Thursday, February 5, 2015


There will be days like yesterday I guess when the eye just says, "Not today," and that is that.  Actually, it picked a good day as things were muddled as opposed to today when things are less muddled Over There.

The lines have been drawn with the Greeks asking for debt relief and the Euros saying no...or something close to no.  Markets were shocked, SHOCKED, when the ECB announced that they would no longer accept Greek sovereign debt as collateral for the direct borrowings of Greek banks.  Why shocked?  You tell me.  One applies pressure where pressure can be applied and it was always in the cards that this would be the first move in the big chess match that has now begun.  My thoughts?  There is one problem hinging over all of this:  The new Greek government is composed entirely of rookies; the Euros are led by a bunch of hard cases in Berlin and the advisor is Lazard and one individual within the firm who is more disliked than the firm itself.  There are also huge egos all over the place.  This package isn't dynamite; it's more like Nitro..unstable to a fault.  A misstep here, a slip up there, the egos take over and one finds one's self on a very slippery slope indeed.

Now if everyone keeps their heads here's what I think is going to happen not because it should but because it is the only real way out of this thing unless the decision is made to say the hell with Greece and carry on from there.  And that could's just that I don't think it will.  I just don't think the Euros have the nerve.  But here's where rookie mistakes come in.  The ECB decision will force the Greek central bank to support it's banking sector directly and for that they are going to have to, at this point at least, reach some kind of accommodation with the ECB.  Demands will be made; the bargaining position of the central bank is not good.  There has been a huge loss of liquidity in the past month that must be stopped and you really run out of options very quickly.  Either the central bank--and the government--eats some humble pie, or the government does something VERY stupid like imposing controls on capital.  It is not beyond the realm of thought that an angry, young, inexperienced government would do just that.  I discussed this with He Who Knows All Things and his view is that finishes the Euro.  I disagree.  It finishes Greece but not the Euro although it would not make for a fun time.  Indeed, it might in the end be the easier way out.  Here's why.

Little Paulie Krugman's solution to the problem would be simply to throw more money at the Greeks.  Little Paulie is on to something but unfortunately, he doesn't know what.  Deficits to him spell growth.  What he fails to recognize or admit for that matter, is without RELIEF from this level of debt, there can be no growth.  Nick Brady (with a little nudge from other people) figured that out 25 years ago.  So what has to be crafted here is some accommodation where a "restructuring" is constructed in a manner where the result is debt relief and that is kept hidden from the great unwashed for as long as possible.  That must be done because in this situation, the creditors of Greece are not financial institutions who were the main holders of sovereign debt when Nick was roaming the range and to whom you could put the screws at the drop of a hat...and he did to the tune of 35% plus in one swell foop.  Oh no.  Today the creditors are other sovereigns and that means, as I have stated, Das Volk.  Governments have fallen for less.

How does one do this?  I have no idea having no detailed knowledge of the composition of Greece's debt (don't believe everything you read in the papers).  But there is always a way PROVIDED everyone works together and keeps their mouths shut.  This is not easy to do with a bunch of precocious politicians and investments bankers running around loose.  Start shouting victory from the rooftops and you can be sure that down below there will be a chorus singing along called Italy, Spain and a some of their friends.  It is going to require a very delicate touch.

There is one further observation I would like to make at this point which one might choose to keep in mind.  Does anyone really believe that the Greek banking system is solvent?  No?  Well then, how does it keep functioning?  This is the perfect proof of what I have said over and over:  Banks get sick on the asset side but die on the liability side.  It's liquidity that counts, boys and girls.  You can keep a nation's entire banking system running forever as long as you are dumb enough to lend it money.  Go tell that to Crazy Lizzy Warren.  If she doesn't believe it, tell her to call Charlie.  You see, I did it once.

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