Friday, January 22, 2010

Tempest In A Tzatziki Pot

Note: I was going to title today's post "Permission Denied", but then I decided to join the ranks of the Dumb Title Brigade (see further below). If you are not familiar with Greek cuisine, see here for the wiki on tzatziki (jeez, will this guy quit with the bad word puns, already?)

Greece has been on the market's ropes for some time now, after it announced a whopping 12.7% budget deficit for 2009, the largest in the eurozone (a year ago the previous government was projecting it around 4%). If Disraeli was alive today, this massive departure from reality-based numbers would have doubtlessly caused him to cry "Lies, damned lies and Greek statistics".

Analysts and the financial press are having a field day with this, dusting off their schoolboy knowledge of all things Greek: "A Greek Tragedy", "Marathon Ahead For Greek Economy", "Greece Enters Plato's Cave"... I bet "Greek Bonds Skewered Into Souvlaki" is the next salvo from the Dumb Title Brigade.

The yields spread of Greek 10-year government bonds over German ones has risen as high as 310 b.p. (3.10%), the highest in nearly 10 years. The five year credit default swap has likewise jumped to 340 points (see chart below).

Five Year CDS On Greek Government Bonds


The Greek Problem has now turned into a European Problem, as speculators the world over are turning this debacle into an opportunity to drive the euro lower in the foreign exchange market. The dollar has strengthened from 1.51 to 1.41 vs. the euro in just two months. Moreover, policy and geo-strategy wonks are salivating at the prospect of the eurozone (and then the entire EU) falling apart. All that for a country with a GDP amounting to less that 2% of the entire EU.

There is no question that Greece needs to overhaul its public sector - indeed, its entire economy. But that's a far cry from speculating that it will be the cause of the EU's demise. There's simply too much invested, over too many decades, by the other 98% to let the 2% drag it down. Greece is simply going to be denied permission to default and/or exit the euro zone. Therefore, the whole thing will end up amounting to no more than a tempest in a tzatziki pot.

And what will happen next? After the Greeks have made their grudging obeisance to the All-Mighty Market in the form of mandatory reforms, the EU will bail them out (probably in the form of ECB credit facilities). I expect this in the next few months, even weeks.

P.S. My buddies working at CDS desks are reporting something quite interesting: non-Greek institutions are not accepting Greek names (i.e. Greek banks) as counterparties when the latter are trying to sell CDSs. It does make logical sense (if Greece defaults would you want your Greek bond insurance to be issued by a Greek bank?), but it makes for a very thin and one-way market. My experience says that this is very dangerous ground for those going long Greek CDS, right now.


  1. On a loosely related note, I thought y'all would like to know that the Opel workers in that General Motors factory that G.M. wants to shut down have decided to...
    not hold hostage upper level management. (That's a French idea, and a bad one, at that... who knows, the powers that be, in a tight place would probably be willing to SACRIFICE their upper level management...)
    They have decided to confiscate the factory's production, ie, the cars that are STILL coming off the assembly line, as collateral in negociations.
    Now.. THAT's a smart idea, I must say.
    One of the smartest ones I've heard yet...
    Oh the irony of investors salivating at the idea of the EU going kaput. (Not that I'm a great fan of the EMU, excuse me, that would be more accurate...)
    The big show is everywhere these days.
    The same people go to disaster movies and wank off too.

  2. Sorry, that factory is in Brussels, for those interested. In Anvers. This solution should be getting more attention.

  3. Quick question re: "the EU will bail them out (probably in the form of ECB credit facilities)."

    What about flipper and perma-growth?

    Are you saying what you think will happen? What should happen or what you want to happen?

    The tone of this post has an air of inconsistency/cognitive dissonance.

    Just curious if this is a kind of double standard, that's all?

    Be well

  4. Dear Thai,

    There's a difference between what I think should happen vs. what I think will happen.

    This post is about the latter.


  5. The western world is slowly reverting to its precolonial status when it wasn't so easy to confiscate the wealth of the less advanced societies in Asia & Africa.

    As there are no more virgin continents to despoil, it will be highly interesting to see how the decline will be managed.

  6. If so, bad precedent for the PIIGSmen. Euro parity with the dollar would help, not hurt.

  7. Thanks for pointing out that Greece is only 2% of Eurozone GDP. Not that Greece isn't an issue but I have been pounding the table with my colleagues about California being a MUCH bigger issue for the US, at around 10-12% of US GDP. For some reason the Euro is being interpretated as the weaker currency but in my eyes, the dollar will eventually fall further as the market eventually realizes that California is in way worse shape than Greece.

  8. On another note, I am somewhat surprised that with the dollar rising against other currencies, that there hasn't been more of a correction in the price of oil.

    Oil is down this morning to $75/barrel (down from $81). So there is some correction taking place, just not as much as I would have expected.

