySC's picture

Is this really bad news?

I really don't think so. 

Let the healing begin.

 

 

Sat, 09/24/2011 - 13:46 | 1705517 RSloane
RSloane's picture

"I think Europe has to take the pain now, or risk further pain."

If they had thought that way months ago, they would have saved billions as well as provided some stability to their financial markets.

 

 

Sat, 09/24/2011 - 13:54 | 1705534 Ponzi Unit
Ponzi Unit's picture

Two questions:

What is the tail risk of a Greek default?

What if Europe is past the fail-safe point?

Sat, 09/24/2011 - 13:56 | 1705542 Market Efficien...
Market Efficiency Romantic's picture

I guess, no European politician would want or agree to a Greek default, if the systemic risks had not been at least considered manageable. I believe, German and French governments have had pretty long conversations with those Deutsche Bank, SocGen et al CEOs.

Sat, 09/24/2011 - 14:03 | 1705570 There is No Spoon
There is No Spoon's picture

The tail risks are chaos in the fx market, U.S. banks going bankrupt, money market funds breaking the buck, funds blowing up, forced liquidations, credit markets freezing up, and more! Some of these things are already happening. Europe is past the fail-safe point.

Sat, 09/24/2011 - 15:55 | 1705846 DosZap
DosZap's picture

There is No Spoon

Europe is past the fail-safe point

Yep, what happens here is Greece, then the contagion will spread,Spain is the pain.

As the Fourth largest EU member, there is no way they can stop a full blown total crash when she goes.( there are simply not enough funds).

Merkel is in a VERY bad spot, for the good of the largest, and most prosperous EU state left, she would indeed be wise to PULL the plug, and go back to the Deutsche mark,and say sorry we cannot backstop the entire EU,without destroying ourselves.

The German populace are going to get VERY frisky,if this continues, Communism never worked, never will.(and this is exactly what this is).

Save your own ass Germany while you can.

Sat, 09/24/2011 - 13:57 | 1705544 zorba THE GREEK
zorba THE GREEK's picture

I love the smell of printer's ink in the morning.

Sat, 09/24/2011 - 14:01 | 1705560 americanspirit
americanspirit's picture

This article makes way too much sense, therefore it deserves to be ignored. Default? I don't need no stinkin' default. Onwards, into the fog.

Sat, 09/24/2011 - 14:02 | 1705565 wombats
wombats's picture

Today seems like a very good day for a Greek default.

Sat, 09/24/2011 - 19:28 | 1706207 Optimusprime
Optimusprime's picture

Hoka hey!

Sat, 09/24/2011 - 14:06 | 1705584 eddiebe
eddiebe's picture

One more time now: Time for the bond holders and banks to suck it up. When I have to make payments on the car that just took a big dump, I cant go crying to daddy that I need a new car while I dont want to make payments on the piece of crap that just quit running. Same thing, end of story!

Sat, 09/24/2011 - 14:10 | 1705597 zorba THE GREEK
zorba THE GREEK's picture

If investors believe Greece will default in one month, then effectively Greece has defaulted and there will be no controlled default.

Default does not begin when it is announced, it begins when the market decides it is inevitable. This news out of G20 should create the

conditions for market chaos on Monday. We will see. 

Sat, 09/24/2011 - 14:28 | 1705643 jon
jon's picture

well the best time for them to default was yesterday, so let's just turn them all into neutrinos and let them travel back in time and do it. i hear tell CERN can help

Sat, 09/24/2011 - 18:26 | 1706099 knukles
knukles's picture

Are you Cerntain of that?

Sat, 09/24/2011 - 14:40 | 1705670 Kataphraktos
Kataphraktos's picture

I would rather be the first to default than the last to default. Everyone says that Greece must be "sacrificed" to save Europe blah blah blah, but really, who would you rather be?

Greece post-default next month, with no market access to allow the kleptocrats to pillage more, and a few lean years to force the country to reform effectively? A nice round of deflation to make life cheaper for residents already seeing rising taxes and lower incomes - and cheaper to attract more tourists...?

