Europe implicitely asks Greek PM to go.

• Greece announces one more tax raid to plug the hole in the budget as the estimated deficit jumps to 9.5% from the 7.6% forecasted for 2011.
• European leaders barking at Greece
• Scenarios going forward

It should by now be very clear that every time we are approaching an installment, Greece would start kicking and the European leaders/lenders would start shouting verbal abuse. In addition, there would be the customary rumors regarding Greece exiting the Euro, declaring default over the weekend and the seven plagues visiting Greece together with the Troika inspectors.

I am surprised, by the inability of the market to comprehend that the European Union is just a babel of views and that it should not pay attention to what they say but what they can or cannot do. With that in mind, can we seriously estimate the cost of Greece proceeding with a disorderly default and possibly exit from the common currency? I think not, at least not in the near future. It is not a question of morality or whether it is right or wrong to punish the non-compliant Greeks. Morality exists only in humans and not in states and right or wrong never enters a political calculation. It is rather the monetary consequences to the European Financial institutions, the ECB and the Global economy.  Then we have the social consequences in Greece and across Europe. The philosophical ideal of a united Europe would suffer a blow and the notion that we have a German led coalition of northern countries against the south would gain credibility. In short, other countries not having similar problems might think of leaving the Union or not entering at all. After all, this is supposed to be a Union of willing partners and not vassalage. 

I therefore find the market’s reaction slightly over the top and that the most likely outcome to the current mess is a compromise and more time-buying.

Greek PM has become part of the Problem.

Watching the PM’s speech in Thessalonica was a painful ordeal. The market was expecting some mood changing announcements and instead they got the usual Greek rhetoric. The PM seems to have forgotten that the speech’s audience was the European politicians and the markets and not the Greek public. He reiterated the usual “we shall fight on the beaches” and “we will do whatever it takes” slogans coupled with the customary attack on the conservative opposition.

Greece The morning after

The fact that Europe’s countries are NO longer partners but changed their relationship to CREDITOR-LENDER is the only real “Game Changer”.

• Now that we have more details of the new bailout we can dissect the numbers further. The so called 21% haircut on the NPV of the rolled over bonds is arbitrary. It only comes if we assume that the risky coupons are discounted by 9% for 30Y or roughly 550bp for the Greek spread. As we show later, it can as high as 40% or as low as zero! Thus the PSI is dubious. 
• The total size of the new bailout is 109billion.
• Only 34 billion is hot new money that would go directly into Greece to repay any bond redemptions and plug deficit holes.
• Another 20billion would go into buying back some Greek bonds from the secondary market. The EU/IIF estimate savings of 12.6billion. This means average price of 62% on a Notional of 32billion. This figure may be optimistic as most long dated GGB are locked in the Hold to Maturity (HTM) book marked at Par. For example between 2019 and 2030 there are 71billion. To find almost half of them at 62% is a tall order.