Thursday, April 15, 2010

It's deja vu all over again...

Greece speads have been blowing out wider again. Back to the levels before the bailout was announced.  What gives? Wasn't the unveiled plan supposed to stop the run by reassuring the creditors that there will be no default - so that, as Hank Paulson would have us believe, once you show that you brought a bazooka out, you'd never actually have to use it?

Well, if that was the plan, we've got some 'splaining to do, because it's pretty clearly failing. 

First, we need to figure out what's actually happening with the market for greek debt, which, alas, I cannot. But perhaps someone else could answer this question: is there widespread selling (and therefore widespread buying just not at prices that Greece can bear) or is the market incredibly shallow such that the brief blips of tightening are immediately offset by another seller who is trying to liquidate his longs.  I suspect it's the latter. I suspect that there are virtually no buyers except a few random hedge funds that are speculating and a central bank or two (paging Mr. Bernanke!). I suspect that there are also not too many sellers at these prices: whatever banks are holding long-term Greek sovereign debt have decided that the better strategy is to hold out and hope for a better price and continue the practice of "mark-to-myth" accounting than to liquidate the positions in full and take an immediate and large hit to the balance sheet. 

So no one's really buying the bonds and no one's really buying the Kool-aid that Papandreu is selling. You can see why too. Take a look at this excellent spreadsheet and see for yourself. At first blush the curve looks kinda primising. And the numbers that result in that curve don't look particularly weird either... until you realize that these are probably fairly optimistic projections on every metric for United States, let alone Greece. To pick out a few obvious examples:
 - The interest rates are way too optimistic. There is no way that Greeks are getting under 5% rates for 2010 and 2011. Just think: the European bailout will cost then 5%. So that's a floor, below which any new debt they raise is highly unlikely to fall. On a hunch - go ahead and plug in 6% for the debt cost in 2010 and 2011 and see what that does.
 - Inflation??? Hasn't Latvia taught us anything? Deflation is what Greece is about to experience, and that's the end of it. Plug in a modest -1% into the Inflation boxes for 2010 and 2011 (let's assume that after that modest inflation will return) and see what that does.
 - Account balance at a mere -3.7% in 2010? How the fuck is that supposed to happen, pray tell?

So we can easily see how the Greek assumptions begin to unravel. And even with the bailout, the fiscal situation looks pretty hopeless. There is just no compelling reason why this will not be just another Argentina, which held stayed afloat for a bit but finally caved in and defaulted.  Unless, that is, one bailout is followed by another... and another.

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