Via Peter Tchir of TF Market Advisors [10],
Bailout somehow seems too nice of a word. It implies working together, giving a helping hand, making a real effort to help someone out. As I read the headlines coming out of Greece for the past 2 weeks, all I can think of is, how do you say “squeal like a pig” in German.
The market is happy because it looks like PSI will go through and that in theory will be enough to convince the Troika to send money to Greece, so long as they live by the latest austerity package. That all seems fine, I guess, but looking beneath the headlines, it seems far worse than that.
The ECB is getting special treatment on their bond holdings. They will not participate in PSI, in fact it looks like they are just going to change the bonds they own to identical bonds that aren’t subject to retroactive collective action clauses. This may help the current situation, where bonds are already trading at 20% of par, but the implications for the market as a whole aren’t so good. All none ECB holders are subordinated. Period, end of story. Right now as the markets are in a period of calm, that can be ignored, but it will come up again. Possibly the moment the ink is dry and Portugal and Ireland want new deals.
Then there is the retroactive collective action clause. On the bright side, triggering that will actually allow a Credit Event to be declared. On a scarier note, is the fact that not only are the rules changing, but investors are being told they have been changed as though they were always in place. That is about as Orwellian as you get. The message should be clear – once the entire economic system functions on printed money and government programs, they will treat the system like they own it – since they do. So far investors are buying into the idea that this is a unique situation and a one-time thing. But this seems like an incredibly slippery slope – a government, with the blessing of the ECB, is changing bond laws after the fact and forcing investors to deal with that new law as though it had always been in place. Once this tactic has been used, it will be tempting to use again when it suits them – and them being any government, not just the Greek government.
And the Greek government has been a complete failure. They are represented in these negotiations who owes his job to the people he is negotiating with. His job was not to represent the Greek people, but to force a deal down their throats. No work was done on alternatives to the bailout (until recently). He didn’t explore what options Greece had other than the bailout. All he did was create fear that without a bailout Greece would fall into total chaos and used that to get his job done – passing austerity measures imposed on the people by the Troika. The situation in Greece seems awful. The economy is collapsing. The human toll is growing, yet the puppet didn’t spend time looking for alternatives, looking for paths that might be good for Greece, but instead tried to promote irrational fear and get his job done.
Any attempt by Greeks to explore alternatives has been shut down. Remember when the last Greek leader had the silly idea of a referendum? Samaras mentioned that the April elections could change things, which led to some demands that the elections be changed, but ended (so far) with him just groveling for forgiveness. And that is a trend that is growing. This is no longer any attempt by one nation to help another, this is now about creating a pecking order. Too many things have been said that cannot be unsaid that hurt the dignity of the Greeks. If they had a leadership that had worked on alternatives to the bailout, maybe the PSI talks would already be over. Instead, there is a real risk they accept a deal and allow their dignity and sovereignty to be stripped away, all for a deal that probably isn’t in their best interests. The deal is in the best interest of the Troika – not Greece.
The worst part is that all these talks go on while in the background everyone is acknowledging that this deal won’t even work anymore. That level of denial is scary.
The one element not being addressed by this Greek default, is what happens to all the bonds they guaranteed? Are those guarantees still “good” in the eyes of the ECB? That is the only way Greek banks are funding. But yes, in this world, if the ECB decides they are valid guarantees, they can fund the banks based on those guarantees, in spite of the fact that they are worthless.
Quietschen wie ein schwein (according to google translate).