Monday, September 19, 2011

Not Mincing Words On Greece

I have long since stated that Greece will default.

I didn't mince words back then and I am not mincing them now.

Greece has really three options to cut their debt.

1-Pay it off
2-The Kramer Method - Write It Off
3-The British/US Method - Inflate it away

Option 1 would be the best method for autocrats/technocrats/policymakers everywhere. The Cubs would win the World Series before this happens however. This on the surface looks to be the most healthiest form of paying it off for market participants. But its not happening for Greece as the debt load plus austerity is crushing.

Option 2 would be to write it off. This looks to be the most efficient plan for the Greeks. This is a default. Pure and simple. We will have to figure how the market reacts to this. How would bilateral CDS contracts be settled, etc. This would be incredibly painful but would be a cathartic revelation. How they handle the haircuts and what that amounts to will be important.

Option 3 would be in my opinion the most dangerous. The Greeks would have to exit the Euro and then reissue Drachmas. The currency would immediately drop, this would allow the Greeks to export more Gyro's but inflation and falling output would create problems.

All things aside, the markets are weak again this morning. Its become a broken record. The failure of European Policymakers to deal with this issue is flabbergasting. They will continue to muddle through this crisis, making the crisis more and more of a problem. Bailouts, USD Swaps, EFSF talks are all about kicking the can down the road. The current policy is extend and pretend till Wile E. Coyote stays in suspended animation. If and only when the Euro is about to totally collapse and it threatens the entire European Continent will the European Autocrats do the right things and demand 50-60% haircuts and fiscal consolidation.

Yes. Eurobonds. It wont be pretty and it wont be easy. Europe needs a common treasury. This needs to be done first. I understand that Eurobonds have some inherent problems, most notably the lack of a political union but a Brady Bond mechanism needs to be installed.

The markets are again weak coming off additional negative news flow out of Greece, but I fully expect the EU, ECB, and IMF to come up with the money for Greece. I might as well toss in the Fed as well. I fully expect Greece will get her money in a few weeks. The EFSF will then be passed by all European parliaments. Markets will cheer leading into these actions, but then I also expect an orderly Greek restructuring in the area of 50% haircuts which in the grander scheme of things is not enough.

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