Mark Grant On Europe's Plan B, Greek Bank Runs, and Why We Need New Sunglasses

Via Mark J. Grant, Author of Out of the Box,


“I'm not upset that you lied to me, I'm upset that from now on I can't believe you.”
                                          -Friedrich Nietzsche
The words were spoken by many; Juncker, the German Finance Minister, Merkel, Barroso, Monti and you can just keep going. They all said the same thing about the Greek PSI, “This is the best and final offer.” Each intonation was made with great moral suasion; each speech was directed toward the world’s institutional investors as we were reminded again and again that there was no “Plan B.” In the end most money managers swallowed the bitter pill, given such forceful pronouncements and took the deal offered on the $261 billion swap only to watch the value of the new bonds sink into horizon but no choice was given so there was nothing else, really, that could have been done.
“Trust ... plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country's institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.”
                -The scientific journal, Nature
Of all of the events of yesterday, of all of the news, the most significant in my view was the announcement that Greece had paid off the $554 million bond maturity that was due yesterday and paid it off in full; 100 cents on the Dollar. With approximately $6 billion left in international bonds outstanding governed under some law besides Greek law two things are now obvious; there was a Plan B and it was just implemented and that Brussels and Berlin supported the Greek pay-off as there was not one peep of objection from any capital in Europe. What we were told, consequently, was not the truth and no financial paradigm can last for long when they lie to investors and breach the trust that had been placed in them.
"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country's income.”
                 -Steve Knack, Senior Economist at the World Bank
With the yield on the Italian ten year hovering around 6.00% now and the yield on the Spanish 10 year fluctuating around 6.50% the markets are clearly reacting to the breach of faith that has been demonstrated by Europe. This morning the Prime Minister of Spain said that “Spain faces the serious risk of being shut out of the markets.” This comment, by the way, may be the precursor to Spain turning to the EU/ECB/IMF for help and then between the total breakdown in governance in Greece and a plea for financial assistance from Spain is a spot, a line in the sand, where not only Angels but any rational man should well have great fear to tred.
If indications become reality then we are faced with a leftist government in Greece that will either renegotiate a new bailout agreement with Europe or it will head back to the Drachma or be forced there by the refusal of European Union to provide any additional funds. In Spain we are faced with bare bones arithmetic where the country cannot bailout its Regional debt and its back debt because they do not have the capital to do either; much less both. Both countries can flop about for a brief period of time but the conclusions are unavoidable I am afraid and so a very unpleasant landscape awaits us in the coming days. I have warned about all of this for quite some time and I have hammered upon it in recent days as equities, credit/risk assets, the Euro have all declined in value as I had predicted. There may well be a bounce or two along the way but I continue to maintain that dark days lie ahead based not only upon fundamentals but based upon a union in Europe that has been deceptive in presentation and deceitful in practice. Much of this could have been avoided, should have been avoided, but whether it was the European bank stress tests, the inaccurate debt to GDP ratios or the statements on the Greek bailout; Europe has systemically, methodologically and purposefully tried and tried hard to mislead not only investors but the public in the most shameful of manners. The liabilities that they have deemed “contingent” which have not been counted or used as a part of any balance sheet are now beginning to come home to roost and the falsification by omission can no longer be denied as real losses are taken. The lies of the State always give way to the truth of the numbers in the end and the end is nigh on a number of fronts. Long live the Emperor without any clothes but the poor fellow is naked no matter what is said.
In the last 10 days there has been a run on the Greek banks with the President of Greece announcing this morning that almost $1.27 billion has been pulled from their coffers in the last 10 days. The same kind of situation is beginning in Spain as people and institutions react to the unfolding truth. Bloomberg reports this morning that Mr Papoulias said he had been warned by the central bank and finance ministry that the country faced “the risk of a collapse of the banking system if withdrawals of deposits from banks continue due to the insecurity of the citizens generated by the political situation”. Wolfgang Schauble, the German finance minister, stated his view quite clearly this morning, warning that unless Greece delivers a government that honors the terms of the bail-out, that “the country will have to leave the Euro.”   Christine Lagarde, head of the IMF, warned she was “technically prepared for anything” and said the effect was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider.” If Greece defaults on its debts it is a $1.3 trillion dollar number, forget the drivel that you read in the press because it will not just be the sovereign debt but the municipal debt, the derivatives, the bank debt, the corporate debt and all of the obligations of the country that will fall into the sinkhole of no return.
Actually the correct response to all of this will surprise you. You must go out and get the correct pair of sunglasses. That is the answer.
“Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses have been specially designed to help people develop a relaxed attitude to danger. At the first hint of trouble, they turn totally black and thus prevent you from seeing anything that might alarm you.” 
               -Douglas Adams, The Restaurant at the End of the Universe