This was in the midst of being written yesterday when the first thunder storms of the year came rolling in. KA-BOOM! And all electronic appliances stopped but the lights didn't go out. Back on this morning so I thought I would wait and close out yesterday's thoughts. The break is easy to spot.
Well, the papers were full of pictures of Alexis and his new best friend, Val, who was positively dripping with unctuous dribble and the thought of this silly little man from Greece apparently spitting in the eye of the EU over the Ukraine and expecting big numbers from Mother Russia. Putin loves it when ever there is trouble afoot.
Over the weekend, our rock star finance minister traveled to Washington to meet with Christine to promise her that the IMF would get paid and Chrissy, in return, promised to do everything she could to help Greece. Things were looking up until one stops to think that there is really nothing she can do and there is no way in hell that Greece can come up with a couple of billion next week without new loans and hence, Alexis to the Kremlin tout suite.
I think the strategy is beginning to take shape and it doesn't look good. The IMF gets paid but we now begin a series of selective defaults probably beginning, if possible, with Germany because everybody hate the Germans. Now here is where this thing gets hairy as it brings us bright back to where we were a few years ago. A couple of billion missed payments in Euros doesn't scare anyone, but the European banks are still not clean and the specter of rolling defaults or even one massive default could have repercussions throughout the entire EZ. Remember, too, the Greek banks, which are already toast de facto, will become toast de jurie and just what does that mean?
Well, for one thing they have been issuing massive amounts of T-Bills which are guaranteed by the Greek Government, which they buy themselves and sell to the Central Bank to fund their liquidity position! Right now the Central Bank can use the notes as collateral at the ECB! That ends immediately and the music stops. That is when real blood begins to spill. I asked He Who Knows All Things the other day how could there be a single Euro left on deposit in a Greek bank. Answer: "Who says there is other than day to day working capital." It was rhetorical on my part but he confirmed what I already knew.
I don't think we are going to have another banking crises ala a few years back but things are going to become very difficult over the next few months. On a grander scale, if the EZ banking system comes under new stress how can it not upset any thought of an economic resurgence which is being talked of in hushed tones as though it has really come into existence. One must keep in mind that the only real source of credit in the EZ are the banks and if one takes them out of the equation, most everything stops. The concept of such as exists Over Here of a "shadow banking system" is still merely a concept in the EZ. Over Here, the involvement of commercial banks in credit extensions--particularly what is called "C & I" (credit & industrial) lending has shrunk from somewhat over 50% of the market as little as 20 years ago to slightly under 20% today. We have discussed the risk in that on previous occasions but it is what it is. In Euroland it ain't what it ain't.
Well, Christine got her money today, Alexis flew back to Athens and the Rock Star met with Joe Steglitz who, next to his good self, is probably the last economist with whom to be seen in the middle of such a crisis. Alexis got just what he should have expected: a Greek icon stolen by the Nazis during by the occupation and retrieved by the Russians. Reports say Alexis was in tears. Of course the dumb bugger forgot to ask Putin why the Russians had held on to the thing for SEVENTY years before giving it back but, hey, he's learning. He didn't get any money as was predicted in this space but in the future he probably will. Here's how.
I think there will be rolling defaults probably beginning in the next few weeks, not in total, but to the extent that the Greeks can afford to pay out something. In exchange for Greek support on the political front, the Russian will engage in some "bridge financing" to their Orthodox brothers. keep in mind that the sanctions imposed by the Euros on Russia expire at the end of July. They can ONLY be renewed with the unanimous vote of all member states. Do not expect the Greeks to leave the Zone or the Union before that. IF they make nominal payments, they can surely talk this thing out for a couple of months and what's a billion or two to the Russians at this stage given what is at stake. Anyway, that's what I would do. Of course that might cloud the future for a decade or two but they have been around for three thousand years or so...it's only been the past 2000 that have been a problem.
Jamie Diamond's letter to shareholders today really set a cat among the pigeons. Read it and we'll try to talk about it tomorrow
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