Wednesday, April 28, 2010
"History doesn't repeat itself....but sometimes it rhymes"
Is Europe about to re-enact the Lehman Brothers experience? At the moment it sure does feel like it. The sort of slow-motion collapse that Greece is performing is eerily reminiscent of the last days of Lehman, complete with the breezy assumption in some quarters that the authorities would ride to the rescue.
After all, it was only a few months ago that Greece was fighting off yield hogs desperate for some 6% lovin'....remember those €25 billion worth of bids for the 5 year issue in January? That's now looking like a mistake similar to Dick Fuld playing hardball in discussing a sale of "his" bank in '08.
And just as LEH slipped through the Federales' safety net in '08, unleashing a hurricane of unintended consequences, so too has Greece foundered as the Europeans dither over a possible rescue package. Hmmmmm....one is left to wonder whether Angela Merkel plays the violin.
It's really a no-win situation, of course. The prospect of pre-emptively bailing out what's popularly perceived to be a nation of lazy tax-dodgers is a political no-go in Europe's core. But financial black holes- whether they be in banking or sovereign balance sheets- are like cockroaches: there's never only one.
And just as Fannie begat Lehman, who begat AIG, who begat Merrill, who begat Citi (you get the picture)....so too might the collapse of Greece (a seeming inevitability now) herald similar difficulties for the rest of Europe. The last two columns in the table below show the change in 2y yields for various European sovereigns on the year and over the last month. Those that have risen are helpfully coloured red; unsurprisingly, Portugal and Ireland are under the most pressure.
And while the ECB can blithely ignore the ratings agencies when it comes to their collateral rules (which are going to take on a distinctly "make it up as you go along" flavour), private sector investors cannot. S&P's 3 notch downgrade relegated Greece to junk, and heralded its ejection from some European bond indices. Were Moody's to follow suit (and how can they not? They're now 4 notches above S&P on a country with 18% 2y yields!), Greece would leave more indices. The upshot is that real money managers benchmarked to these indices would have to sell all of their Greek bonds if they have (or had) not already done so. Bonne chance, mon brave!
And so we come to the euro, which has plumbed its lows of the year but remains some 7c above its 2008 crisis lows. Hard as it is to believe, the CB bid has remained (though might some of that be covert intervention from the Eurozone via the BIS? Enquiring minds want to know!), thereby dampening the sell-off that everyone expects.
Given all that's happened in Greece and elsewhere in Europe, EUR/USD has actually been a surprisingly difficult trade; it really ought to have fallen much further, more directly. But then again, what's new? Perhaps at this juncture equities are a better bet; divergence between the US and Europe has been steady all year, and seems very likely indeed to continue as Europe shoots itself in the foot.
Yesterday the story surfaced that Europe would convene a "Greek Aid" summit on May 10, with possible payouts a week or so later. All well and good, of course, but real time events are moving substantially quicker than policymaker negotiations. Again, it all sounds vaguely familiar....it's Lehman redux.