Wednesday, 29 February 2012

Greek 'default'

Greece battered by recession, debt and now unseasonal snowstorms
Meanwhile, a coalition of Greek businessmen implores global financial and political leaders to support the country with the slogan: 'All we are saying is give Greece a chance'

A couple seek shelter during a heavy snowfall on the mountain of Penteli in northern Athens. Photograph: Thanassis Stavrakis/AP

28 February, 2012

Greece is being battered by a perfect economic storm of recession and debt – and now an unseasonal snowstorm has arrived to add to the country's problems.

As Standard & Poor downgraded Greece's credit rating to "selective default" – the first time an advanced country has been in default since Germany after the second world war – heavy snow and gales closed the main rail line between Athens and Thessaloniki, ships and ferries stayed in port and schools closed.

A coalition of Greek businessmen has invoked the memory of John Lennon and Yoko Ono's famous "bed-in", with a campaign imploring global business and political leaders to support the country as its politicians voted through another round of drastic pay cuts. "All we are saying", says the campaign, "is give Greece a chance".

The campaign is backed by several of Greece's biggest companies, including Aegean airlines, Hellenic Petroleum, Piraeus Bank and a dozen other Greek companies.

It is aiming to win back support from the eurozone to "ensure that the sacrifices made by every Greek under the toughest austerity package in modern history do not go in vain".

The Greece is Changing campaign was launched online as the Greek cabinet met to approve swingeing private sector pay cuts and prepared to vote on Tuesday night on a fresh round of public spending cuts to meet tough demands set by the European Union. The Greek government must vote through more than 80 fresh austerity and reform measures over the next few weeks to secure ongoing support to prevent the country's economy from collapsing.

The launch of the campaign comes a day after Germany approved Greece's second €130bn (£110bn) emergency bailout and the S&P default ruling. Greece is expected to remain in selective default until its debt swap offer as part of a €206bn closes on 12 March.
Nobel prize-winning economist Paul Krugman warned that Greece is "very close to running out of alternatives" to being forced to leave the eurozone.

The new business lobby group warned that "careless rhetoric" about the country could have a "catastrophic effect" on the country's future.

"As we enter our fifth year of recession we want to rebalance the agenda [and] inject some more facts into a debate sometimes overrun by fiction," the lobby group said as it launched its internet campaign. "[Greeks] have already made sacrifices and are ready to do more and just need a chance to change Greece.

The campaign group said Greece has already made good progress in reducing its vast public spending budget. It said more than 85,000 public sector jobs have been axed since 2009, wages have been cut by 30%, pensions reduced by 10% and are due to fall by a further 4% since year.

VAT has been increased on all goods and services, with taxes on fuel, cigarettes and alcohol increased by 33%.

The minimum wage has been cut by 22%, and by 32% for those under 25. Official unemployment stands at 21%, up from 8% in 2010. The real rate of unemployment is likely to be far higher, because only people that have previously been employed are able to claim benefit.

The businessmen implored Europeans to "see through the stereotypes and realise that there is another Greece which believes in modernity, in the stability that being part of Europe brings, that is fighting a battle for change that can be won".

Greek police, firefighters and harbour police staged a rally in Athens on Tuesday night and the country's two biggest unions have called for a demonstration on Wednesday.

So Greece 'Defaults' And Europe Moves On...

28 February, 2012

Via Peter Tchir of TF Market Advisors,

So far there are no dramatic consequences of the Greek default.  The ECB did say they couldn’t accept it as collateral, but national central banks (including Greece’s somehow solvent NCB) can, so no real change.  We will likely get a Credit Event prior to March 20th once CAC’s are used to get the deal fully done.  Will the market respond much to that?  Probably not, though there is a higher risk of unforeseen consequences from that, than there was from the S&P downgrade.

It just strikes me that Europe wasted a year or more, and has created a less stable system than it had before.  A year ago, Europe was adamant about no haircuts and no default.  I could never understand why.  Let Greece default, renegotiate terms, stay in the Euro and move on.  The key then, as now, was ensuring that banks that were solvent had enough liquidity.  Rather than take that advice, Europe proceeded to buy Greek debt, which not only failed miserably, but has complicated the situation.  The ECB holdings stick out like a sore thumb.  Had Greece been allowed (or forced) to default and restructure when the crisis first hit in 2010, the ECB wouldn’t own a single bond.