Or Italy post-default in a year or two, after Ireland, Portugal and Spain have already gotten flushed, Germany has gone Rentenmark, racist (OK, all the euros are going there, but anyway) and isolationist, and they can't even scrounge up enough Nuovoliras to pay the bankruptcy attorneys?

Sat, 09/24/2011 - 18:55 | 1706135 Papasmurf
Papasmurf's picture

It isn't about what is best for Greeks.  It's about what more can be pillaged by banksters.

Sat, 09/24/2011 - 14:46 | 1705694 lizzy36
lizzy36's picture

Proving the old trading desk saying that your best loss is your first loss.

The EU banks have had 2.5 years to raise capital. If Greece had been allowed to default 12 months ago the amount of capital spent trying to contain contagian, could have been spent on recapping the banks (or gasp....allowing them to go under and recpapping new banks).

There is never a good time to cut off your gangrenous toe, but better a toe than a leg, and better a leg than........

Sat, 09/24/2011 - 14:50 | 1705703 Tuffmug
Tuffmug's picture

Will the Greek 10 year bond rally if Greece defaults with a 50% haircut?

Sat, 09/24/2011 - 15:24 | 1705783 Eireann go Brach
Eireann go Brach's picture

So from looking at the stock market figures above, the US has the most manipulated stock market as it has suffered zero losses since this date last year!

Sat, 09/24/2011 - 15:55 | 1705845 Seasmoke
Seasmoke's picture

no one wants that first domino to fall, but fall it will

Sat, 09/24/2011 - 16:43 | 1705929 theprofromdover
theprofromdover's picture

Germany demands 50% haircuts, and each country then is free to save their own banks or not once the dust settles.

I think they'll go for that. The bankers are sure the politicians are in their pocket, and the central banks will side with their own.

Won't solve anything, just prolongation -at any cost.

 

But Christine... What do your words mean?  "Solve the problem, whatever the cost", now that is a new kind of phrase.

Sat, 09/24/2011 - 17:39 | 1706030 topcallingtroll
topcallingtroll's picture

I cant believe the troll is saying this.

GOLD IS WHAT REMAINS AFTER PAPER PROMISES ARE NO LONGER TRUSTED.

I think we are at a fairly decent entry point for gold for everyone late to the party. Dont worry if it drops to 1400. This is a multidecade problem.

Sat, 09/24/2011 - 18:09 | 1706066 UBIGDummy
UBIGDummy's picture

Guys help me out here. 

Yes I think that this whole kitten and caboodle (SPL) is going down.  I know about the shorting funds etn DZZ and FAZ.  Can you guys tell me some more, cuz i'd like to go ballz deep for betting on a crash.  PLEASE HELP

Sat, 09/24/2011 - 19:31 | 1706222 Papasmurf
Papasmurf's picture

DZZ & FAZ are paper.  With counter-party risk, you still lose even if you called the direction right.

Sat, 09/24/2011 - 18:24 | 1706096 knukles
knukles's picture

Hah hah hah hah haaaaaha 
(maniacal laughter)

Only a bunch of self-impressed incompetent pseudo-faux-Leaders of a Euro "trash" Zone would dare prolong such a charade this long whole expecting to retain a modicum of credibility.  Even folk like Quadaffi and Idi Amin know when the game has been lost and to cut the crap.

Oh fuck it.  Call another series of meetings, Cry Blather and release the Dogs of Incompetence.

Sat, 09/24/2011 - 19:31 | 1706218 Optimusprime
Optimusprime's picture

Let slip the dogs of incompetence?

Sat, 09/24/2011 - 19:05 | 1706149 CrashisOptimistic
CrashisOptimistic's picture

Y'all really, really need to think this through.

The question really isn't so much default or not.  They may pretty up a default with other words, but that's what it will be.

