On Walking The Maginot Line

Via Peter Tchir of TF Market Advisors

Over the weekend I wrote about what I thought the EU and the ECB needed to do to in order to prepare for a Greek default. Nothing that has been said or done this week goes against the view that Europe is preparing for Greece to default.

In the past week someone went into all the EU officials' speeches and did a replace all and "default" became "controlled default". Notice how they have backed off how bad a Greek default would be and try and narrow it down to the fact that a default without adult supervision would be bad.

After yesterdays conference call they said that Greece would remain in the Euro. They never said Greece wouldn't default. That conference call was as likely to be scripting out the roles for the next few weeks to control the default and arrange post default financing for Greece. The language was not that strong and I don't believe their words were chosen by accident.

If Greece defaults the first obvious panic will be how do the European banks get funding, especially in dollars. Well, that question has been answered. The mechanism to avert short term liquidity problems after Greece defaults is now in place.

Well, what about the equity for banks. Won't some need money? Geithner has already suggested a TARP like function for the EFSF. China said they were less interested in bonds than investments. Warren Buffett and BAC have set the pricing. Investors should be happy to take deals with terms similar to Buffett - at least that is what politicians will tell them. Banks will be told to accept the deal or risk not getting full support. A 100 billion of Chinese money dumped into the bond market is not going to turn the boat around. That money invested into banks would make a big difference. EFSF may not yet be ready to TARP the banks but individual countries could. Germany and France can handle that themselves and the bric's could help with the rest.

Faros was one of the first firms to suggest the ECB sell CDS to supplement their bond purchases. I see no reason why the ECB couldn't do that, but honestly think they would get far more bang for the buck (sovereign CDS does trade in $'s) using that in the aftermath of a Greek default. Heck they might even make some money if they get started when the market is in a panic rather than just reasonably pricing in the problems of each country. I don't the the effect would be long lasting but the impact would be much greater in controlling the situation after a Greek default, than before.

So what to do with Portugal and Ireland? Buy as many bonds on the open market as possible and then offer the banks a harsh and timely restructuring option. Make the banks give real concessions. The threat of default will be much more real once Greece has defaults.

I am not sure what announcements I'm missing but I am confident that it would be easy to demonstrate that they fit in with default preparations. I did not a lot of votes seem to have been delayed - that too would be consistent with a near term end game making them irrelevant.

Who gets hurt the most by this? Banks and bank shareholders. Frankly, Scarlet, I don't give a damn. There is not a single politician who any longer cares about the feelings or wealth of bankers. They can't believe that the banks and too big to fail have brought them back to the abyss. They are going to let Greece default, try and contain the aftermath, and then get focused on some other serious issues. This has taken far too much time and effort over the last 18 months and they think they can deal with a default and that risk is worth potentially putting the mess behind them.