The "EURECA" Moment

Via Peter Tchir of TF Market Advisors

As realization settles in that levered EFSF may not be the best solution since it is circular and puts the ratings of every country in Europe at risk, along comes another proposal to save Europe.  The "Eureca" plan which can be found at has made its way around the market the past couple of days.

The premise of the plan is that speculators are to blame and that Greece should sell its state assets "such as ports, airports, highways, and real estate".

The asset sales would generate 125 Billion from Europe, to whom, Greece, naturally would sell.  Those proceeds would then be used to fix Greece.  How about Greece defaults.  Refuses to pay on existing bonds.  Wipes out all debt, and then sells these same assets to China for 200 Billion Euro?  Greece could then buy Italian debt trading at 7% and wait for Germany and France to bail out Italy and make a huge profit, further increasing their reserves?  Seriously, if Greece is willing to strip itself of its sovereign assets, they might as well do it right.

Then once again there is talk about how this would put an end to speculators and crush the CDS buyers in particular.  How many hedge funds are short Greece through CDS?  Greece is trading at 62 points up front.  There is daily noise that Greece may receive some miracle bailout.  There is the risk that Greece, in an attempt to get future debt would negotiate a decent recovery for existing holders.  A recovery of anything above 37 means the CDS would LOSE money in event of default.  Squeezing Greek CDS tighter, in conjunction with the bonds, will do nothing to hurt speculators.  The morbid fascination people have with the CDS market and its impact gets out of control sometimes, and this is one of those times.  It was dumb banks willing to lend a country 145% of GDP based on figures that everyone knew "wink/wink" were fudged.

My favourite part was the suggestion that 20 billion EUR could be used to restructure the state assets increasing their value by 50 billion EUR.  Only a management consultant firm could create a 150% return so easily.

The market seems to be grasping at straws. Plan after plan seems to catch a brief following, but falls apart under any scrutiny.  Why are any plans on how to manage a Greek default completely ignored?  I remain convinced that a Greek default could be dealt with.  I don't think stocks would go below 1000 on SPX, and afterwards the financial system would be less complex and easier to manage going forward.  Instead we leap from plan to plan, fixing nothing, and risking a much much steeper decline.

The market is drowning.  Germany and France are trying to save the market.  Germany is growing concerned that the thrashing drowning man may actually drag them down.  France swims on, oblivious to the risk of being dragged under by the market they are trying to save.  Somewhere on the beach is a crowd of people, yelling at the drowning man to stand the heck up!  It's only 3 feet of water, just stand up!  Just to be clear, it is the market they are trying to save, not Greece, and the market may not be in as desperate shape as some believe.


Roland Berger EURECA Project 20110927


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