Pass the methadone please, darling

Wednesday, May 11, 2011

Since our post yesterday there's been a catalogue of rumours and headlines concerning Greek packages. Together with a bounce in commodities that has yet to have its feline qualities tested, the market has calmed down. TMM actually think that today is make or break for the construction of the next big move, but first let's have a look at the Greeks' package.

As we discussed yesterday, it looks as though the Eurostriches are pulling their heads out of the sand and accepting that "something must be done". But what? Unfortunately, judging by comments out overnight, nettle grasping is still considered a last option. Lagarde's comments are particularly head-buryingly worrying.

"Lagarde said that no decision had been taken on the possible amount or form of any supplementary aid for Greece, but a debt restructuring was out of the question because it would mean higher interest rates for all euro zone members and losses for the ECB on its Greek debt portfolio"

Europe has a simple tradeoff to ponder over:
- Increase in the cost of borrowing for the EU in general if Greece defaults times size of EU debt over a the guessed period of how long it all takes to stabilise, versus
- The cost of funding periphery nations' debt until they sort it out for themselves.
It would appear that Lagarde has chosen the policy of passing more methadone to the addict, having decided that the path of federalizing periphery debt is the way forward. As to where to stick the debt, pushing it deeper under the carpet of an "EU" label (either ECB, EFSF or ESM) may not fool anyone who has noted the exploding size of the ECB's balance sheet (now around 1.9 trillion Euro). However, to the general populaces of France and Germany it is not yet visible as their problem.

TMM therefore look forward to a headline along the lines of

**EFSF TAKE UP FULL ISSUE OF GREEK ZERO COUPON PERPETUALS.

In seriousness, we think this is a very dangerous game on two fronts:
1) The bulge under the ECB carpet is so large that even Herr Hans Publik (as well as his more suave conterpart, Monsieur Jean-Jacques Publique) will spot it, releasing pent up political problems.
2) The ransom equation may come down in favour of supporting Greece or Portugal, but it won't be that easy if Spain should find themselves in similar need. However, once the commitment to federalise has been made, it cannot be unmade. This once again will leave the market watching and testing the membrane of Spain that separates the good guys from the not so good ones.

But back to market reactions. A relief rally in practically everything so far leaves TMM thinking that it's decision time for the next make or break move. Voldermort et al may well be back in the fray but the first signs from our DNA tests are pointing towards a feline heterozygote. As such so TMM stay firmly in the JSTFR camp in all the main dumpage candidates of last week and especially the Euro.

Posted by Polemic at 12:56 PM  

17 comments:

Good take on the Euro action.
I would not bet against them just continuing with more of the same that we have already seen. Anything that can ring fence European banks fom an overt balance sheet problem and similarly appear to ring fence Euro solidarity. The options are many, but they all imply a continuance of kicking the can ever further down the road until they hope that can is empty of systemic Euro problems..

Anonymous said...
1:29 PM  

But efsf is aaa... Don't you want to own that paper all day long?? The capital is rock solid... In the form of promises to pay.

Jim said...
2:52 PM  

looks like real finns kicked the habit to everyone's annoyance:

http://www.market-ticker.org/akcs-www?post=185817

Anonymous said...
3:40 PM  

Bailout Fatigue!coming to a market near you.

FX said...
3:43 PM  

Is that a Greek package or did you stuff a kebab in your pocket on the way home last night after getting hammered?

Anonymous said...
3:44 PM  

I think I'm going to marry you,TMM.

FX said...
5:04 PM  

Really appreciate your sentiments fx, but the only chance of that is if you are vicar.

Polemic said...
6:33 PM  

Bugs on the Windscreen again today, TMM. Been saving that line for months....

Leftback said...
6:50 PM  

Earthquake in Spain, but not in the bond market as yet. Quake centered in Lorca, near Alicante.

http://www.bbc.co.uk/news/world-europe-13368599

Leftback said...
7:16 PM  

I strongly agree that the next few days could be formative but the key, for me, are the real money guys. The Algo,CTA, fast money crew can create a huge amount of noise in the short term (and some startling moves) but once they have thrown the toys out their prams things have tended to rush back up. When your friendly sales guy calls you up and nervously announces his cash cow clients are running away then we can all leverage up for a really nasty move. These guys have gotten used to ignoring the noise (and their risk management genes) and looking smart for it. Lets see if this time we can observe them being a little less complacent.
I live in hope..
db

Anonymous said...
8:01 PM  

Anon 1.29pm - theh problem is that I htink it'e less like a can and more like a snowball -the further its rolled the bigger it gets.

Anon 3.40 - I really do like the Finns. Loads of common sense and know how to party. Big time.

Anon 3.44pm .. hmm I reckon thats LB hiding behind an anon !

Lb - Cheers.

Anon 8.01(db) - Bang on, fully agree about the superhuman invulnerability some of them feel having weathered a stream of usually disastrous one offs. I bet a few systems will have been back-modelled to include the survivability of such as well. Be a shame to have climbed Everest and then get run over by the neighbour pulling out of the drive as you get home!

Polemic said...
9:53 PM  

"I really do like the Finns. Loads of common sense and know how to party. Big time"

Oh yes do they ever.Try them on the mid year clebration and be prepared to suffer afterwards.

Anonymous said...
10:19 PM  

Noticing that Denmark is about to reinstate border controls... there seems to be some inverse relationship between a country's size and its pain-in-the-ass qualities in the EU.

Yes LB, the flat rocked back and forth three times this PM. Epicentre in Murcia. Portent of the Banco Mare Nostrum IPO surely.

Charles Butler said...
11:40 PM  

DB....Institutional money seems to be making lower highs.

http://bbs.cobrasmarketview.com/download/file.php?id=2636&sid=7afcccebc218f3b007656110e9833469&mode=view

FX said...
12:01 AM  

Interesting problem with blogger. I see that May 12 never actually happened and that May 13 market action looks a lot like May 11....

Perhaps investors should all head down to the bunker again, TMM?

http://www.bloomberg.com/news/2011-05-12/apocalypse-angst-adds-to-terrorist-threat-as-rich-russians-acquire-bunkers.html

Leftback said...
5:51 PM  

This is a pain in the arse. We hope blogger hasn't been Sony'd.

Looked like it was all back an hour ago, now yesterday's post has vanished again with no trace together with all the comments.

Polemic said...
7:40 PM  

Bad week for the GGUF crowd. Plenty of news about noodle-eater, curry-eater, taco-eater loading up on babarous relic but the thing isn't going anywhere really.

Have a good weekend TMM

Anonymous said...
9:20 PM  

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