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.