The economy of the whole damn world seems to be on pause waiting for Greece. Everybody knows what's going to happen because there's nothing else that can happen and even the two most powerful women in Europe, Frau Merkel and Mme. Lagard are beginnig to speak of some form of rescheduling. Before everything goes to hell in a hand basket the IMF board had best get cracking, elect Christine baby the new MD and get the show on the road.
For those against this sensible approach (that means you Jean Claude) things didn't get much easier with the results of the election in Spain over the weekend in which the socialists took a real shelacking. The fear of the dreaded "contagion" spilling over to other countries has become quite real with the belief that Spain might well join Ireland in adopting the terribly rational view that it is no where written that banks can't lose money in the sovereign debt game. They can and they have, witness those involved in Latin America in the ninteen eighties. The only question is are the banks ready, balance sheet-wise, to accept the loses they must at this time?
There are a couple of signs that they may well be at that point. I cannot believe the French and the German governments even musing about such events if a solution to their banking sectors' problems had not been discussed much less agreed. On top of that, I have it on rather good authority (ok, I read it in the papers) that the hedge fund guys and a whole bunch of vulture fund managers are spending a beaucoup amount of time in Europe with the banks who are shoveling crap out the door as quickly as possible. As usual, the Euros are two years behind the colonials but they appear to have finnally gotten the picture.
Having said all that, I doubt that the European banking sector is yet in a position to take losses ala the afore-mentioned Latin America situation where Mexico led off with a 35% haircut and everyone else piled on. Betcha what we get here is an extention of maturities on Greek debt and a "voluntary" reduction in interest rates (guys, at these levels you still have a positive carry) all of which buys time to the eventual write-down which has to be coming. Fine, it's hardly an honest approach but it might just save everyone's Moussaka.
What's going to be needed, however, is liquidity and a continuation of relatively low interest rates by the ECB and getting M. Trichet to commit to that will not be easy. As we have said before, central bankers are basically exterminators and the cockroach they hunt is inflation. It is bred into them, and this is the inflation scenario that terrifies them. This is especially so because it appears certain they will receive no help from this side of the pond as Ben & Co. shows no real sign of a move away from a loose money policy either through "a recycling of the coupons" as it is now known or an outright QE II 1/2 or QE III, which despite all comments to the contrary, I believe to be still out there. After all, as the Shadow put it: "Who knows what evil lurks in the hearts of Central Bankers..." He did say that, didn't he?
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