Time To Schedule The Next Summit?

Via Peter Tchir of TF Market Advisors

The G-20 is almost over and it looks likely to end with some indications that the IMF will put more money into Europe in some form and that all the leaders will pledge to continue to work together to resolve the debt crisis.

Since resolve doesn't involve letting Greece default and remain in the Euro (the best solution for that country) we will have to continue to guess at what resolve means.

Greece may soon have a new government or no government, joining Belgium the home of Dexia. That is somehow better than letting then just default, restructure within the Eurozone and move on. Commerzbank took a decent sized write-down on their Greek debt and the world didn't end. In a true default the hit would be bigger, but being able to move past Greece and all these half baked Greek bailout plans has to be worth something. Bank stocks might get hurt - but if the EU could demonstrate that the problem is contained and that the CDS could trigger and not cause a cascade of counterparty defaults we would be much better off.  No doubt there would be some white knuckle moments but seriously, living with that has to be better than this endless attempt at can nudging (it's not even being kicked just nudged a little further with each new futile plan). The ECB's bonds are one of the biggest roadblocks.

Speaking of the "grand plan" it has been over a week and the IIF is still figuring out how to structure a 50% haircut? It just isn't that hard. For every 100 euro - you get 50 of a new amortizing 30 year bond with a 5% coupon. Amortizing ensures a smooth payment schedule for Greece and it might not trade at par, but if the 200 billion the IIF talks about is real, then Greece would be in much better shape. Not as good as real default but something. I think the Debt to GDP almost laughable goal of "120 by 2020" could be bettered.  But alas, because there is some free EFSF money for the banks and it is all based on some NPV calculation, we still don't have an actual proposal. Any people wonder why Greece is questioning the wisdom of proceeding? The bailout is worse than default for Greece, and Greeks are just getting the first inklings that default could be the preferred solution.

Any mention of the D-word is met with cries of poverty, dark ages, hyper inflation, but any reasonable analysis of what Greece would look like post default is not so bad and is probably better than what it will look like after another year of the TROIKA diet.  Europeans seems to enjoy rhetoric more than calculations but as more people realize default is inevitable and start doing some calculations and evaluations they may decide that default is preferable. We are at the early stages but it finally seems like people are trying to move beyond the panic and plan what a default would look like. Bad for banks and France, but good for Greece and maybe not so bad, after an initial shock, for the rest of Europe.

The EFSF is still not designed - probably because the flaws in their plans become apparent every time they try to structure it, but that hasn't stopped them from asking for money. What is China supposed to say, you don't even have a vehicle and you want them to commit money? China didn't get a surplus by being that stupid - Europe may be in a deep hole from having been so stupid. EFSF needs to be designed - though how they get anything close to a trillion out of 250 billion of AAA guarantees is confusing. KISS would be my advice to them, but we are likely to get more complexity rather than less because they have figured out the end result and now just need to twist their limited resources to a point that they say they got there.

With more noise of IMF funds and new quick access programs from the IMF, I can only assume they realize they over promised on EFSF and need more help. The inability to price a simple deal this week was shocking. There had to be enough demand for 3 billion, so it had to be about price. If EFSF is going to quibble over a few bps or pull deals in tough market conditions, they will struggle to meet their mandate.

Italy has asked the IMF for advice.  That seems funny on so many levels. The IMF involvement with Greece has achieved nothing. As far as I know, all the successful IMF programs involved hard restructuring and losses for bondholders (Greece is almost there) and Italy would rather ask for advice than take it.

The economic data out of Europe was weak. Europe is already in a recession. Using every ounce of political energy and available funds to prop up the price of bank shares, seems a horrible waste and is unlikely to do much for real companies and the economy.

In the end it still seems like default or print are the most likely options and all these games that are being played to nudge the can a bit further are draining scarce and valuable resources from projects that might be a lot better for everyone in the medium to long term. (the banks have already complained via the IIF about the capital raising issue and possible dilution - so why funnel all this money where they benefit the most and aren't even grateful?)   Lend to Siemens and fiat directly and let them do something. There have to be companies that could do great things if the politicians dedicated even a fraction of the resources to them - especially once Greece and the weakest banks default and can stop acting as an anchor on everyone else.

April 2012 bonds are offered at 47 - that is one heck of a yield given all the plans to save them.


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