    I attended a lecture last night wherein I asked a marine biologist about the problems in raising fish for food. He acknowledged the problem and said that 30 years ago they were using the slogan "the solution to pollution is dilution."

    Well, the long and short of it is that he said that the next big problem (from their perspective, of course) will be the need for fresh water. I said the same thing in November, 2007. He said we are living "on borrowed time."

    Anyway, what piqued my interest were all of the fish dying down here on the Gulf Coast. The local news reported that the last time this happened, it took years for the fish stocks to be replenished.

    This year, the marine life has been hit by both things that kill them: red tide and cold weather. There are millions (yes millions) of fish and other sea life washing up on the shores here.

  9. Just what is it going to take for everyone to realize that California is in worse shape than Greece ?
    Over here in Euroland the U.S. is STILL living on that aura it collected after "delivering" Europe from those nasty Nazis.
    People get all starry eyed and moon over Barack.
    WHO is going to realize ANYTHING in that context ?
    One of the most dismal "facts" about analyzing the economy is the fact that lots of people still think that man is a RATIONAL animal.
    He most certainly is NOT.
    California can fall into the ocean before anybody "realizes" anything.
    Okie, the fishes' death makes me weep.

  10. Big problems in Japan?
    One finance secretary dies, the next is hospitalized with health issues, debt to GDP is near 200% and another trillion $$ stimulus package just got past.
    All that as a nation of savers is about to turn into a nation of spenders as retirees will start drawing down on their savings. Things will get interesting. The US is on the same path, just 15 years behind.

  11. Deb and Yoski, a little clarification Hell has reminded us of many times (but in a different way). You both are making points that require a similar "clarification".

    Which Californians and which Japanese are you referring to?

    For as I am sure you are aware, the problem with associating word/terms such as "worse shape" or "problem" with words/terms like like "Californians" or "The Japanese" is you first have to define kin boundaries.

    So for instance, the idea that "The Japanese" have problems is a little like saying "The Yoskis" have a problem when Yoski owes his brother a lot of money for the corvette he lent him. If Yoski defaults on his brother, he is financially better and his brother is worse off yet the two of them net are the same. The "Yoskis" are no different than they were before.

    Some Japanese owes lots of other Japanese a lot of money. Yet if these Japanese default, the mess remains in the family so to speak yet "The Japanese" are no different.

    I think Krugman was making a version of this point here.

    Of course Paul is being a little inconsistent since he likes to remind us when markets are irrational yet seems to like to agree with them when they support his particular viewpoint.

    It still always gets to viewpoint and values/moral matrices/kin boundaries, etc...

    ... Something I think Deb has been reminding us of all along. ;-)

    Be well

  12. Um, Thai, if you read carefully you will notice that I made no mention of "Californians".
    I said "California".
    The state of California. And my first sentence was a non italicized quote of a previous reader talking about California.
    It looks bad on paper. It (not they, it) is overextended.
    IT can fall into the ocean before anyone realizes anything.
    I am NOT personifying California, either, in any way or form, not lending it human caracteristics.
    And I maintain that the U.S. government and country, in Europe, are still surrounded by an aura that dates back to the liberation, and that the liberation continues to affect European governments' and citizens perception of American culture, and solutions to economic problems.
    An incredible irony in France, considering that the U.S. intended to set up a protectorate in France at the end of WW2 and occupy the country, like it did to a great extent in West Germany.
    What a wonderful big brother, right ?

  13. "All that for a country with a GDP amounting to less that 2% of the entire EU."

    Yes but the PIIGS collectively represent about 26% of EU GDP. And they're all falling down the stairs together.

  14. Re:PIIGS GDP in the EU

    As Orwell said, not all PIIGS are created equal.

    The original PIG's GDP (Portugal, Ireland, Greece) amounts to a total of only ~550 billion euro, i.e. 4.3% of EU.

    On the other hand Italy = 1.5 trillion and Spain = 1.05 trillion. But they are not in nearly as much trouble as, say, Greece.

    Let me put it another way, from a market participant's perspective. If the ECB, or other EU collective institution, tomorrow announces a bridge loan or facility to Greece for, say, 25 billion euro the tempest is over and spreads/CDS will collapse within hours.

    The amounts involved are pretty tiny in the context of a 12 trillion euro economy.

  15. ECB credit facility? How is that going to work? While I too feel Greece will not be allowed to bring down the EMU it's not a tempest in a teapot. I wouldn't know if Greece were in greater trouble than ES or IT. I'll take your word for it. But both ES & IT have DEEP structural problems which will take years & € to overcome & DE isn't going to lay out that money already feeling (justified or not) that they already laid out the money to get them in the union. And Greece sets the precident for the rest. I'm not saying a credit facility can't work. But it's more difficult than extend & pretend which is the current policy and the easiest way forward.