The question is, rather, what happens to Greek politicians and bankers after it happens.

If they continue to go to work, and the people suffer a bit, but aid agencies rush in to be sure there is gasoline to run trucks to deliver food and the whole thing is somewhat painless . . .

THEN ALL THE OTHERS FOLLOW SUIT.  IF THE EVENT IS PAINLESS, THE OTHERS ARE IRRESPONSIBLE IF THEY DON'T DEFAULT, TOO.

If Greek politicians develop bullet holes in skulls and banksters ditto, then and only then do Italy and Portugal and Spain find some way not to default.  Then and only then does Merkel write checks, to prevent her own skull from developing holes.

And of course writing those checks makes the holes more numerous a few years later, but that's how it will play.  

If killings occur in Greece, the other PIIS don't default.  If no killings occur, then they do. 

Sat, 09/24/2011 - 20:26 | 1706346 Waterfallsparkles
Waterfallsparkles's picture

Time for the World and all of the Countries to default on the Bankers Debt.

That is the only solution.

Cast them out and let the people survive from the fruits of their labors.

Sun, 09/25/2011 - 07:12 | 1706367 Waterfallsparkles
Waterfallsparkles's picture

The World and the US will survive without the Bankers.  Let them fail and let us start to rebuild Society on basic principals.

Why do the Bankers need to enslave Greece or the entire world to pay their debts to the Bankers?

Makes you think of Moses and the Egyptian Pharaohs.

Let my People go.  No one or any group of People should be eternal physical or debt slaves to the Bankers.

Sat, 09/24/2011 - 23:34 | 1706639 onlooker
onlooker's picture

 

Tyler, IMO this is one of your best. It does not get more understandable than this. Thanks from me and the friends this is going to via email.

Sun, 09/25/2011 - 00:10 | 1706687 winter is coming
winter is coming's picture

TD, phenominal work once again... 

Sun, 09/25/2011 - 00:38 | 1706724 zorba THE GREEK
zorba THE GREEK's picture

This article is Greek to me. Oh, that right, I forgot , I understand Greek.

The sooner Greece defaults , the better for everyone. The sooner assets are marked to market

and written off worldwide, the better for everyone. Like alcoholism or drug addition, the sooner

one admits they have a problem, the sooner they can start on the road to recovery.

Sun, 09/25/2011 - 01:41 | 1706791 Fips_OnTheSpot
Fips_OnTheSpot's picture

Quite some wisdom in two simple sheets.

As a german I am really ashamed about the sleepiness of the people around me.

The "total opposition" (in parliament) is like "We demand another official PROMISE from Merkel that the savings are save!"

That's beyond being hilarious - I lack words for that.

Sun, 09/25/2011 - 07:12 | 1707044 DrunkenMonkey
DrunkenMonkey's picture

Hate to admit it, but he's right. The Greeks won't reform their rubbish attempts at governance and pay their debts, ever, so best to let them default or invade and take what they owe. Unfortunately the latter would be more expensive than the former.

Sun, 09/25/2011 - 17:46 | 1708589 toto
toto's picture

"Invade and take what they owe"

Relax Rambo.

What greece owes is "ena arhidi" and you can come and get it peacefully.

Sun, 09/25/2011 - 07:16 | 1707051 Waterfallsparkles
Waterfallsparkles's picture

There was a time when it took Armys to Conquor other Lands and take all of the assets of that Country.  Now it only takes Debt.

Not even one Bullet fired.

Sun, 09/25/2011 - 11:11 | 1707451 Sudden Debt
Sudden Debt's picture

We are all being controlled by a new kind of monarchs who couldn't care less about us.

They rather see everybody starve than to lose some of their wealth and power.

And it's now already proven that during this crisis that they where the only once who gained from it and got a lot richer.

Now we're entering the second phase and we'll lose again and they'll tripple their fortunes on our backs yet again.

Millions of lives destroyed and not a single billionaire who doesn't profit from it.

That's the society we live in.

 

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