You Maniacs! You blew it up! Oh, damn you!
With part of NYC under water this week, I can’t shake the image of the Statue of Liberty from the end of the Planet of the Apes. In that case, the devastation was something mankind had done to itself. In many ways, it is hard to imagine people making such a big mistake – and in the real world we have avoided it – so far. Yet, in Europe we are back to a situation where the weakness of people may push us over the edge once again.
Greece Highlights the Foibles and Follies of the EU
Greece remains a small country. The entire Athens stock market has a market cap of about €25 billion, about the amount Apple swings in any two days. And even that market cap is misleading since 25% of it, is the Coca Cola Hellenic Bottling Company which I think is moving its listing. So I’m not particularly worried about the moves in the Greek stock market (which many have been pointing to), but I am concerned by the noise that is coming out of Greece, and more specifically about the noise coming out of the Troika regarding Greece.
The ECB doesn’t want to take a loss. The IMF can’t reduce rates. The ESM or EFSF could take a loss, but politicians don’t want to see that. Who are they kidding? Greece has no ability to pay its debt. It has nothing to do with some magical 120 in 2020 Troika guideline. It is too much principal and interest due now. They can talk about the PSI bonds, but that is just plain stupid. €60 billion of debt, with a 2% coupon and no maturities within 10 years is NOT the problem. These bonds trade at 25% to 32% of par for a reason – they don’t offer good coupons to the investors. These bonds also have good documentation – they aren’t Greek law bonds – so harder to fool with this time around. Also, they are largely owned by strong hands who have taken the mark to market hit. That means they will fight.
The official sector will have to take a hit. The question is will it be an organized and controlled hit, or one where Greece takes decisive action to default? More and more it looks like there is a real chance Greece will be forced to default. The arrogance of the Troika is shocking. They don’t seem to see that if Greece defaults or leaves, they won’t have a choice about how or where to take the losses. They will try and assert themselves, but I think they are reading the situation wrong. They seem to believe they have a choice of whether to take losses or not, when the real choice is controlled losses or losses outside of their control.
While that is going on, little things like people questioning whether cuts to pension benefits are constitutional are playing out on the fringes. The EU had the opportunity to help the new government. They have squandered that opportunity, and as the Greek economy continues to struggle, and their banks exist on day to day life support rather than a full restructuring, it will be easier for some politician to tap into the anger of the population and win seats based on a willingness to defy the EU and Troika. This is very dangerous for Europe and the markets.
We can congratulate ourselves on an extra 50,000 jobs this month, which we see as important, while ignoring the risk of €100’s of billions of potential losses in Greece and the cascade into the rest of Europe. Which of these two events is a “blip” on the radar screen?
So my concerns about Greece have gone from minimal last week to high this week. That is a big change in my view on the macro risk, and when coupled with an almost 3% move in the S&P 500 since I turned bullish, is enough to make me neutral at least, if not bearish.
The Spanish Wail-out
I can’t really call it a bailout anymore. The wailing and gnashing of teeth has gotten to me. I still think we get OMT and that it will be helpful for risk, but my concerns are growing.
Rajoy seems to be one of the few people on the planet who is not in a rush. He seems more afraid of any stigma attached to getting a bailout than acting proactively. His reliance on the promise of a bailout is growing old. Monti and Rajoy met, and I expect Rajoy was prodded to act, but I am growing concerned that he will somehow continue to delay.
Even if he asks for a bailout, the talk out of and around Greece makes me concerned that Europe doesn’t understand anything, and the plan will be far more limited in scope than is necessary to assure the markets. The conditionality will be too strong, and will have too many review periods. The markets will NOT react that positively to a plan like that. Many investors seem to be playing for the OMT pop here. Too many, in fact. Too many are missing the signs and clues that the package is likely to fall short of expectations. That alone is a concern about the success of any plan, but the risk that Greece is pushed out also needs to be taken into account.
If Greece is pushed out, any plan created by the Troika, will be shrouded in doubt. Fear will be high and many investors will make the accurate assessment that any non official sector holder will be “primed” as they become effectively subordinated. Nothing about what has gone on in Greece over the past week is positive for the future of Spain and Italy.
So back to being negative on risk here, and remembering how scared I was of gorillas with guns after seeing the original movie as a kid.