...BRUSH THE CHANNEL WITH HIS SLEEVE! It wasn't a bad strategy developed by Von Rundstetd the Elder that actually worked in two wars...well, almost. First time round they got hung up on a river but could see the lights of Paris and the second time...well, the little guy got into a spat with the Ruskies, the Brits got all stroppy and stalled the whole thing, then he decided to take on the Yanks and the rest is history. This time they might actually grab the golden ring.
No, I don't mean young Fritz is going into the closet to dress up in grandpa's fetching gray uniform. But it is becoming more apparent that the whole world is looking to the Bundesrepublik to pull the Greek acorns out of the fire and I think they will..for a price.
Let's review the playing field. The Greeks owe about E300 billion (about $420) at current exchange rates. Most of it is foreign held and most of it in bonds. BIS reporting banks say the hold about 25%; the rest? It would be nice to know but it isn't and that's not a good sign. Now I for one would love to see the Euros say the hell with you go work it out but that isn't going to happen unless something really goes haywire. A Greek default might very well signal the end of Maastrict and would certainly, in my estimation destroy the Euro as a serious currency so that's not going to happen. Too much a stake. Greece has highlighted what everyone knew was the problem; monetary policy, created in a void of local political reality meeting the lack of fiscal discipline. A train wreck in the making. Bound to happen. But is allowed to default one can be certain that those other countries close to the brink will say, "Bugger this monetary union stuff," and start doing what they gotta do by beginning to print their own money once again. EU=RIP.
So what happens? As mentioned, not knowing who are the creditors makes things a bit more difficult. Way back when, when only banks were the lenders of record, life was easy. The central bankers of the world grabbed all the banks, put them in a room and beat their brains in until they halted collection attempts and then rescheduled the debt. Easy. Not so with bond holder. The reason? No leverage. Not to change the subject, think of AIG for a minute and perhaps the reason for the inability to negotiate a haircut from the beneficiaries of the CDSs becomes apparent. If you think the world is going to end in ten minutes and the other guy KNOWS you think that, waddya got? What you don't got is leverage, Jack. The banks involved are probably going to be asked to reschedule whatever they have in some ugly way...and they will. In return, they will probably get a guarantee of principle (but not of interest--some risk must be taken,what?) The bond holders who will of course come out of the woodwork are going to get asked to give up something; whether they do or not is an open question. As for the guarantee?
It will be German-led but involve all the usual players in Euroland. And in return? Ah, mein leiber freund, more about that tomorrow as well as the issue of moral hazard. Any thoughts?
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