John Mauldin: Kicking the Can Down the Road One More Time
My friends at GaveKal point out that this is “… the sixth time in 18 months European leaders have announced a definitive solution to the Euro crisis. Should this version of the final bailout be taken any more seriously than the first and second solutions to the Greek crisis in May and September 2010 or the Irish bailout of December 2010 or the Portuguese rescue package of March 2011 or the breakthrough vote in the Greek parliament of last month? The supposedly good news for markets was that the -21% haircuts to be imposed on Greek creditors (as estimated by banker groups) were less than half those suggested a few days ago.”
A 21% haircut is a bad joke. If you assume that Greece can afford to spend 10% of their revenues just to pay the interest, which is what they will need to be able to do to get out of their crisis, then the haircuts look more like 75-80%. Sean Egan, the most credible credit analyst in the country, estimated this week that the eventual haircuts on the Greek debt will be 90%.
You can read the release from the EU leaders in its entirety, if you like, at http://www.foxbusiness.com/markets/2011/07/21/read-eu-leaders-full-statement-on-greek-bailout/. I really have no idea what you should drink as you read it.
Here is what it really says: We are going to keep throwing good money after bad and work as hard as we can to transfer the debt that is on the banks to the ECB and European taxpayers as long as the voters will let us. This first tranche will be another €109 billion. That will last a few years, and Greece will only have to pay about 3.5% on that debt and the rollover debt, and people who expected to be repaid in that period will see payment extended to either 15 or 30 years.
You can call this what you like, and they call it “selective default,” but it is a default. There will be government guarantees on the debt, so the ECB can take it from the banks.
Let’s see what the “voluntary” debt rollovers will look like and what the likely debt destruction will be. This is from Global Macro Monitor.
First, notice that the plan claims haircuts will only be 21%. But that assumes you can sell the new bonds at a 9% interest rate. If the interests rate demanded by the market are 15%, which is closer to reality, the haircuts are closer to 67%, after what appears to be an initial 20% cut. Will any institution not immediately try and get those bonds into the hands of the ECB? This is just ugly.
- The Yield Hunt - By Michael Lewitt
Anyone who does not understand that the price of every stock and every bond is being artificially altered by the fact that interest rates are being manipulated by the Federal Reserve should not be risking any money in the markets. Monetary policy has...
- John Mauldin: There Will Be Contagion
… (December 11, 2009) – Greece's prime minister, George Papandreou, told reporters in Brussels on Friday that European Central Bank President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker see "no possibility" of a Greek...
- Hussman Weekly Market Comment: Whipsaw Traps
With respect to Europe's perceived "solution" to its debt crisis, the 50% write-down of Greek debt is appropriate (better than 21%, but probably still light), but it's not clear that this includes a writedown of Greek obligations to "official"...
- Hussman Weekly Market Comment: Not Over By A Longshot
On Friday, the yield on 1-year Greek government bonds closed above 135%. As I've noted in recent weeks, the bond markets continue to reflect expectations of certain default on Greek debt. All they are working out now is the recovery rate. As of last...
- Hussman Weekly Market Comment: Preparing For A Greek Default
The yield on 1-year Greek government debt ended last week at 110%, down slightly from a mid-week peak of 130%. Even with the pullback, the Greek yield structure continues to imply default with certainty. All the markets are really quibbling about here...