10 Oct 2011
Comment: Stephen Pope, Managing Partner - Spotlight Ideas
OK...OK... the ECB sat on their hands as far as rates went; Mr Trichet was never going to admit he was wrong. Besides, he only ever cared about his anti inflation record. Still they did step up the covered bond purchases and extended 12 month facilities. Big deal! Still one day on and just in time for the weekend there is a rift between the leaders of France and Germany.
Since October 2009 the markets have raised a concern about the ability of Greece to manage its debts ... in fact many have had doubts since 2001 when Greece was first allowed into the Euro. It was always felt that the politicians had been less than transparent with the true state of the nation's finances.
Now the issue has reached a head. Greece has bills to pay on 15th October and it needed the EUR8Bn from the Troika to do so...that money is not forthcoming.
So I have to wonder if I missed something...because this past week has seen the myriad talking heads in the Euro Zone (EZ) continue to state that Greece will be OK.
1. Greece needs EUR8Bn from the Troika
2. Money is not forthcoming as Greece has failed to meet the required Debt:GDP levels.
3. Bills are due on 15th October.
4. Bills will not be paid on the 15th, which to me is a credit event if one wishes to be polite.
5. Greece will have defaulted...if only someone at the top of the overblown EZ would admit it.
In the markets now there is a cost of protecting against the inevitable Greek default as the costs are $6m + $100,000 each year to insure $10m of Greek debt for 5 years. The level of the default swaps imply a 91% chance of default. Why on earth has it stopped at 91%? Greek 10 year paper trades at 2100bps over German 10 year Bunds.
I am staggered by the arrogance of the suggestion that Merkel and Sarkozy and they alone shall decide if Greece to default and how to manage the fallout. They will attend their 8th bilateral summit in 20 months in a matter of days (9th October in Berlin), ...but no doubt whatever they say at the end of the meeting will be kept company by words of wisdom from Barroso, Junker, Papandreaou, maybe Draghi and if we are really lucky there will be a rare sighting of Van Rompuy.
(Can someone tell me what he actually does?)
But of course this is where it all get quite intriguing as well as frustrating. The CEO's of BNP Paribas, Credit Agricole and Societe Generale have told us all summer that (1) they can survive a Greek default and (2) they do not need new capital.
Sarkozy is no fool and even if the Banque de France, led by Christian Noyer do not see any storm clouds, Sarkozy knows that his Presidency may be a 1 term affair if the banking bastions of La Defence take a mortal hit. The July deal asked the private sector to recognise a 50% haircut on Greek assets...the French have just applied a 21% reduction. They are fixated on a "Mark to Model" concept...not a "Mark to Market". They have also demanded that naked short selling be banned. Why...they are seeing a weak share price because they have behaved foolishly, acted and lent irresponsibly and are desperate to seek out a scapegoat...anyone except a member of the French elite. So blame the market. No they should not blame the market, they should accept responsibility and resign or be forced out by their shareholders. Why not take them at their word...if they say just once more that they do need recapitalisation...deny them funds. The squeal will be worse than of bad brakes on a 2CV.
France doesn't want Greece to default for a number of reasons, but the chief of these is that it will hurt the French banking system. As of 31st March French financial firms had $672Bn in public and private debt in Greece, Portugal, Ireland, Italy and Spain according to the Bank for International Settlements. This figure represents the single largest exposure to the EZ’s troubled countries and is 30% more than the exposure of German lenders. What on earth were they thinking?
If Greece falls off the cliff... then there is a risk that the spreads on other nation’s debt will rise against Germany. It really miffs the French that Germany is the core and not the BTAN/OAT market. French 10-year OAT's yield 78 basis points more than their German 10 year Bunds; this is approaching the Euro era record set in early August and compares to +35 as the year began.
If spread widening rips through the EZ one can easily see France being drawn into the melting pot as Credit Default protection on Germany stands at 3 Month Euribor + 121 bps cf. France at +200. No wonder the French President is concerned...he must just be glad the Socialists seem unable to find a suitable candidate to rally around.
Germany and France are at odds over whether the European Financial Stability Facility (EFSF) rescue fund should have limits on government bond purchases. It is clear that Germany does not want the EUR440Bn spent too rapidly...as the ECB refuse to be used to leverage it, Merkel can see that the facility will run of cash PDQ and guess who will be asked to contribute more once again. The Chancellor has stated in no uncertain terms that the chequebook of Germany has limits and she and Germany only want the EFSF used if the stability of the euro as a whole” is at risk. How can anyone not believe it is already at risk?
Recently the Irish Finance Minister said Europe should recapitalize banks to build a “financial firewall against contagion,” tackle Greek debt and then sort matters of governance, he said.