  16. Dear Marco,

    A temporary bailout of Greece would not do a thing about resolving its structural problems. Instead, it would be a signal to markets (and many others, besides) that the EU is, in fact, a Union.

    What is going on right now, in my opinion, is the application of extreme pressure onto the Greek govt. and society to rapidly accept painful reforms.

    Once they cry Uncle! the bailout will come. Quid pro quo..


  17. Yes, but Hell....
    Accept economic reforms that look like IMF strong arm tactics in a country which is already on the brink of revolution because of unemployment ?
    Aren't you indulging in a bit of wishful thinking there ?
    If Greece "accepts" those incredibly unimaginative reforms proposed by institutions and people devoted to paying lip service to the doxa, THEN you'll see the fireworks begin...(they already have)
    Over here in Europe, a lot of people have been incredibly patient with the doxa for quite some time now.
    Their patience is wearing thin...

  18. The economy of Greece may be 2% of the EU but what of the loans? If Greek bonds are perhaps 50% of EU pension savings .. Or Worse 50% of Danske Banks liabilities then trouble will come.

  19. "Once they cry Uncle! the bailout will come. Quid pro quo.." 

    Agreed.  I'm only not sure how a credit facility would be structured and how you would get anybody to agree to it.   Real difficulities.    

    "What is going on right now... is the application of extreme rapidly accept painful reforms."

    Less sure about GR, but the point I was trying to make is that if it were ES or IT (and it may soon be) the needed reforms CAN'T be made rapidly.  To say nothing of the fact that the reforms needed are different in each case.  And I would be sure that Brussels already knew this and so would imagine the hew & cry is for public consumption.  Mis-direction.      

    "...would be a signal ...that the EU is, in fact, a Union."

    Your US bias is really getting in the way here.  Full disclosure: I carry US papers too.  Europe never has been & in our lifetimes never will be a union in the sense that the US is.  Harmonization is not the same as united. 

    From Charlemaine to Ferninand & Isabella and still today I would argue these "unions" produce nothing united and instead only incorporate new factions under a harmonized umbrella. It's the European way.  There is nothing on the horizon which would lead us to believe this can soon be changed.  And as I tried to infer DE has an entirely different view with regard to credit & monetary policy. 

    Which doesn't mean that it can't happen or even that such an outcome would not be desirable.  Just sayin, long odds.  And I wouldn't be at all surprised to learn that someone in Brussels was working on this credit thingy.  But getting that through will be as difficult as a constitution.  An alternative will likely be found.        

  20. Would be grateful if someone would help me spell Charlemagne

  21. Debra -"Accept economic reforms that look like IMF strong arm tactics in a country which is already on the brink of revolution because of unemployment ?" 

    In Argentina impossible IMF demands were met in the streets by women carrying frying pans who threatened a coup. Very dangerous. IMF determined there would be no contagion and let them default.   After LEH here in US can't imagine ECB will make the same assumption.    

  22. What about Mosler's proposal to have the ECB distribute 1 trillion euro on a per capita basis? DE would get the most, but GR, ES & IT would certainly receive their share.

    PS. Shouldn't ECB bonds - were it to issue any - be the benchmark, instead of German ones?

  23. Yeah. This will be great. The EU imposes IMF type austerity conditions on Greece and eventually the rest of the PIGS. Then more loans will flow and more onerous payments will ensue, followed by a deepening of the contraction. I'm sure these countries will do very well with staggering unemployment....not. All would be better off leaving the Euro and issuing there own sovereign currency, which would allow them some flexibility in how they respond to this crisis.

  24. Have y'all reflected on the fact that this "crisis" is happening just at the time when the last eyewitness survivors of WW2 are dropping off ?
    God has no grandchildren, as we say, and it's a lot harder for people who haven't personally lived through circumstances to testify about the necessity of doing things the way the previous generation(s) decided at the end of the debacle.
    As far as the difference between the European Union and the UNITED states, I keep remarking that it's kind of hard to perceive exactly what is federating the united states these days.
    The sense of purposelessness and lack of mission is overwhelming.
    Maybe the UNITED states have an umbrella like structure too, and nobody has guessed it so far ??
    OR... the ONLY thing that permits any kind of significant federation in the U.S. still is the fact that... English is still understood by a greater proportion of the population than any other language.
    Not true in the EU, where language differences are STILL at the root of tremendous cultural differences.

  25. Dinner Time Conversation

    Cali's in free fall
    Gulf Coast fish are dying off
    Let's eat more prime rib

  26. Dear Thai,

    That link was great! Thanks.


  27. Yeah, great link.
    I would have to play it in slow to hear (and understand) everything though.
    Love your links, Thai.

  28. Only takes two pounds on the trigger to unleash a lot of devastation!

  29. SO glad Obama gets the fact that the future is a green economy! It sure seems he's been reading you Hellasious :)