Every step of the way, the avoidance spread the risk and created contagion, rather than solving it.  EFSF was an artificial construct designed to sound impressive and never be used.  In the end it has been barely used, sounds unimpressive, and  did spread the contagion.

European leaders somehow see the “bailout” as having solved Greece’s problem.  The reality is massive debt forgiveness and losses to creditors do far more.  The leaders won’t pull back, but it would be far easier, and longer lasting, if they let Greece default (including on ECB holdings), wipe out virtually all the debt (offer 20% recovery), and have the EFSF give the €30 billion to Greece as fresh money rather than to creditors.  The IMF and ECB could still play roles too.  They won’t do it, because they continue to fight the wrong issues.  The German vote yesterday was helped along by the “incalculable” damages warning from Merkel.  That warning was based on Greece “leaving the Eurozone” which it wouldn’t necessarily have to, and doesn’t seem supported by any fact.  Just like their fear of default originally, and their fear of CDS, someone will eventually see the light, but it may be too late (at least for the Greek people).   

Whatever has been done is likely going to need to be fixed, and once again, they missed the chance to do something proper because they are all stuck in their positions, mostly based on fear, rather than critical analysis.  They will point to the SPX and say it is higher now than a year ago, and much higher than 2 years ago.  Correct.  What is hard, if not impossible to determine (except by central bankers) is what path the market and the economy would have taken if they had dealt with Greece properly.  Would contagion have spread and we hit much lower lows?  Or would contagion have been stopped in its path after some restructuring and liquidity?  What if the last year (or 2) had been spent focusing on growth for the countries in the most trouble, rather than on ways to keep them paying creditors?   What about a world where we had fewer zombie banks because they had been allowed to go bankrupt and new banks and financing companies been allowed to start?  Maybe securitization and the shadow banking system would be alive and well now, and cheap money would actually be flowing from central banks into the economy rather than just into banks and sovereign debt?  Maybe the S&P would be at 1,700 and we would have more to talk about than Apple and a QE inspired hope for housing?

We continue to try and avert short term pain at all costs.  Every plan is to get through the next month or two and doesn’t deal with the real problem.  We saw it in the US back in 2007, and it has never really stopped.  The economy and stock market are okay at best (stock market better than the economy), but still reliant on government support.  Defaults, write-downs, killing zombie banks, allowing free markets and real interest rates would have set us up for a much cleaner and optimistic future.  LTRO may help the market again tomorrow, but at what cost to the long term?  It is time to end the “it would have been worse if we did nothing” argument, and start talking about “look at how much better off we are now by doing so little” argument.

We get a lot of data today.  Home price is interesting since the price shouldn’t be impacted by the weather (sales yes, price no).  But since it is December data it is likely to be ignored if bad.  Durable goods orders estimates look low given the weather.   0% ex transport seems more likely to surprise to the upside, but with all the data and current stock prices, a surprise is likely baked in.  Richmond Fed is unlikely to do much either way unless it is massively different than expectations, and consumer confidence is likely to be strong – but who really cares?  And strong is a very relative term.

Tomorrow’s LTRO is definitely interesting.  It seems like every outcome is now bullish – big take up is bullish because of the “carry” trade.  Low take up is bullish because “banks are okay”.  I expect low take-up, partly because it was never meant to be for the carry trade anyways.  It was designed to ensure banks could deal with near term maturities.  It did that job.  Short dated sovereign has come in with it, part because banks could buy some, part because SMP was buying (looking at Greece, it looks like SMP likes the front end), and momentum chasing/stop loss trading helped things along.  With Spanish and Italian 2 year bonds trading at 2.5%, there isn’t that much left in the “carry” trade.  Any weak bank looking to borrow from the LTRO to buy sovereign debt would be insane to buy bonds longer than 3 years and take the roll risk, but on the other hand, the weakest and most insolvent, got there by doing insane things in the first place.

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