OK...OK... the ECB sat on their hands as far as rates went; Mr Trichet was never going to admit he was wrong. Besides, he only ever cared about his anti inflation record. Still they did step up the covered bond purchases and extended 12 month facilities. Big deal! Still one day on and just in time for the weekend there is a rift between the leaders of France and Germany.
Since October 2009 the markets have raised a concern about the ability of Greece to manage its debts ... in fact many have had doubts since 2001 when Greece was first allowed into the Euro. It was always felt that the politicians had been less than transparent with the true state of the nation's finances.
Now the issue has reached a head. Greece has bills to pay on 15th October and it needed the EUR8Bn from the Troika to do so...that money is not forthcoming.
So I have to wonder if I missed something...because this past week has seen the myriad talking heads in the Euro Zone (EZ) continue to state that Greece will be OK.
1. Greece needs EUR8Bn from the Troika
2. Money is not forthcoming as Greece has failed to meet the required Debt:GDP levels.
3. Bills are due on 15th October.
4. Bills will not be paid on the 15th, which to me is a credit event if one wishes to be polite.
5. Greece will have defaulted...if only someone at the top of the overblown EZ would admit it.
In the markets now there is a cost of protecting against the inevitable Greek default as the costs are $6m + $100,000 each year to insure $10m of Greek debt for 5 years. The level of the default swaps imply a 91% chance of default. Why on earth has it stopped at 91%? Greek 10 year paper trades at 2100bps over German 10 year Bunds.
I am staggered by the arrogance of the suggestion that Merkel and Sarkozy and they alone shall decide if Greece to default and how to manage the fallout. They will attend their 8th bilateral summit in 20 months in a matter of days (9th October in Berlin), ...but no doubt whatever they say at the end of the meeting will be kept company by words of wisdom from Barroso, Junker, Papandreaou, maybe Draghi and if we are really lucky there will be a rare sighting of Van Rompuy.
(Can someone tell me what he actually does?)
But of course this is where it all get quite intriguing as well as frustrating. The CEO's of BNP Paribas, Credit Agricole and Societe Generale have told us all summer that (1) they can survive a Greek default and (2) they do not need new capital.
Sarkozy is no fool and even if the Banque de France, led by Christian Noyer do not see any storm clouds, Sarkozy knows that his Presidency may be a 1 term affair if the banking bastions of La Defence take a mortal hit. The July deal asked the private sector to recognise a 50% haircut on Greek assets...the French have just applied a 21% reduction. They are fixated on a "Mark to Model" concept...not a "Mark to Market". They have also demanded that naked short selling be banned. Why...they are seeing a weak share price because they have behaved foolishly, acted and lent irresponsibly and are desperate to seek out a scapegoat...anyone except a member of the French elite. So blame the market. No they should not blame the market, they should accept responsibility and resign or be forced out by their shareholders. Why not take them at their word...if they say just once more that they do need recapitalisation...deny them funds. The squeal will be worse than of bad brakes on a 2CV.
France doesn't want Greece to default for a number of reasons, but the chief of these is that it will hurt the French banking system. As of 31st March French financial firms had $672Bn in public and private debt in Greece, Portugal, Ireland, Italy and Spain according to the Bank for International Settlements. This figure represents the single largest exposure to the EZ’s troubled countries and is 30% more than the exposure of German lenders. What on earth were they thinking?
If Greece falls off the cliff... then there is a risk that the spreads on other nation’s debt will rise against Germany. It really miffs the French that Germany is the core and not the BTAN/OAT market. French 10-year OAT's yield 78 basis points more than their German 10 year Bunds; this is approaching the Euro era record set in early August and compares to +35 as the year began.
If spread widening rips through the EZ one can easily see France being drawn into the melting pot as Credit Default protection on Germany stands at 3 Month Euribor + 121 bps cf. France at +200. No wonder the French President is concerned...he must just be glad the Socialists seem unable to find a suitable candidate to rally around.
Germany and France are at odds over whether the European Financial Stability Facility (EFSF) rescue fund should have limits on government bond purchases. It is clear that Germany does not want the EUR440Bn spent too rapidly...as the ECB refuse to be used to leverage it, Merkel can see that the facility will run of cash PDQ and guess who will be asked to contribute more once again. The Chancellor has stated in no uncertain terms that the chequebook of Germany has limits and she and Germany only want the EFSF used if the stability of the euro as a whole” is at risk. How can anyone not believe it is already at risk?
Recently the Irish Finance Minister said Europe should recapitalize banks to build a “financial firewall against contagion,” tackle Greek debt and then sort matters of governance, he said.
