Wednesday, 7 March 2012

What if?

 Reproduced also in IFR

What if questions are never easy to answer but an honourable attempt is better than not asking the question. So: 
For whatever reason, percentage or legal the PSI is rejected. What is the sequence of events that might follow.
1.      Let’s start by apportioning blame. If the PSI fails it would be not because of the Greeks. All the Greek banks and the majority of the Pension funds have signalled their willingness to tender. If the PSI fails it would be humble pie for Germany not for Greece. Germany is the major driver of this policy. Germany is responsible for pushing this bad solution to Greece even though they conceded that it is bad back in October 2011. So if the market fails the PSI it would be calling Germany’s bluff in a big way. It would not be punishment to Greece.

2.      Mario Draghi is going to come out probably with another trillion of a 10Y LTRO and would reduce the Regulatory Reserve to zero percent. It would further alter the collateral rules and accept with no haircut anything that resembles a promise to pay even from Bernard Madoff. Yet another pie for Bundesbank.
3.      To that extend the PSI failure would be a bullish sign rather than a bearish one.
4.      Gold might go up momentarily as the new printing machine is oiled up.
5.      Most policy makers are promoting the idea that they would let Greece default. This time though it would not just be a restructuring event but a Failure to PAY; this is a far more serious offence than restructuring.
6.      It is odd to see point (4) being talked by Greek politicians. I thought they were there to save the country not to drive it into suicide. So my guess is that they would try to secure another deal by giving earth and water (is an ancient Greek saying that means total unconditional surrender, γῆ καί ὕδωρ) to Troika.
7.      Would the EU and especially France and Germany allow Failure to Pay inside Europe with elections round the corner? If not they need to come up with another plan by the 18th May when the next 8billion mature.
8.      In this case they could divert some of the 30billion that are destined for the PSI to pay the March bond. After all 4.6billion is owned by the ECB. Failure to Pay also means failure to pay the ECB.
9.      They might even come up with a better plan for Greece and Europe. They might include the official sector in the haircut which seems to have amnesty. Or even better they might sit down and get REAL solution for Europe. A proper fiscal union, not the Mickey Mouse one that lacks democratic accountability and takes Europe back to the dark days.
10.  It is actually better to move it further as elections are to be held in early May in Greece and Europe must know whether Greeks would be able to implement the reforms or join the long list of failed states.

So, the threat of disorderly default does not seem to hold much weight. It is for this reason that investors are sceptical about tendering their bonds. Tendering 100 to get back 20 versus a default and recovery of about 20 is not a real threat. It is an incentive to hold out. Happy results.