Thursday, October 27, 2011


What came out of Brussels last night was worst than a dog's breakfast but probably the best that could be expected under the circumstances.  Remarkably, and to highlight a world-wind problem, the only thing the talking heads had to say this morning was that Greece had been moved from page one to page two so let's go but stocks which is whay everybody did (mind you, the short covering I suspect was massive)  which is why the Dow closed up 339 points.

What was the deal?  Well, it appears that the banks agreed to lose 50% of their exposure to Greece.  This, according to the sharp-pencil(head) boys will bring down Greece's debt to GDP ratio to 120% by 2020. Great joy abounds.  Of course, the former number is a given whilst the latter...well, just let's say that it depends somewhat on the estimation of economic growth (like 100%) and those kinds of estimates have tended to be a bit dodgy in the past.  Nevertheless, we hope for the best.

Of course I'm not really sure how much of Greece's former bank debt is still held by banks and I'm not sure the Greeks know themselves.  If it turns out that certain banks have been selling this stuff at a discount to Vulture Funds for example, closing this deal may not be the slam dunk people are expecting.
Private investors tend to be a different breed of cat as opposed to government regulated entities some of whom will no doubt require governmental assistance in the future to insure their survival.

And speaking of insurance, one has to wonder what this does to the very active CDS market of very unhappy memory--AIG--as this supposed deal with the banks is being catogorized as a "non-credit event," it being "voluntary" in nature, and not a default which would trigger payment under the CDSs.  I suppose if a gun is held to your head and you give all your money to the guy with the gun that could be considered a "voluntary" act:  I kinda look at it as theft but that's just me.  I wonder whether we will here more of this.

Sticking with the banks, they will also have to recapitalize themselves to the tune of 103 billion Euros which is suppose to cover not only their Greek "voluntary" losses but act as a buffer against any future hick-ups in the credit markets.  The Tier 1 capital level is to be set at 9% and is to be raised from the private market but there is some verbage about governmental help if needed.  It will be.

Now speaking of this, those who have been paying attention might remember the stress test of 6 months ago.  At that point it was determined that the banks needed to raise 200 Billion Euros of new capital; two months ago that number was reduced to 120 Billion no doubt as a result of greatly improving economic and credit conditions.  Of course at the time this was done, it was also announced that Dexia was on the list of the ten best capitalized banks in Europe...just before it was intervened, broken up and shut down.  If anyone believes this 103 Billion Euro crap they aught to have their head examined, but there was language that the liquidity of the system would be protected in some undisclosed manner (read, ECB prints as much money as needed) so that isn't a bad thing.  Mind you, there isn't a lot out there, IMHO, to be raised for any Euro bank so all of this may be moot.  Look for partial nationalizations, mergers and issuance of funny money from the governments if they are to fulfill this nonsensical requirement.

So that takes care of the banks and Greece boys and girls and now the only thing we have to worry about is Italy, Spain and Portugal and of course the FESF or the bail-out fund as I choose to call it.  To be honest I do not have all I need to speak on this yet but  the information is arriving as we speak.  I'm going to defer until tomorrow but keep in mind that as I write, missonaries have already been sent into BRIC lands to convert the natives and convince them to support The One True Church of Euroland.  Anyone know how one says, "Waddayou nuts?" in Portugese?

See you early tomorrow.

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