Monday, February 06, 2012
The cosmic background radiation of the US payrolls is still echoing around the financial universe but today's other archaic story echo is the Greek PSI Deal (or No Deal). More of the same from Greece as the party leaders reject yet more austerity in order to satisfy the Troika. This time, it does seem as though though "this is it", as murmourings last week and at behind the scenes at Davos suggest the EU/IMF have last patience with Greece and that post the ECB's 3yr LTRO that a firewall of some degree is now in place to cushion the blow of Greece being cut loose. Now, TMM certainly don't agree that a firewall is in place to allow such an event to proceed contagion free. But it does seem as though the Troika - and the Germans in particular - have come to the point of being willing to risk it. That concerns TMM.
But equally, it also appears that the political leaders are more open to negotiating this time around, in stark contrast to the class A twit Samaras' usual hotheadedness. This is encouraging. Indeed, the report from Papademos' office suggesting broad agreement for 1.5% of consolidation would tend to support a favourable outcome. By that, TMM mean "any deal with the Troika". The problem is, that "any deal" is unlikely to be a particularly good surprise for markets, while a collapse of negotiations and the Troika leaving Athens aboard a plane this evening would be highly damaging to asset prices, at least in the short term. It is not hard to imagine talk of an imminent Greek Euro exit sparking panic - regular readers will know TMM's view on whether or not a Greek Euro exit can be managed without catastrophe
Now, TMM reckon that even the Greeks are not *that* stupid, and that we will indeed get a deal, with all that it entails: the PSI, disbursement etc etc. But the more unfavourable outcome cannot be written off and should it occur, TMM will be selling.
That said, for the moment let's assume that the deal goes through. Bears have been doing their damnedest to try and hype up the potential for another bailout programme for Portugal that may include PSI, following the well-rehearsed Domino Theory. And while it is not hard to imagine Portugal needing another programme at some point, it has managed so far to meet its fiscal targets - albeit by raiding the pension funds. TMM digress. Let's assume that Portuguese bonds remain under pressure. Today, this article has been doing the rounds, reporting that Portugal is considering going down the restructuring route. What does that mean for broader markets? Well, TMM would note that the Greek & Italian contagion events in May 2010 and August 2011 both occurred when the economic data globally had begun to disappoint, and positioning in risk assets was quite heavy both in the leveraged and real money space. TMM would point out that it is hard to argue that such a backdrop currently exists: the economic data has been surprising to the upside globally and positioning is still significantly underweight. It is difficult to get broader market contagion under these circumstances.
So TMM reckon that, Greece deal permitting, Portuguese concerns are unlikely to take hold of markets immediately as risk creeps higher into the LTRO at the end of the month. With positioning likely to be larger then and the "surprise factor" from better data largely digested that Portuguese contagion is more probably a story for March.
But for now TMM suspect that the market will to continue to suffer "Death by x-axis". Every time the markets determine a "must be solved by date" those involved procrastinate right through it and yet the world does not melt, the trains don't stop running and the lights don't go out (though of course the threat of that in Athens is getting closer).